Why Most Small Businesses Fail and How to Avoid It: ‘The E-Myth Revisited’ Book Review

Introduction to “The E-Myth Revisited”

Michael E. Gerber’s “The E-Myth Revisited” has become a cornerstone text for entrepreneurs and small business owners worldwide. The book’s enduring popularity stems from its insightful analysis of why many small businesses fail and its practical advice on how to build a successful enterprise. Gerber’s work challenges common misconceptions about entrepreneurship and offers a revolutionary approach to business development.

At its core, “The E-Myth Revisited” addresses what Gerber calls the “Entrepreneurial Myth” or “E-Myth” – the mistaken belief that individuals who start small businesses are entrepreneurs and that starting a business is all about having an entrepreneurial personality. This fundamental misunderstanding, Gerber argues, is at the root of most business failures.

The book’s premise is that most people who start small businesses are not true entrepreneurs but “technicians” who happen to be suffering from an entrepreneurial seizure. These individuals, skilled in their craft or profession, mistakenly believe that their technical skills are sufficient to run a successful business. However, as Gerber points out, the skills needed to perform a technical job are vastly different from those required to build and run a successful business.

Throughout “The E-Myth Revisited,” Gerber provides a roadmap for transforming a small business from a job for the owner to a true enterprise that can thrive independently of its founder. This review will explore the key concepts presented in the book, their practical applications, and how they can help entrepreneurs avoid common pitfalls and build sustainable, successful businesses.

The entrepreneurial myth explained

The cornerstone of Gerber’s book is the explanation and debunking of what he terms the “Entrepreneurial Myth” or “E-Myth.” This myth is the widespread and often detrimental belief that people who start small businesses are entrepreneurs and that entrepreneurship is all about possessing certain personality traits or characteristics.

Gerber argues that this myth is responsible for many business failures because it leads people to start businesses for the wrong reasons and with unrealistic expectations. He identifies three primary misconceptions that contribute to the E-Myth:

1. The Entrepreneurial Seizure: This is the moment when a technician (someone skilled in a specific trade or profession) decides to start their own business. The individual believes that because they excel at the technical work of the business, they can successfully run a business that does that technical work.
2. The Assumption of Control: The technician-turned-business owner assumes that by owning the business, they’ll have more freedom and control over their work and life. In reality, they often end up with less freedom and more responsibilities.
3. The Fatal Assumption: This is the belief that understanding the technical work of a business automatically means understanding how to run a business that does that technical work.

Gerber illustrates these points through the story of Sarah, a pie baker who starts her own pie shop. Initially thrilled with the idea of being her own boss and doing what she loves, Sarah quickly becomes overwhelmed by the demands of running a business. She finds herself working longer hours, dealing with tasks she never anticipated, and losing the joy she once found in baking.

This scenario, Gerber explains, is common among small business owners who fall victim to the E-Myth. They start a business based on their technical skills without understanding the complexities of entrepreneurship and business management.

To counter this myth, Gerber introduces the concept of the “true entrepreneur.” Unlike the technician suffering from an entrepreneurial seizure, the true entrepreneur:

• Views the business as a system for producing results for customers and profits for the owner
• Works on the business rather than in the business
• Focuses on creating systems and processes that allow the business to run without the constant involvement of the owner.
• Sees the business as a product in itself, one that can be replicated and scaled

Understanding and overcoming the E-Myth is crucial for anyone looking to start or grow a successful business. It requires a shift in mindset from being a technician who owns a job to being an entrepreneur who builds a business system.

By recognising the E-Myth and its pitfalls, aspiring business owners can approach entrepreneurship with a clearer understanding of what it truly entails. This awareness is the first step towards building a business that can thrive independently of its founder’s daily involvement.

The Three Business Personalities

In “The E-Myth Revisited,” Gerber introduces the concept of three distinct personalities that exist within every small business owner: the Entrepreneur, the Manager, and the Technician. Understanding these personalities and their roles is crucial for business success.

The Entrepreneur

The Entrepreneur is the visionary and the dreamer. This personality:

• Thrives on change and sees opportunities where others see problems
• Lives in the future, never in the past and seldom in the present.
• Provides the creative energy for every new venture
• Is innovation-orientated and comfortable with uncertainty?

However, too much of the entrepreneurial personality without balance can lead to chaos. The entrepreneur may start many projects but finish few, constantly chasing the next big idea.

The Manager

The manager is the pragmatic personality. This aspect:

• Craves order, planning, and predictability
• Lives in the past, constructing and maintaining systems based on past experiences
• Provides the stabilising force in the business
• Is process-orientated and uncomfortable with change

While necessary for business stability, an overemphasis on the managerial personality can lead to stagnation and an inability to adapt to changing market conditions.

The Technician

The technician is the doer. This personality:

• Lives in the present and is focused on the work at hand.
• Loves to tinker and is happiest when engrossed in specific tasks.
• Believes that if you want something done right, you should do it yourself.
• Is often sceptical of lofty ideas or complex management systems

Most small business owners start as technicians, but an overemphasis on this personality can lead to burnout and limit business growth.

Gerber argues that a successful business owner needs to balance all three personalities. Here’s why:

1. Complementary Skills: Each personality brings essential skills to the business. The entrepreneur provides vision, the manager creates systems and order, and the technician delivers the product or service.
2. Balanced Decision-Making: When all three personalities are in harmony, decisions are made with consideration for vision, practicality, and implementation.
3. Sustainable Growth: A balance prevents the business from becoming too chaotic (overly entrepreneurial), too rigid (overly managerial), or too focused on day-to-day operations (overly technical).
4. Scalability: By developing all three aspects, the business owner can create systems and processes that allow the business to grow beyond the capabilities of any one individual.
5. Preparation for Expansion: Understanding these personalities helps in hiring and delegation. As the business grows, the owner can bring in people who excel in areas where they might be weaker.

To achieve this balance, Gerber suggests:

• Self-Awareness: Recognise which personality tends to dominate in your approach to business.
• Intentional Development: Work on cultivating the aspects of your personality that are under-represented.
• Strategic Planning: Create a business plan that addresses the needs and concerns of all three personalities.
• Systematic Approach: Develop systems that allow the business to function effectively, catering to all three aspects.
• Delegation: As the business grows, hire individuals who can take on roles that complement your strengths and compensate for your weaknesses.

By understanding and balancing these three personalities, small business owners can avoid the common pitfalls that lead to failure. They can create businesses that are visionary yet stable, innovative yet consistent, and capable of growth beyond the capacities of any single individual.

The Turn-Key Revolution

In “The E-Myth Revisited,” Michael Gerber introduces the concept of the “Turn-Key Revolution,” a fundamental shift in how businesses are conceived and operated. This concept is crucial for understanding why some businesses succeed where others fail, and it provides a blueprint for creating a business that can thrive independently of its owner.

What is the Turn-Key Revolution?

The Turn-Key Revolution refers to the development of business systems that are so well-designed and comprehensive that the business could theoretically be “turned over” to someone else to operate with minimal training. This approach transforms a business from a job for the owner into a system that can run smoothly without the owner’s constant involvement.

Key aspects of the Turn-Key Revolution include:

1. Systems-Dependent vs. People-Dependent: A turn-key business relies on systems and processes rather than specific individuals. This makes the business more stable and scalable.
2. Replicability: The business model is designed to be replicated easily, much like a franchise operation.
3. Consistency: By following established systems, the business can deliver consistent results regardless of who is performing the work.
4. Scalability: With proper systems in place, the business can grow without being limited by the owner’s personal capacity to manage everything.

Why is the Turn-Key Revolution Important?

Gerber argues that the Turn-Key Revolution is crucial for several reasons:

1. Overcoming the Technician’s Trap: Many small business owners are trapped in their businesses, working long hours and unable to step away. The turn-key approach frees the owner from day-to-day operations.
2. Creating Value: A business that can run without the owner is inherently more valuable than one that depends entirely on the owner’s presence.
3. Enabling Growth: Systematic operations allow for easier expansion, whether through new locations or franchising.
4. Improving Quality: Well-designed systems ensure consistent quality, enhancing customer satisfaction and loyalty.
5. Facilitating Innovation: When the owner is not bogged down in daily operations, they have more time and energy for strategic thinking and innovation.

Implementing the Turn-Key Revolution

To implement the principles of the Turn-Key Revolution in your business, Gerber suggests the following steps:

1. Develop a business format. Franchise: Even if you don’t plan to franchise, design your business as if you were going to. This mindset forces you to create robust, replicable systems.
2. Document Everything: Create detailed documentation for every process in your business. This includes operations manuals, training guides, and standard operating procedures.
3. Create Systems for Everything: Develop systems for every aspect of your business, from customer service to product delivery to financial management.
4. Focus on consistency: Ensure that your systems deliver consistent results every time, regardless of who is implementing them.
5. Test and refine: Continuously test your systems and refine them based on real-world results.
6. Train for the System: Train your employees to follow the systems you’ve created, rather than relying on individual improvisation.
7. Work On the Business, Not In It: As the owner, focus your energy on improving and expanding the business system rather than performing day-to-day tasks.

Examples of Turn-Key Success

Gerber often points to successful franchise operations as examples of the Turn-Key Revolution in action. Companies like McDonald’s, Starbucks, and Subway have created highly replicable business models that can be operated successfully by individuals with minimal prior experience in the industry.

However, the principles of the Turn-Key Revolution can be applied to any business, not just franchises. For example:

• A local bakery could create detailed recipes and processes that ensure consistent quality across all products, even when the owner isn’t baking.
• A consulting firm could develop standardised assessment tools and report templates that allow junior consultants to deliver high-quality work consistently.
• An e-commerce business could implement automated systems for order processing, inventory management, and customer service, allowing it to scale without proportional increases in staff.

Challenges and Considerations

While the Turn-Key Revolution offers many benefits, it’s not without challenges.

1. Initial Time Investment: Creating comprehensive systems takes significant time and effort upfront.
2. Resistance to Change: Employees accustomed to improvising may resist the implementation of standardised systems.
3. Balancing Standardisation and Flexibility: It’s important to create systems that are standardised enough for consistency but flexible enough to adapt to unique situations.
4. Ongoing Refinement: Business systems are not set-and-forget. They require continuous monitoring and improvement.

The Turn-Key Revolution represents a paradigm shift in how small businesses operate. By adopting this approach, entrepreneurs can create businesses that are more stable, scalable, and valuable. It’s a key strategy for avoiding the common pitfalls that lead to small business failure and for building a business that can thrive independently of its founder.

The Business Development Process

In “The E-Myth Revisited,” Michael Gerber outlines a comprehensive business development process. This process is designed to transform a small business from a chaotic, owner-dependent entity into a well-oiled machine that can operate smoothly and grow systematically. Understanding and implementing this process is crucial for entrepreneurs who want to avoid the common pitfalls that lead to business failure.

The Seven Steps of the Business Development Process

Gerber breaks down the business development process into seven distinct steps:

1. Primary Aim
2. Strategic Objective
3. Organisational Strategy
4. Management Strategy
5. People Strategy
6. Marketing Strategy
7. Systems Strategy

Let’s explore each of these steps in detail:

1. Primary Aim

The primary aim is not about the business itself but about the business owner’s life goals. It answers the question, “What do you want out of life?” Gerber argues that understanding your personal goals is crucial because your business should be a means to achieve those goals, not an end in itself.

To define your primary aim:

• Reflect on your values and what’s truly important to you.
• Envision your ideal lifestyle
• Consider what you want to be remembered for.

2. Strategic Objective

The strategic objective is a clear statement of what your business has to ultimately do for you to achieve your primary aim. It’s a bridge between your life goals and your business goals.

Key components of a strategic objective include:

• Financial goals (e.g., revenue targets, profit margins)
• Business model (e.g., type of business, target market)
• Benchmarks for success (e.g., number of customers, market share)

3. Organisational Strategy

The organisational strategy involves creating a structure for your business that will allow it to grow and operate without your constant involvement. This step is about defining roles and responsibilities within the company.

Key aspects include:

• Creating an organisational chart
• Defining clear job descriptions and responsibilities
• Establishing a hierarchy and chain of command

4. Management Strategy

The management strategy focuses on creating systems and processes that allow the business to run smoothly. It’s about how work gets done in your business.

This strategy involves:

• Developing standard operating procedures
• Implementing performance metrics and tracking systems
• Creating training programs for employees

5. People Strategy

The People Strategy is about how you recruit, train, and manage your employees. Gerber emphasises the importance of hiring for attitude and training for skills.

Key elements include:

• Defining your company culture and values
• Creating a hiring process that aligns with your culture
• Developing comprehensive training programs
• Implementing performance review and feedback systems

6. Marketing Strategy

The marketing strategy focuses on how you attract and retain customers. Gerber emphasises the importance of understanding your customer’s needs and creating a systematic approach to meeting those needs.

This strategy involves:

• Defining your target market
• Creating a unique selling proposition
• Developing a marketing mix (product, price, place, promotion)
• Implementing systems for lead generation and conversion

7. Systems Strategy

The systems strategy ties everything together. It’s about creating a set of integrated systems that allow your business to run like a well-oiled machine.

This includes:

• Hard systems (e.g., computer systems, equipment)
• Soft systems (e.g., policies, procedures)
• Information systems (e.g., data collection and analysis)

Implementing the Business Development Process

Gerber emphasises that implementing this process is not a one-time event but an ongoing journey. Here are some key principles for successful implementation:

1. Start with the end in mind: Always keep your primary aim and strategic objective in focus.
2. Document everything: Create detailed manuals and guides for all aspects of your business.
3. Test and refine: Continuously evaluate and improve your systems and processes.
4. Involve your team: Engage your employees in the development and refinement of systems.
5. Be patient: Building a systematic business takes time. Don’t expect overnight results.
6. Stay flexible: Be willing to adapt your strategies as your business grows and market conditions change.

Benefits of the Business Development Process

When properly implemented, the business development process offers numerous benefits, including:

1. Scalability: Your business can grow without being limited by your personal capacity.
2. Consistency: Your business can deliver consistent results, leading to increased customer satisfaction.
3. Reduced dependency on individuals: Your business becomes system-dependent rather than people-dependent.
4. Improved valuation: A business with well-documented systems is more valuable to potential buyers.
5. Enhanced work-life balance: As the owner, you can step away from day-to-day operations without the business falling apart.
6. Clarity and focus: Everyone in the organisation understands their role and how it contributes to the overall goals.

Challenges in Implementation

While the business development process offers significant benefits, it’s not without challenges.

1. Time investment: Developing comprehensive systems takes significant time and effort.
2. Resistance to change: Employees (and sometimes owners) may resist the shift to a more systematic approach.
3. Balancing flexibility and structure: It’s important to create systems that provide consistency without stifling innovation.
4. Ongoing commitment: The process requires continuous refinement and adaptation.

By following Gerber’s Business Development Process, entrepreneurs can transform their businesses from chaotic, owner-dependent entities into systematic, scalable enterprises. This approach addresses many of the root causes of small business failure and provides a roadmap for sustainable growth and success.

The franchise prototype

One of the most powerful concepts in “The E-Myth Revisited” is the idea of the franchise prototype. Gerber argues that entrepreneurs should build their businesses as if they were creating a prototype for thousands of franchise operations. This approach, he contends, is the key to creating a business that can thrive independently of its owner.

What is the Franchise Prototype?

The franchise prototype is a business model that is:

• Systematised
• Replicable
• Consistent
• Operable by people with the lowest possible skill level

It’s important to note that Gerber isn’t suggesting that every business should actually become a franchise. Rather, he’s advocating for adopting the mindset and practices that make franchises successful.

Why is the franchise prototype important?

The franchise prototype concept is crucial because it addresses several key issues that often lead to small business failure:

1. Owner Dependence: Many small businesses are entirely dependent on the owner’s constant presence and expertise. The franchise prototype creates systems that allow the business to run without the owner.
2. Inconsistency: Small businesses often struggle with delivering consistent quality. The franchise prototype ensures consistency through standardised processes.
3. Limited Scalability: Without systems in place, businesses hit a growth ceiling. The franchise prototype is designed for scalability from the start.
4. Lack of Value: A business that can’t operate without its owner has limited value to potential buyers. The franchise prototype creates a valuable, saleable asset.

Key Elements of the Franchise Prototype

1. Operations Manual: This is a comprehensive guide that details every aspect of running the business. It should be so thorough that someone with minimal experience could follow it to operate the business successfully.
2. Consistent Branding: This includes visual elements like logos and colour schemes but also extends to the overall customer experience.
3. Standardised Processes: Every task in the business should have a standardised, documented process. This ensures consistency and makes training new employees easier.
4. Performance Metrics: Clear, measurable standards for every aspect of the business.
5. Training Systems: Comprehensive training programs that can quickly bring new employees up to speed.
6. Marketing Systems: Systematic approaches to attracting and retaining customers.
7. Financial Controls: Systems for managing cash flow, expenses, and profitability.

How to Develop Your Franchise Prototype

1. Start with the Customer Experience: Define what the perfect customer experience looks like in your business.
2. Document Everything: Create detailed documentation for every process in your business.
3. Simplify and Standardise: Look for ways to simplify processes and create standard operating procedures.
4. Test and Refine: Continuously test your systems and refine them based on results.
5. Train to the System: Focus on training employees to follow your systems rather than relying on individual expertise.
6. Measure Everything: Implement systems to track key performance indicators.
7. Continuously Innovate: Always look for ways to improve your systems and processes.

Benefits of the Franchise Prototype

1. Scalability: The business can grow without being limited by the owner’s personal capacity.
2. Consistency: Customers receive a consistent experience, leading to increased satisfaction and loyalty.
3. Efficiency: Standardised processes reduce errors and increase productivity.
4. Easier Management: With clear systems in place, the business becomes easier to manage.
5. Increased Value: A business that can run without the owner is more valuable to potential buyers.
6. Innovation: When day-to-day operations are systematised, owners have more time to focus on strategic improvements.

Challenges in Implementing the Franchise Prototype

1. Time Investment: Creating a franchise prototype requires significant upfront time and effort.
2. Resistance to Change: Employees (and sometimes owners) may resist the shift to standardised systems.
3. Balancing Standardisation and Flexibility: It’s important to create systems that provide consistency without stifling creativity or ability to adapt to unique situations.
4. Ongoing Refinement: The franchise prototype is not a “set it and forget it” solution. It requires continuous monitoring and improvement.

Examples of Successful Franchise Prototypes

While Gerber’s concept isn’t limited to actual franchises, looking at successful franchise businesses can provide insight into the power of the franchise prototype approach:

1. McDonald’s: Perhaps the quintessential example of a successful franchise, McDonald’s has created highly detailed systems for everything from food preparation to restaurant layout.
2. Starbucks: Known for delivering a consistent customer experience across thousands of locations worldwide.
3. H&R Block Demonstrates how even knowledge-based services can be systematised and replicated.

By adopting the franchise prototype mindset, entrepreneurs can create businesses that are more stable, scalable, and valuable. This approach addresses many of the root causes of small business failure and provides a clear path to building a business that can thrive independently of its founder.

Working on Your Business, Not In It

One of the most crucial concepts in “The E-Myth Revisited” is the idea of working “on” your business rather than “in” it. This shift in perspective is fundamental to transforming a small business from a job for the owner into a true enterprise that can thrive independently.

Understanding the Difference

• Working “In” the Business: This refers to performing the day-to-day tasks that keep the business running. It’s about doing the technical work of the business.
• Working “On” the Business: This involves stepping back and focussing on the strategic aspects of the business. It’s about developing systems and processes that allow the business to run without the owner’s constant involvement.

Why is this distinction important?

1. Avoiding the Technician’s Trap: Many small business owners spend all their time working “in” the business, leaving no time for strategic planning and growth.
2. Scalability: A business that depends entirely on the owner’s daily involvement can’t grow beyond the owner’s personal capacity.
3. Creating Value: A business that can run without the owner is inherently more valuable than one that can’t.
4. Work-Life Balance: Owners who are constantly working “in” the business often experience burnout and lose the freedom they sought when starting their business.
5. Innovation: When owners are bogged down in daily operations, they have little time or energy for innovation and improvement.

How to Shift from Working “In” to Working “On” Your Business

1. Develop Systems: Create standard operating procedures for every aspect of your business. This allows others to perform tasks consistently without your direct involvement.
2. Delegate Effectively: Train your team to handle day-to-day operations, freeing you to focus on strategic tasks.
3. Schedule Strategic Time: Set aside dedicated time each week to work “on” your business. Treat this time as sacred.
4. Create a Business Plan: Develop a comprehensive plan that outlines your vision, goals, and strategies for growth.
5. Implement performance metrics: Establish key performance indicators (KPIs) that allow you to monitor the business’s health without being involved in every detail.
6. Continuous Learning: Invest time in learning about business strategy, leadership, and industry trends.
7. Build a Strong Team: Hire and train employees who can take ownership of various aspects of the business.

Key Areas to Focus on When Working “On” Your Business

1. Strategy and Vision: Define and refine your long-term goals and the strategies to achieve them.
2. Systems Development: Create and improve systems that make your business more efficient and consistent.
3. Marketing and Sales: Develop strategies to attract and retain customers.
4. Financial Planning: Focus on budgeting, forecasting, and financial strategy.
5. Team Development: Invest in training and developing your team to take on more responsibility.
6. Innovation: Look for ways to improve your products, services, or business model.
7. Customer Experience: Analyse and enhance the overall customer journey.

Challenges in Making the Shift

1. Letting Go: Many owners struggle to delegate tasks they’ve always handled themselves.
2. Time Management: Finding time to work “on” the business when day-to-day operations are demanding.
3. Skill Development: Working “on” the business often requires different skills than working “in” it.
4. Mindset Shift: Changing from a technician mindset to an entrepreneurial one can be challenging.
5. Short-Term Sacrifices: Investing time in systems and strategies may mean short-term sacrifices in productivity or revenue.

Benefits of Working “On” Your Business

1. Scalability: Your business can grow beyond your personal capacity.
2. Improved Work-Life Balance: You can step away from the business without everything falling apart.
3. Increased Business Value: A business that runs systematically is more valuable to potential buyers.
4. Innovation and Growth: With more strategic focus, you can identify and capitalise on new opportunities.
5. Enhanced Customer Experience: Systematic operations often lead to more consistent, higher-quality customer experiences.
6. Improved Financial Performance: Strategic focus often leads to better financial management and profitability.
7. Personal fulfilment: Many entrepreneurs find working “on” the business more rewarding than constant involvement in day-to-day tasks.

By shifting focus from working “in” the business to working “on” it, entrepreneurs can overcome many of the challenges that lead to small business failure. This approach allows for the creation of a business that is not just a job but a true asset that can grow, thrive, and potentially be sold or passed on in the future.