I was once held hostage—by an employee.

I was in the first weeks of my new tree-removal business and had hired an arborist to assemble and run the crew. He quickly saw that I couldn't survive without him—“You know business, not tree removal,” he indelicately pointed out—and demanded an increase in salary. I couldn't afford him, so he jumped ship for a more lucrative position. And I shut down the business.

Mine was a situation familiar to many entrepreneurs. But could I have avoided it?

Absolutely.

While empowering employees is key to retaining them, surrendering too much may come back to bite you. Heed the warning signs and keep equilibrium in your business.

Warning Sign No. 1: Beware the business driven by something other than your own core competence

As my mutinous employee pointed out, I don't know how to remove trees. That means I can't assess the quality of my product, or jump in and do the work should the crew fall ill or, more likely, leave. In my case, that was a key weakness; the crew does the work and is also the face of the company.

Does this mean you can't run a business unless you're an expert in every facet of its operations? Of course not. But be mindful of your vulnerabilities.

In the case of my tree business, I may have been able to cope if my coffers had been big enough to support two foremen. That way, I would have some redundancies in crew management—a backup in case I need one. Thought of another way, I would have diluted my vulnerability (i.e., my lack of tree removal knowledge) with two managers instead of one.

Given my limited financial means, however, I had to lean on one man—and paid the price. Simply put, I chose the wrong business. Had I started, say, a tutoring company, I could have easily filled in for tutors who didn't show up.

The lesson: the operator of a small business must have a core competence that meets the business's minimum requirements.

Warning Sign No. 2: Beware the business driven by highly skilled labor

I see two reasons for concern in this area. First, as in Warning Sign No. 1, if any of these employees disappears, you may find your business stalled. Even if you're capable of doing the work, you may need extra skilled help that is hard to find.

Think about the lawyer whose associates leave him high and dry: where's he going to quickly find more lawyers to help him with the case? He can get them, but it's not easy.

Second, and more important, is that businesses driven by highly skilled labor—graphic design firms, for instance—have trouble scaling. A business that depends on each and every employee's reinvention of the wheel cannot easily duplicate itself across geographies or markets. Operators of these businesses work as hard for the first dollar as they do for the last. And that can be a heavy cross to bear.

My defunct tree company is a perfect example. Let's assume for a moment that my arborist had remained with the company and I could have jumped in and done the work had he fallen ill. That still doesn't change the fact that every tree is different, and every job requires the individual judgment of the arborist. For this reason, I would have had to add a second crew had I grown—and that would have meant a search for another arborist, additional equipment, and more training.

I am not suggesting that businesses that depend on highly skilled labor are poor models. But the successful ones do something that the others do not.

They automate.

Not necessarily with technology, though that can be a wonderful tool. Companies also use standard procedures and division of labor to put their operations on autopilot. This allows an employee to jump in should another fall overboard.

Consulting firms, which certainly depend on skilled labor, are masters of this technique. They create templates to standardize and automate system implementations, strategy analyses, process improvements and other services. To the customer, this is sold as a “methodology.”

But inside the consulting firm, it's a way to keep the operations running efficiently. (Incidentally, these methodologies also help consulting firms maintain a consistent brand.) In this way, any consultant can jump in and do the work of another, at least to some extent.

Could I have automated my tree business? Sure, but not where it counted. The arborist does all his work in the tree: coordinating the felling, working the chainsaw, attaching the crane, and managing the crew. Every job is different because every tree is different. And there isn't room for more than one person on any given tree, so division of labor is impossible.

Warning Sign No. 3: Beware the gold-rush mentality

I had started my tree business amidst a dramatic bark-beetle infestation that had killed millions of trees over the course of one year. I was so focused on the increase in demand and the promise of profit that I failed to anticipate the other side of the equation. That is, the scarce pool of skilled tree climbers would suddenly be in demand and could thus squeeze employers for as much as they liked.

It's an easy mistake to make: I forgot to test my assumptions. I assumed that there was plenty of labor to go around (after all, that was the case with every other business in which I had worked). Instead, I concerned myself with finding bargains on bulldozers and cranes because I was intimidated by their six-figure price tags. As it turned out, finding cheap equipment was easy. So I moved forward with no further questions—and when I lost my arborist, I couldn't find another.

The Takeaway

Am I suggesting that it's foolish to start a small business unless you can manage its every aspect? Is it true that small businesses that depend on skilled labor are doomed to fail? And when an opportunity presents itself, does the entrepreneur have to question its every single aspect at the cost of progress?

The answers, of course, are no, no and no.

But every business model has its weaknesses, and labor is an important factor that often takes a back seat to sexier issues such as marketing and operations. My point is this: when devising your strategy, don't underestimate the leverage your employees possess—and have a backup plan in case you're left hanging… from a tree.