BRKeenan & Associates, LLC

Common Reasons for Small Business Failure: What to Avoid

Failure ColumnsAnother Installment from “Small Business 101: From Start-up to Success

 

In last week’s blog, I discussed that more than half of new businesses are caput before their first anniversary and 95% are dead by age 5.  That is an abysmal collective record.  To avoid this outcome, wisdom can be acquired through direct, painful experience, or, more efficiently, by learning from the mistakes of others.  Watching another bang their head against a brick wall should suggest something to avoid.  This blog lists a few head bangers to avoid when starting your company.

In next week’s blog, I will address some of the proactive steps you can take to maximize success.

  1. The Deadly Sins – The SBA List of Common Failure Points

On its website, the US Small Business Administration lists several common reasons for failure, including the following:

  • Lack of experience
  • Insufficient capital (money)
    • Poor credit arrangement management
    • Personal use of business funds
  • Poor location
  • Poor inventory management
  • Over-investment in fixed assets
  • Unexpected growth

While several of these items need little explanation beyond listing here, others I will explore below.

  1. The Novice Complex – Lack of Experience

In today’s culture, many novices and neophytes succeed.  Silicon Valley is full of would-be entrepreneurs toiling the midnight hours to self-develop the next great app or software.  But, these rookies are not playing outside their comfort zone – for example, they did not go into manufacturing or catering; rather, they went into software development, which they know.  With due respect to all the successful Double Diamonds, most MLM[i] wannabe’s fail because MLMs are built on networking and retail sales, which is not most people’s forte.  In short, do not start a business in an unfamiliar industry.  The failure rate is high enough with industry knowledge and expertise.  Don’t double down on risks by acting outside your comfort zone.

  1. “A horse, a horse!My kingdom for a horse!” – Lack of Capital

Many start-up are scions from another firm.  But, opening a new shop takes capital to handle both cash outflow and reduced cash inflow during the early period.  For this reason, many entrepreneurs moonlight, working their day jobs while developing their start-up at night.  It makes for long days.  Depending upon the industry, start-up capital can be substantial.  For example, an industrial lathe balancing start-up spent $ 5,000 each time their prototype blew, and for a time, it blew on an hourly basis.  As a rule of thumb, before going all-in, have sufficient liquid (or near liquid) capital to adequately cover all first year business and living expenses plus a 100% percent cushion.  Your firm can survive having too much capital, but it will fail if you have too little.

  1. Location, Location, Location

Location matters even in today’s digital age.  Some business such as restaurants, retail outlets and personal services firms (e.g., dentist, doctor, auto mechanic, stylist) are almost entirely location based.  An inexpensive rental space is usually inexpensive for a reason – so beware!  In Naperville, IL, where I live, there is a restaurant locale which every other year or so changes marquees.  Although on a major north-south corridor, it is isolated from other evening go-to places and, as a result, languishes.  Each new chef never considered key issues, such as (a) where are the customers already going? (b) where are competitors located, (c) what is the normal and abnormal traffic patterns, accessibility, parking and lighting? (d) what is the condition and safety of the building? And/ or (e) what has been the historical success or failure at that very spot?  In selecting the ideal spot, there are a host of factors other than mere price.  So, if the proposed locale seems to have a revolving door quickly turning from occupant to occupant, run-do-not-walk to the nearest exit.

  1. Hyper-Inflation – Growing Too Fast

In their book, Great by Choice, Jim Collins and Hansen talk about the 20-mile march.  It is a metaphor for measured and steady growth wins the day.  As counter-intuitive as it may seem, explosive, hyper-inflationary growth can be crippling.  Business is a marathon, not a series of sprints; or, per another metaphor, the slow growing hard wood will withstand the winter storms better than the fast growing soft wood.  Tracking Progressive Insurance, SW Airlines and other companies, Collins and Hansen persuasively argue that controlled, measured growth will enable to the firm to withstand the inevitable winter storms as they arise.  Growth exhaustion can leave a firm without reserves and thus unable to successfully counter the unexpected which always happens.

  1. Hide-and-Seek – Lack of a Website and Other Online Materials

Not included on the SBA’s list, but included elsewhere (such as here and here), small business fail because they do not have a website.  In today’s business culture, not having a website is a major error.  Decades ago, anybody who was anybody had a business card; today, any business that is any kind of business has a website.  Add to a website, you should think about SEO optimization, social media marketing, and cross-selling between all communication channels.  For some businesses (such as for solo practitioner specializing in wills, trusts and estates), it is unlikely a website will actually generate sales, but lacking a website – even a static, simplistic one – will lose sales.  And that loss can be huge.

Thus, before you begin, check for vulnerable points, such as

  1. The SBA list of common failures
  2. Your experience level in the target industry
  3. Capital required
  4. Location, whether physical or online
  5. Website and social media plans, and
  6. How to walk continuously forward rather than sprint in fits and starts

 

Brett R. Keenan is a Business Coach and Retained CFO/General Counsel for Small Businesses and author of the blog “Small Business 101: From Start-up to Success”.  Based in Chicago IL, BRKeenan & Associates has helped numerous large and small companies with Finance, Law, Operations and Strategy since 1999.

©BRKeenan & Associates, LLC. – December 2014

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[i] MLM, or multi-level marketing, such as Amway or NuSkin.