It is like a sixth sense: You walk or drive past a new place that has opened and know that the chance of its success is limited to no more than a year.
Perhaps it is that, after years of working with businesses, I can just feel it. Too many businesses open in hopes of prospering—only to collapse a few months later.
Why does this seem to happen so often?
Some root causes of business failure include:
- Over-optimism – Assuming that “everyone is going to love us!”
- Undercapitalization – Funding to initially open or launch – and assuming that everything will be profitable in a very short period.
- Not seeking professional advice – Business Advisers and sharp CPAs nearly always caution against over-optimism or reckless decision-making.
- Failure to work with a strong, seasoned Commercial Broker – Knowledge really is power – and someone who has experience in negotiating on a business owner’s behalf is worth his/her weight in gold.
- Having Aunt Betty do the books – “She is good with math and certainly will do a good job while allowing a business to save on professionals to manage the books!” Yet managing business books can quickly get complicated. Especially if a business has employees. And if “Aunt Betty” isn’t knowledgeable with managing QuickBooks then the reports can take on a life of their own.
- Lacking an established relationship with a Banker (who will be a trusted partner and adviser). I’m not talking about a “flavor of the month” banker who is really just a sales rep. for big banks until something better rolls around. We are referring to a Banker who has made it a career to be your advocate and partner in advancing long-term growth.
- Being overconfident and growing too fast – The percentage of initially successful businesses that I have cautioned not to grow aggressively, and did so anyway, are in the graveyard of failed ventures.
- Lack of understanding of city guidelines, taxes, and rules – Those fines can quickly multiply.
- Inadequate experience in management (particularly with employees) – It only takes one bad employee to take down a start-up. Being well versed in labor laws, hiring practices is essential.
- Failure to have a sharp Business Attorney – to insulate you from costly contract mistakes. This is particularly relevant with business partnerships. In the same vein, this also applies to understanding limits to insurance policies etc.
And while there a many other factors, these are some key ones. Having a well thought out strategy is essential, along with surrounding yourself and your team with competent advisers. Knowing your limitations and validating whether your scaling budget and timeline is realistic is essential. If in doubt, hold off on the venture until you are.