Why Medium to Small Businesses Fail

Your dream was always to be your own boss and run things yourself. You had the self-confidence, resources, ideas and passion for this activity and the support you needed from your family to do this. Retirement or an exit from the business was really never in the forefront of your planning thoughts, so you went about your daily, monthly and annual duties as if "trees grow continually to the sky"!

Success followed you throughout the typical ups and downs of an entrepreneurial venture and you had a good time and made a living you and your family could be proud of. Over the years many changes occurred that held your interest. You maintained the business growth on a reasonable basis and lo and behold you have paid all the debts, possibly acquired the real estate that housed your activity, but in the "effort and grind" of daily activities you did not take into account what could happen to all of this. After all your best friend was in the business with you and yes you had both agreed to a buy out plan, had it drawn up at the beginning and even had insurance to help pay for it all. Only one thing you neglected to do and that was to sign and execute the document.

Did you ever consider developing an in-depth exit strategy plan?
Did you ever consider that competition might be gaining on you and you were unaware of the consequences?
What else could possibly go wrong with you having such a strong business in a strong marketplace?

THE 4 D's should be considered as all are out of your control but any one of them can and will bring a good business to its knees.

DEATH:

Unbeknownst to you or your best friend and partner one day he's in for a routine medical procedure and a disaster occurs and he dies unexpectantly. Oh well you have this agreement. But wait it's not been signed, so what could possibly happen?

An awful lot can happen and none of it's good.
- You now may be in the unenviable position of being in partnership with someone else's spouse or their kids who know nothing of the business and only know of the income they have received throughout their lives. They have never worked in the business and are absolutely clueless as to what goes on in the business and do not care. They just think you must be trying to take advantage of them, so they go hire a lawyer on a contingency basis as they have no cash and the lawyer, they hire will be equally clueless. Yes, they expect to make you the survivor pay the fees!

So, what? Well their lawyers are going to help you with this issue and the cost of one big lawsuit can run into the 10's of thousands of dollars and more. This is on top of how you run the business with your partner gone who was in charge of a major portion of the business. His role in the company must be replaced as it was critical to the ongoing success and you just do not have the time to fight the lawsuit and learn how to run his portion of the business.

Be sure all agreements are executed. Plan for the worst in the beginning and hope for the best. How do you get out of something if things go wrong? You can usually fix things if they go right!!

DISABILITY:

You are in the business by yourself and one of your passions is playing baseball which you do on weekends and during several tournaments during the year. What a blast and as you've taken good care of yourself physically and are working and playing hard. Then on the way to a game your car is blindsided by someone and you have been seriously injured and will be lucky to live much less be able to work again. Now what happens? Maybe not much and therein lies the mess.

With no one trained to replace you or your critical activities this business sits on the edge of going out of business or possibly being one that is to be taken over as an asset sale only and no goodwill value may be transferable. In many small businesses, especially service oriented, the good will value is the majority of the value as there are not many tangible assets needed.
Partners, like spouses, are hard to find and even harder to keep, but a solid backup person that is well trained can be invaluable in a transition even if you have to seller finance the transition for them.
- It's always easier to find a way for someone to buy your business if you can consider the many ways that this can be done, so that you do not lose it in a case like this.

DISINTEREST:

Ok you've now run this business for over 40 years and that's 100% of your adult life. Your spouse has somehow put up with you being gone all the time as the financial benefits have outweighed the absences. But what you might learn is that your spouse took you for life but not for lunch! So, you wake up one day and realize that you're not getting to the office until 10:00 am and wondering who you will have lunch with that day. Sales have remained steady, but not a lot of growth as you have a good staff, but your level of interest has waned over the 40+ years at the same desk, in the same office and the same building. In other words stagnation.

Should the business be in a sound market and have a good position it may not be too late to find a buyer, but remember that any new buyer is looking for a business that will service the "outrageous debt to buy the business", be able to earn a good salary, plus a reasonable ROI or "momma" is not going to let the new buyer purchase this business.
Be alert and aware of disinterest as this disconnect will creep up on you before you even know it.

DISASTERS

Hurricanes, tornados, fires, floods etc. we've all seen what they can do to us locally, but never in most of our lives have we ever seen the results of this pandemic. Hopefully this too will pass, but there will be countless businesses that will never re open again. Until there is a "cure" or a "vaccine", so many people will be hesitant to take up their lives again as they were. The restaurant industry is the one that comes mostly to the forefront to me at this time as it's one of the largest industries and employers in the USA and by far one of the hardest hit. Yes, there are some businesses that thrive in a crisis but that's not the norm. So, as you go forward it's always a good idea to maintain a conservative approach to many aspects of your business and I always say, "keep your powder dry", because if you run out of cash you typically are out of business.

The 4 D's refer to the old adage either if you fail to plan you can plan to fail. At Business Brokers of Texas, we offer consulting services, valuations and help you prepare to sell your business in order to maximize the selling price and minimize when it's time to sell.

Why Medium to Small Businesses Fail - The 4 D’s