How to Kill a Business
December 04, 2009
In past posts, I have extolled the virtues of entrepreneurs and how important they are for creating jobs. I have also noted that not all entrepreneurs are good businessmen. A community is generally worse off for having had a business begin then fail than it would have been not having the business started in the first place. The reason, of course, is that a failed business can have an adverse domino effect on businesses that provided it with services and supplies. In addition, credit commitments made by employees based on continued employment could go into default. A number of “lists” have been drawn up to help entrepreneurs avoid failure and going over those lists is an interesting exercise. The first list is contained in a book written by Donald R. Keough entitled The Ten Commandments for Business Failure. If you want to fail, here is what Keough says you need to do [the comments in brackets are mine]:
1. Quit taking risks [I’ve noted in past posts that entrepreneurs are risk takers. When they stop pushing the envelope (to use an aviation term), they lose one of the critical edges they enjoy over other business people.]
2. Be inflexible [If you’ve been reading this blog for very long, you know how my company, Enterra Solutions, has changed as opportunities have emerged and the business landscape has altered. Good entrepreneurs recognize when and how things change and are flexible enough to change with conditions].
3. Isolate yourself [I’m a big believer in connectivity, including (and maybe especially) face-to-face contact. I’m also a big believer in cross-discipline approaches to problem solving. When you isolate yourself you deny yourself access to new ideas and approaches, you will not only miss opportunities you will start making bad decisions.]
4. Assume infallibility [“Anybody stupid enough to think that they have all the answers is destined to fail. This “commandment” is not new. Business analysts have long known that a “not invented here” attitude toward innovation is a surefire way to lose business and promote failure.]
5. Play the game close to the foul line [Having only seen Keough’s table of contents and not having read the book, I’m assuming that he is saying that people who conduct their business in an unethical way are doomed to fail. I couldn’t agree more.]
6. Don’t take time to think [Entrepreneurs generally enjoy a healthy optimism and a persistence that Sisyphus could admire. Optimism and persistence, however, need to be tempered by a sound business plan. Although “he who hesitates is lost,” you should hesitate long enough to weigh the risks.]
7. Put all your faith in experts and outside consultants [Since part of Enterra Solutions business offering is consulting, one might expect me to disagree with Keough on this one. I don’t. Keough isn’t denying the value of consultants, he is saying don’t put “all your faith” in them. Consultants are sometimes hestitant to recommend risky strategies because their reputations are on the line. In addition, no one will ever know your business as well as you do. Nevertheless, consultants can offer you advice from an outsider’s perspective that can be very helpful.]
8. Love your bureacracy [“All ogranizations have a formal organization chart and they also have informal ways of getting things done. I suspect that Keough is simply saying that you shouldn’t let the org chart get in the way of progress.]
9. Be afraid of the future [“As I’ve noted in previous posts, entrepreneurs look at the horizon and always see a sunrise. Even in difficult times, they can find opportunities.]
10 .Lose your passion for work–for life [I think this “commandment” is self-explanatory].
The second list is provided by New York Times‘ blogger and small business owner Jay Goltz [“Eleven Easy Ways to Destroy Your Company,” 29 October 2009]. His list is for other small business owners, but many of his comments apply to any size company. He writes:
1. The lowly extension cord. People get cold feet. They get a space heater. They plug it into a two-pronged extension cord. They forget to unplug it when they leave work. That night, while you are sleeping, your entire business burns down. … It is good practice not to allow any extension cords in your business that aren’t three-pronged. [Good safety practices are always a good idea.]
2. Bad receivables. Let’s assume that you are using good judgment as to which customers get credit and how much. … Bad things happen to good people. Good and honest intentions do not always result in getting paid. It is very painful and difficult to cut off an old customer, especially when you need the business. But many companies go broke because of bad receivables. [This is a problem with which all business owners can relate.]
3. Interviewing. It is both art and science. Like a bad science experiment, it can cause explosions. Having someone who hasn’t been properly trained interview prospective employees is a recipe for disaster. There are many questions that you cannot ask without risking a nasty lawsuit that will cost plenty of time and money. [Oh yeah! Fortunately, I’ve got great HR people working with me.]
4. Hiring without doing background checks. There are some bad people out there looking for jobs. Even with a background check, there is no guarantee that you won’t have a problem, but it will certainly improve the odds.
5. Vehicles. They are rolling liabilities. Allowing someone who is not insured properly through the company to drive one can have disastrous results if there is an accident. You will be seen as having ‘deep pockets’ — even if your pockets are empty.
6. Vehicles, again! With the demise of the full-service gas station and longer intervals between oil changes, many people are driving around on under-inflated tires, which are much less noticeable since the advent of the radial tire. Under-inflated tires are more likely to cause a blowout, which can result in very bad things. We check all of our vehicles once a month. [Goltz has convinced me I don’t need company cars!]
7. And again! Texting while driving is the new drunk driving. Do not allow it.
8. Insurance. I asked my insurance broker what the three biggest small-business insurance failings were. His response: 1) understating insurance to value; 2) not having employment-practices insurance; 3) not having business-income replacement coverage to replace lost revenue until the company is up and running again. It is no secret that the insurance companies are in a much bigger hurry to settle a claim when they are paying out money every week to replace that income.
9. The wrong accountant. Many accountants just do tax returns and are not qualified to act as an outside voice and keep an eye on the health of the company. I have seen more than one company fail because the owners didn’t know what they didn’t know.
10 .Bad controls. Many companies have gone broke because of theft or embezzlement. Your accountant should help you set up these systems.
11. Bad company policies. I was just in a spa. There was a sign posted that said that tips must be paid in cash. I asked why. (Apparently, they get asked about this a lot.) The receptionist explained that the employees didn’t necessarily claim all of the tips and the company did, so there could be a discrepancy if either got audited. Not a great story. I am sure that some customers — 5 percent? 20 percent? — will either find it inconvenient to use cash or will resent supporting tax evasion. If I am right and they lose customers, the spa will undoubtedly blame the losses on competition or the economy. [More importantly, employees deserve to know how you expect them to act. They deserve to know that your company operates ethically and that you expect them to do likewise.]
Inspired by Keough and Goltz, Financial Times’ columnist Luke Johnson came up with his own list [“Ten easy ways to murder a business,” 18 November 2009]. He writes:
1. Take on too much debt. Companies usually go bust because they owe the bank too much. If you have no borrowings, you can survive a lot. We have lived through an era where it made sense to borrow and buy if you could; now everything has changed, and certain lenders are taking no prisoners. If there are problems looming, move early to raise capital. If you leave it too late, there may be nothing left to save.
2. Choose the wrong business partner. Plenty of companies hit the wall thanks to disputes between owners. It happens even between siblings. If you go into business with someone, be cautious before taking the plunge and have a proper subscription agreement – and keep communicating, even if you disagree.
3. Become overdependent on one customer. Most small non-consumer businesses have just a few clients. If they lose a big one, they are likely to fall into sharp loss. The answer is to diversify if you can, and try your best to be an irreplaceable supplier so that you can never be dumped.
4. Get ill. Many small businesses sink because the founder gets sick or injured, and therefore can’t work. So take exercise, eat sensibly, drink in moderation, stop smoking, buy insurance and try to plan management cover in the event of an accident or other enforced absence.
5. Make a mess of a major IT project. I have seen companies hit the rocks because they spent fortunes on computer systems that did not function properly. I’m not suggesting you never invest in technology, but make sure you take expert advice, and embark on such a move only when the time is right.
6. Get into a price war. Companies frequently undertake suicidal contests with rivals in a desperate attempt to seize market share. This tends to be a zero-sum game that benefits customers only, and leaves the operator with the least cash broke. I prefer to sell on quality or other differentials. Discounting is a dangerous pursuit.
7. Sign a burdensome property lease. I have witnessed many professional services companies go under because they signed a long-term lease on too much office space at the wrong rent – and then revenues collapsed. It must be the main reason for accountancy, law and architecture firms having to dissolve. Now would be a great time to start such a business if you can generate the orders.
8. Forget your customers. I am constantly surprised at how often one experiences poor service, especially in competitive fields. Almost everything is a repeat business, and if you are treated badly by someone, you don’t purchase from them again – and you tell your friends not to go there too.
9. Never evolve. Successful companies can fall into the trap of saying “If it ain’t broke, don’t fix it” to every innovation that comes along. They grow complacent and allow newcomers to eat their lunch. Long-term winners are always improving, questioning, adapting. No commercial formula lasts for ever.
10. Don’t bother investing. Certain proprietors strip their business of every penny of cash, starving them of capital. But every undertaking requires maintenance and refreshment – otherwise the facilities grow tired and inefficient, and new product development evaporates. If you dividend everything out, you will eventually discover that you own a wasting asset.
There is a lot of great advice contained in those three simple lists. If you are thinking about starting a business, you should take their lessons to heart.