Common Reasons for Small Business Failure

Why Many New Businesses Fail – Four Common Reasons of Small Business Failure

You may have already heard many stories of how people started a business with much enthusiasm but fail to run it successfully for a long-term. The failure of a business has, in my opinion, nothing to do with your luck or any other spiritual powers. There are a few common reasons of small business failure and I have written some of them in the following headings;

1: Poor Market Research

It sometimes happens that you wake up from your bed at 3 a.m and say to yourself ”wow, this is a multi-million dollar business idea”. Lame! Multi-million dollar business ideas do not simply pop-up into your mind while you are sleeping; instead they require a hell lot of market research to assess whether your business idea is worth a million dollars or not. Making a million dollars is not as easy as you think.

Poor market research plays an integral role in small business failure. People forget to gather useful data from the market which, in real terms, ensures success. They overestimate the potential of their product/service to sell in their target market. So, before you spend a single penny on your business, conduct a detailed market research.

2: Poor Business Planning

I have seen people who grab a page or two from their pocket and say, ”this is my business plan”. You are pretty much sure about the reaction that occurs on your face when someone says so. You’re right! Another reason why people fail to make their business successful is that they do not draft a proper and well-researched business plan. Warning: do not waste months on preparing a business plan rather than actually doing anything.

A business plan will help you draft a map of how your business will meet its objectives. You will address all operational areas of your business before actually starting anything; this will ensure that you are well prepared for any surprises that come your way. I have covered a diverse range of topics related to business planning in my blog and hope you will find them helpful. While preparing your business plan, all you need is to be honest and realistic about the projections and assumptions you make.

3: Limited Start-up Capital

Another common reason for most business failures is either they start with little start-up capital or they spend the available capital on unnecessary luxuries such as buying expensive furniture, expensive graphic designs for your websites, hiring more people than required, expensive marketing campaigns etc. It is always important that you prepare for running the business at breakeven (or even loss) for at least the first year of operation. The available capital shall be used in necessary and value adding items.

A business plan will help you develop a forecast of how much capital do you need to start your business and what is actually necessary at the start. Spending wisely in the start will help you sustain for a longer period as well as prepare you for hard times.

4: Synergy between Team Members

This is another common reason causing many new businesses to fail. Unless you are a single proprietor or a professional offering your services, you need to team up with people. You may also have co-founders who are with your from the scratch of your business. The team members and their synergy among each other play an important role in the overall success of your company.

Be careful when you select your partners and other team members because they will be playing a key role in your business. There is a need of people who have technical knowledge about your industry as well as those who are good in other business operations.

I hope the above reasons have helped you in understanding how you should start initially. There are many other reasons to a business failure that can be written here but these four reasons are in my top list.

How To Turn Self Employment Into A Business

are really self-employed or a have a business? Ask yourself if you can still generate an income when you take a holiday.

Many individuals who have chosen self-employment haven’t had a holiday in years, because they cannot afford to take time off from running their business.

Don’t be fooled into thinking that because you’re self-employed and don’t have a boss that you have your own business. For many such individuals, instead of having one boss, you’ve got twenty, fifty, or hundreds of bosses (depending on how many customers or clients that you have). Increasing your success being self-employed generally translates to working harder and longer, giving you less time to enjoy life.

Moving from self-employment to becoming a successful business owner can mean real freedom. It is comforting to know that you can leave the business operating without your direct involvement each day and still have income as the business functions in your absence.

Turning self-employment into a business requires establishing systems and procedures so that your business continues whether you are there or not. One reason that many business owners are afraid to take time away from their business is that they fear their staff cannot do as good a job, or cannot make the necessary decisions required in the daily operations.

The first step in overcoming that obstacle is to examine what you do in your daily routine and ask yourself what would happen if you didn’t do some of those tasks. Would your business cease to function? If not, then maybe some of those tasks are taking up time that would be best spent on other activities.

Your next step is to decide which of those tasks necessary for your business really need to be performed by you, or can someone else do them? Obvious jobs would be collecting the mail, buying tea, coffee, stationery items etc that could be done by someone else in your business.

Since some tasks may have to be done by skilled people, you could employ or subcontract others to perform them. There’s other operations necessary for your business to function that could be outsourced, such as bookkeeping and accounting.

As you examine each task you perform as a self-employed individual, you’ll begin to realise how you are spending (or wasting) valuable time in areas that are not as productive or maximising your skill sets. To turn your self-employment into a business you need to look at ways of leveraging your time, increasing your income, and freeing up some of your daily tasks.

As you start to identify the more and the less productive tasks you can begin to compile a manual that outlines how your business operates, and can assign tasks to other people. Now you’re thinking like a business owner rather than being self-employed.

By having an operations or procedures manual in place, these daily routines can be documented so that everybody concerned understands what is required to ensure the business keeps operating without you, the business owner, being present every day.

Fast food chains are classic examples of how systems and procedures have been implemented so that young inexperienced teenagers can run these operations with no business skills whilst the owners can be sitting back enjoying the profits.

You’ll be amazed at the benefits that compiling a procedures manual can bring to your business. As you document all the steps involved you’ll begin to recognise tasks you can delegate, methods you can streamline, and even find more efficient ways to achieve the required results.

Your business manual will make the business so much easier to run. Your staff can all refer to the manual each time they have a problem, instead of waiting to speak to you about the same issues they raised the previous week.

Once you get the business running without you, there may be other opportunities for you to leverage. With the experience you’ve gained you could duplicate the business in a new location and further reap the financial benefits. Other avenues to increase your profits may be through developing a franchise, or licensing your business model.

Not only will the operations or procedures manual add efficiency and speed to your business, but you’ve just added so much more value to the business if and when you decide to sell it.

If you’ve been struggling to find the time and freedom that you were hoping for when you decided to start working for yourself, then maybe the time has come for you to look at other ways of turning your self-employment into a business.

Picking The Best Time To You Sell Your Business

When marketing a business for sale you will want to get the best result possible. So when is the best time to sell so as to achieve the best realisation of the value of a business?

When Should You Sell?

You are likely to get the best price for your business at the point when its growth prospects appear highest. The growth prospects of your business will appear best when:

- your company’s business is growing (has been growing strongly and has prospects of strong future growth);

- your industry is growing; and

- the outside economy is growing.

Ideally therefore, you want to be selling at a time when your performance is good and your prospects are better.

It is a fact of life that many entrepreneurs are attracted to high growth industry as an expanding market offers easier opportunities to create a new business. What you must bear in mind however is that every high growth industry eventually settles down to a much lower rate of growth which cannot support new entrants into the market and often cannot support all of the existing players. Therefore many sectors, from skateboard shops through to nursing homes, golf clubs, and mobile phone shops, will show periods of high growth with large numbers of players entering the field only to have a ‘shakeout’ as the rate of growth declines and the less successful players go to the wall.

In buying your business, purchasers will be putting a value on the prospects of the business.

When picking your moment to sell therefore, it pays to ‘leave something in it for the next man’. Remember that selling a business is a process that will take some time. Many entrepreneurs are tempted to hang on into a growth industry, attempting to squeeze every drop of growth out of the business and aiming to sell right at the top of the curve.

The danger with this approach is that you just might be very lucky and sell out at exactly the right time. However, bear in the mind that the sales process will take several months to complete, from start to finish. The chances are that you will not be successful and will miss selling right at the peak.

The point to note here is that the value of the business sold when it is on the up in a high growth phase is likely to be much greater, or as great as the value of the business sold at the peak as growth starts to tail off, because the business during the growth phase will be being valued on the basis of continuing growth as perceived in the marketplace; whereas the value of the business as the market flattens out may be valued on greater absolute earnings, but potentially at a much lower multiple due to lower growth prospects.

Moreover, if you wait too long in the business’ lifecycle and the market starts to decline, the value of the business will be based on a deteriorating growth prospects which will be reflected in the multiples achievable.

You should review your business every six months or so and consider whether now is a good time to sell. In fact, asking yourself the question: ‘Would people want to buy my company?’ is a good test of whether you are generating value or not. Because if the answer is ‘No’, what does this tell you about your business?

Keep an eye, therefore, on the value of your business and the rate of growth of it, its industry and economy in general.

So What If You Need To Sell But Your Business Is In Difficulty?

If your business is in difficulty, if you attempt to sell it you will have to accept that you are unlikely to get as much for it as you would if it was in good health; since as a distressed seller or someone selling a distressed business, the value you are likely to achieve for your business will be low.

Therefore, if your business is in difficulties, in order to improve the price you are likely to achieve, it is usually best to attempt to turn it around first so as to be able to market a business with a better current trading performance and future prospects (a process sometimes referred to within the turnaround profession as ‘polishing the pig’).

If your business has become quite severely distressed, and in practice would fail one of the tests for insolvency set out in the Insolvency Act 1986, in that it is unable to pay its debts as they fall due or that its liabilities exceed its assets, then there are further problems in attempting to achieve a sale.

These are, that in the event of a liquidation, the insolvency practitioner who has been appointed will have a duty to look at transactions during the period leading up to the insolvency, particularly those undertaken when the company was technically insolvent, to see whether any of these should be reversed.

In particular he will be looking for transactions at undervalue where he is able to argue that an asset has been sold off cheaply (such as you have sold the Rolls Royce to Joe, your brother, for £5 the day before the liquidation), or preferences, where he is able to argue that you have acted to put one creditor in a better position than others (such as you have paid Joe, or have transferred assets to him in settlement of his account prior to the liquidation, when you have not paid other creditors).

Thus, any sale or transfer of a business’s assets in the period leading up to a liquidation may be subject to a challenge in the courts by a liquidator. They may also feature in the liquidator’s report on the directors’ conduct prepared for the Government’s directors disqualification unit on which they may decide to bring proceedings.

So in summary, when you want to sell your business, choose your moment to sell, do not have it forced upon you. Be proactive about deciding when you want to sell your business and never allow yourself to become a forced seller of your business as a result of economic or other reasons. If you do, you will achieve a worse price because firstly, you will not be selling at the most opportune moment to maximise value, and secondly, because anxiety will force you to accept lower offers than you would otherwise consider.

What Business to Buy

There’s a twofold answer to the question ‘What Business to Buy’ simply because in its’ core it involves two aspects: You and The Business.

At first it is all about Your Skills, Knowledge, Experience and Interests. When looking for Opportunities in Business You are a fundamental Part of the Process. Make list to narrow down personal interests, traits and characteristics and look for a Business that suits these traits. Most of the time when entrepreneurs buy Businesses that don’t match their Temperament, they end up unsuccessful, unhappy and selling the Business.

Ask yourself the following questions to get Your Ideas for Businesses:

What are my 5 Strongest Personality Traits? You can also opt to ask your Friends and Family to send you lists with their observations (can be very revealing).
What are my 5 Strongest Skills when it comes to doing my current or previous jobs?
What Role do I want to Play in the Business?
What Destination and Location do I want my Business to have or can it be a Business without a fixed Location (such as internet based).
Do I prefer a large-scale Business with many contacts and customers or do I prefer to focus on a niche market, dealing with a smaller number of contacts and clients?
Do I want a Product Supply Type of Business or a Service oriented Business?
What is my Business Investment Budget?

When going over all the answers to these questions, you will have a Clear Picture What Type of Business you want to Buy.

Find a Business to Buy

After having identified What Type of Business you want to Buy it is time to Find a Business to Buy. You will want to opt for a Business that offers Value for Money. Its Valuations have to be backed up by Reliable and Detailed Financial Data.

Some Investors are Buying Businesses because they are Cheap compared to their core Value. They believe that as long as the Market undervalues the Business relative to the core Value, they are making a Solid Investment. This way of Investing fully depends on the reasoning that the market will eventually realize it has undervalued the Business and will correct its Course.

Below some questions you can ask yourself when determining What Business to Buy:

Does the Business Match my Personal Characteristics and Expectations?
Is there a Solid Business Plan available?
What are the Top-5 Competitors of the Business?
Do I have access to all Detailed Financial Data?
What is the Trend in Profits over the last 5 years?
Does the Business show healthy and consistent cost margins?
What is the expected Return on Investment?

How much you will eventually profit from your Business depends on the level of Original Investment and Your Management and Marketing Skills.