Business Failure: Autopsy and Recovery

Failure and setbacks in a business venture can take many forms, from a botched new product or service launch, to cash-flow insufficiency, losing the lease on the perfect storefront or office location, to the appearance of an aggressive new competitor. Business failure is painful and humiliating.

Even if the pre-launch planning and start-up capital are inadequate, significant research and planning and usually a large sum of money (that may have been borrowed) are nevertheless invested with the hopeful intention of bringing a new product, service, or company to life. If things don’t pan out, it’s inevitable that those involved feel crushed and demoralized.

The intricacies of launching and operating a business can cause any venture to falter, even if the founder is not directly responsible for the downfall. The many moving parts of a new venture can cause the founder to overlook essential factors, resulting in a failed launch.

Yet, in some cases,  it’s possible to recover and relaunch after an autopsy has been performed and you and your team (if there is one!) have figured out why things unraveled and how to avoid that problem and maybe others, too, in a second attempt. Common stumbling blocks include insufficient operating capital, an ill- conceived business model, an inadequate assessment of what target customers value and improper pricing.

Many Freelancers and entrepreneurs, after allowing themselves to grieve the loss, are able to move forward with determination and a better plan (and additional resources, most likely) to do much better in the next iteration. Take a look at these common causes of business failure and make note of the lessons to learn:

Unanticipated start-up costs and low sales revenue

Whether you self-financed and bootstrapped your business or borrowed from a bank or investors, you can find yourself in financial quicksand if your projections of start-up costs were underestimated and expectations for customer acquisition were blue-sky optimistic. It’s very easy to rack up big credit card debt and then succumb to panic that leads to making reckless decisions, such as second- mortgaging your home or borrowing from friends and family, as you struggle to successfully launch and create adequate business revenue. Unfortunately, you might find yourself unable to repay as expenses mount and customers are slow to arrive.

THE LESSON IS, do your homework. Thoroughly research the amount of money that will be required to launch your new business, or new product/ service, and make a rational plan for how to acquire the funds, whether you go to the bank, self-finance, ask to borrow from selected family and friends, or take on partners.

Regarding target customers, your first task is to figure out who will buy what you propose to sell, whether products or services. Is there a viable and growing market? Moreover, can you access those prospective customers, something that can be a challenge in the B2B sector.  Realistic financial projections will protect you, especially a Break-Even Analysis, which helps you predict when customer sales can be expected to pull into profit-making territory.

Finally, develop a profit-making business model. You must anticipate the start-up costs, be able to access the targeted customers, you must have the right method of delivering the products or services and pricing must be acceptable to the customers and profitable for the company.

Receivables collection problem

“They’d take sometimes 3 – 4 months to pay and it was killing my cash flow,” she said. “I couldn’t pay my suppliers without difficulty. (The company) refused to pay with a credit card. I was trying to get paid.” Lara O’Connor Hodgson, Co-Founder of the NOWaccount

As counter-intuitive as it seems, a business owner can have orders flying out the door and be totally broke. The problem, as described above by Lara O’Connor Hodgson, is that customers can be slow pay and the difficulty in collecting accounts receivable has put many businesses under.

THE LESSON IS, healthy cash-flow is essential to sustaining a viable business. Investigate the NOWaccount, which guarantees that invoices will be paid on time and in full (both you and the customer must have good credit). Those in a service business (me!) are advised to ask clients who contract to pay a project fee for an assignment to pay 15 % – 20 % of the total fee at the contract signing and link additional payments to project milestones or specific dates (at 30 day intervals, for example). The final payment owed should be no more than 25 % – 35 % of the total fee. In this way, you will receive regular infusions of cash and be much less vulnerable to a payment default by ghosting.

Powerful competitor

Facing a big new competitor is scary, but take a couple of deep breaths and take heart. If you’ve been in business for at least a year and managed to attract customers and deliver your products and services adequately, then you have a chance to hang on and continue with a growth trajectory. Just don’t panic; shift your adrenaline to market analysis instead. In reality, your competitor probably does not offer better quality products or services but rather has resources (like a generous advertising budget) that your organization lacks.

THE LESSON IS to 1.) analyze your competitor’s operation and determine the obstacles you need to overcome or what you need to do differently, i.e. smarter; 2.) refresh your customer knowledge to learn how their expectations and concerns may have changed to make them susceptible to switching their business to the competition; and 3.) avoid competing on price, which is usually an unwise strategy for smaller operations.

Larger companies have more money to work with and that allows them to hire more employees, offer a wider range of products and services, roll-out splashy marketing campaigns, stock more inventory and more flavors or colors and also offer lower prices because they can afford to buy in volume from the wholesalers.

Your defense is to brand your business well and customers reasons to think twice about opting for the competitor. Because no two businesses are alike, you must define for current and prospective customers why they’ll do better by doing business with you.

The heart of branding is defining and constantly communicating a company’s unique selling points, so you must 1.) understand the competition’s unique selling points and 2.) learn to clearly define and articulate your organization’s unique selling points so that you can build on the attributes that set your company apart and potentially make you valuable to customers.

When you understand your competition’s unique selling points and update your customer knowledge to learn as many specifics as possible about what resonates with them, at least theoretically, about the competitor’s unique selling points, you’ll see how to tweak your offerings in ways that reflect your company’s “house style.”

New and small businesses should definitely put an emphasis on excellent customer service. The digital revolution has not meant that customer interactions aren’t essential, even though face-to-face communication has become more limited for many.  To the contrary, customer service is even more vital in today’s business world.  Present a customer first attitude and create a pleasing customer experience. Go the extra mile to surprise and delight and your business will quickly become trusted and loved.

If you have employees, you also want to ensure you are the best employer in the industry. Having motivated and skilled staff will provide benefits for your customers and that will translate into benefits for your ability to successfully compete.

Some of the most successful entrepreneurs have suffered the frustrating experience of a business failure. For Scott Adams, creator of the world-famous Dilbert cartoons, life’s path wound through many jobs, failed startups, useless patents he applied for and countless other indignities. In his memoir, Adams shares lessons learned about keeping himself motivated, healthy and happy while racking up the failures that ultimately led to his success.

It’s fine to celebrate success, but it is more important to heed the lessons of failure.”  Bill Gates, Co-Founder and former Chairman and CEO of Microsoft Corporation

Thanks for reading,

Kim

Image: American Gothic (1930) by Grant Wood (1891 – 1942 Anamosa, Iowa, USA) courtesy of the Art Institute of Chicago. The painting depicts an Iowa farmer and his daughter.

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Fixing Your Epic Fail

You’ve got to know when to hold’em, know when to fold’em. Know when to walk away, and know when to run.   “The Gambler”, written by Don Schlitz and made famous by singer Kenny Rogers

The Horatio Alger story remains the ultimate creation myth of the United States. Start out penniless.  Be clever, ambitious and ready to work very hard.  Recognize opportunities that others ignore.  Have the courage to take risks.  Summon the self-confidence and determination to stay the course in the face of disappointment.  Succeed wildly.  Make millions of dollars.

The most admired American heroes are the success stories, the big money makers. Paul Allen and Bill Gates, college drop-outs who pulled all-nighters to build Microsoft.  Madam C.J. Walker, a widowed young mother and one-time laundress who in 1906 created a hair care product in one of her wash tubs, out-maneuvered endemic sexism and racism, and became America’s first female and first non-white self-made millionaire (her line is now at Sephora).  Madam Builds an Empire

Striving is the template for life in this country.  Never give up.  Just do it.   However, quiet as it’s kept, certain dreams simply will not pan out because they cannot.  Some ventures are ill-conceived.  Some are very good, but the resources to launch them are not available.  For others, the timing is wrong and one either misses the market, or is too far ahead of the curve and prospective customers do not yet have the desire for the product (or service).  In these instances the smartest action is, sadly, to scrap the dream and walk away.  It is so painful, humiliating, even un-American.  Success is our brand and the whole world knows it.

One of the biggest questions we will encounter as we build a life is, when do you hold on tight to your dream and keep pushing forward through rejection and disappointment and continue to invest time, passion and money into an idea that might be doomed (or not) and when do you give up?

Failure, at some point, is inevitable.  It is demoralizing and damaging, if only to the ego.  It undermines self-confidence.  Repeated failure unravels and destroys a life.

According to behavioral psychologist James Clear, who studies and writes about performance and creativity, failure can be classified in three categories:

  1. Failure of tactics
  2. Failure of strategy
  3. Failure of vision

Clear categorizes Failure of Tactics as Stage 1 and identifies it as HOW mistakes are made.  According to Clear, Stage 1 Failure occurs as a result of poor planning, preparation, or execution.  The Vision may be sound and the chosen Stategy reasonable, but operations issues bring it all crashing down.  His remedy for Stage 1 Failure is to:

  • Examine the process of product and service delivery (service packages, sales distribution, quality control and customer service, usually)
  • Identify system failures in the sales process/ buying process as articulated by customers and employees.
  • Adjust systems and practices that impede an efficient and desirable customer experience and employee efficacy and morale

Stage 2 Failure results from a Failure of Strategy and Clear calls these WHAT mistakes. Stage 2 Failure occurs when the chosen strategy is unable to deliver the desired results.  Since there is no way to know in advance which of your presumed reasonable products, services, or proposals will succeed until there is a beta test, Clear recommends that after due diligence has been done, roll it out and monitor the progress.  His remedy for Stage 2 Failure is:

  • Launch the beta test quickly
  • Do it cheaply
  • Revise rapidly

Throw it up against the wall and see what sticks. If your strategy isn’t doing the job, have Plan B ready and give your concept another try.  Keep costs low to minimize the financial strain of do-overs.  Ideas are meant to be tested, it’s all about trail and error.

Failure of Vision constitutes Stage 3 Failure and it reveals the most basic reasons of WHY the plan failed. In this scenario, the purpose for taking the action was poorly understood.  Was there no measurement of demand for the product, service, or action taken? Did you overestimate access to target customers? Did you not acknowledge that you’d rather not commit the time and money necessary to build the business or carry out the initiative?

Some of us fail because we get pressured into taking certain actions by those whose motive is to continue a tradition or to exert control.  In these scenarios,  actions are taken to follow the expectations of others, rather than one’s own priorities and preferences.

For example, the brother of a good friend, because he was the only son, was expected to take over his father’s highly successful business.  But according to my friend, her brother was not cut out to run a large and complex business.  He lacked the necessary drive. Unsurprisingly, her brother eventually crashed the business.  Their father spent more than a million dollars trying to bail out his son, but the business went bankrupt.

If you’ve done your homework and can be reasonably confident that your vision is sound and you’re willing to invest your time and money testing Stage 2 issues (launch strategy) and perfecting any Stage 1 challenges (operational glitches), then ignore those who would dissuade you to abandon your vision.  Maybe you’ll never be wildly successful, but if you feel compelled to do what you can to realize your dream, then carry on! Avoid Stage 3 Failure in this way:

  • Determine your priorities and purpose and be clear about what you’re willing to do to make it a reality
  • Identify and stand by those parts of your dream that are non-negotiable
  • Accept that there may be naysayers

Thanks for reading,

Kim

Bouncing Back from Adversity

Every once in a while things fall into place,  our wishes come true and the seeds we plant bear fruit.   But inevitably,  we’re bound to get stung by a territorial hornet.   The strategic plan and common sense precautions fail to produce the expected results.  Adversity strikes and the garden falls apart.

 Maybe you lose your biggest client to a wily or better-connected competitor.   Maybe demand for your services suddenly diminishes.  You’re devastated and depressed,  insulted even,   and feeling like a truck ran over you.  You’re frightened and wonder how the bills will be paid. 

 Nadine Thompson,   founder and CEO of Soul Purpose,   a New Hampshire based direct sales company that produces organic beauty products,   knows this crushing experience intimately.   In 1999,   Thompson founded the herbal beauty care company Warm Spirit.   The company gained national recognition,   was featured in Oprah Winfrey’s O  Magazine,   counted actress Diane Keaton among its celebrity endorsers and had over $16 million in annual sales. 

But  in 2007,    Thompson lost Warm Spirit in a hostile takeover that was precipitated by a power struggle over business strategy with a partner who was providing significant financing.   To her horror,   she realized that not only was she not an equal partner in the business with this financial investor and his partner,   but  she didn’t own even a single share of the company that she created and nurtured.

Shattered,   yet determined to re-group,   Thompson pulled herself together enough to realize her own complicity in the demise.   Obviously,   she neglected to perform basic due diligence and have her attorney and accountant parse the documents and explain to her the full impact of what she was doing when bringing on the  investors.   As a result,   she unwittingly signed away her company in exchange for additional financing.

Fortunately,   Thompson possessed enough clout to quickly secure  financing for a new venture and she was able to launch Soul Purpose in 2008,   less than two years after the takeover of Warm Spirit.   Of her experiences,  Thompson says   “I believe more than ever that entrepreneurship is a journey…..Successful entrepreneurs are those who are able to learn from challenges and use resilience to bounce back from perceived failures.”   Thompson reveals lessons she learned:

1.   Entrepreneurship by definition involves risk.  Accept that.

2.   Opportunities for growth are often disguised as failures.

3.    Intuition is a gift.  Do not ignore it.

4.   Learn from your mistakes and do not repeat them.

5.    When criticized,  hear it with a  “grain of salt”,  but always ask yourself what truth or opportunity for growth is embedded within.

6.   Work not just hard,  but smart.

7.   Allow yourself time to rest and recharge your batteries.

8.   Have faith in yourself and your vision.

 

Thanks for reading,

Kim