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Value Creation Blog

4 Reasons Businesses Fail – Enterprise Value

Posted by Josh Patrick

Business Failure

I’ve seen businesses thrive, survive, and fail.  Those that fail often have something in common.  The founder made mistakes either through lack of knowledge or actions not taken that could have saved the business. 

I find that it’s rare that a business fails because there was no need for the product or service the founder wanted to provide.  The failure will often be around something the founder could have done differently or something the owner should have known.

I believe that before one goes into business they should spend some time learning the language of business (finance) and learn about businesses that have failed and why the failed businesses didn’t prosper.

Here are some, but not all, of the reasons that a business might fail:

The founder took a ‘bet the store’ risk in their business.  Successful business owners often become successful by not taking risks that can put them out of business.  Contrary to popular opinion, successful business owners are not risk takers.  They are instead risk adverse and won’t put their business at risk on one idea.

When starting a business you might have to take a large risk to get started.  That should be the last time you ever take a risk so large that it could put you out of business.  Yes, you will have to take risks, but risks should always be measured ones.

The business had no consistency.  A business can’t provide great product and services one day and terrible ones the next.  All businesses depend on repeat business.  If your customers can’t depend on getting consistent service, even if it’s not the best then you don’t have a chance of staying in business.

I don’t recommend you consistently under perform your customer’s expectations.  Unless you’re in a business like the airline business you’re not likely to get away with that strategy.  Operational excellence is the ticket to entry in most businesses today.  If you can’t provide an excellent customer experience that is consistent you put your business at risk.

Not being able to budget cash needs properly.  This is a big one.  Many businesses go out of business because they run out of cash.  We often are over enthusiastic about how much revenue we’re going to produce and under estimate what our expenses will be.

It’s important that you accurately understand your cash needs.  After you’ve maxed your credit cards and tapped all of your friends and family is not the time to learn about cash flow management.  If you want your business to last, you must know how to manage your cash before it’s too late.

The founder does not take personal responsibility for all activities in their business.  Obviously we can’t be responsible for everything that happens in our business.  At the same time if we don’t at least pretend we’re responsible we won’t have a chance to make sure we take actions that will keep our business afloat.

I recently ran across a business founder who told me all of the reasons that her business went under.  There was a long list of things that went wrong.  She was responsible for none of them.

In actuality she could have taken steps that would have protected her business and prevented it from going out of business.  Because she never took personal responsibility for all of the bad things that happened and ask the question, “what did I learn” she ended going out of business.  I find that without personal responsibility we don’t learn and we put our business at risk.

What are reasons you see business don’t make it?  Do you create any of those in your own business?  If so, ask yourself what you can do to change.  It might mean the difference between success and failure.

Josh Patrick

I’ve written a report on the 7 Myths of the Private Business Owner.  Click on the button below to learn about 7 things that are incorrect about successful businesses and their owners.

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Topics: for business owners, financial planning, enterprise value, risk management

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