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Good Business Failure – Why Does it Happen?

We’ve all heard about business failure. Bad businesses fail due to internal or external factors. Internal factors causing business failure includes bad or poor business leaders, business models, revenue models, judgement, failure to focus, dispute amongst the owners, etc. External factors that can cause business failure include inability to compete, change in business circumstances, inability to keep up with technology, etc.

How Good Businesses Fail

Sometimes thriving businesses can ultimately fail due to an owner’s inability to keep up with the success.

But what about good businesses? How can they suffer failure?

What we oftentimes see at the firm, are business failures due to growth beyond the business owner’s ability to maintain a successful business. Those business and accounting practices that were just fine as a one-or-two person shop suddenly become too cumbersome or begin to hemorrhage money when they grow to an appreciable size. In their success, they take on bigger jobs that consequently bring greater exposure. Then, the house of cards built on the loose foundation comes crumbling down when the accounting used for a big job cannot justify the invoices, and allegations of fraud are bantered about; or the customer fails to pay their bills on time; or the business exceeds its ability to borrow; or some sort of criminal activity hits.

Can Good Businesses Grow Too Much For Their Own Good?

If a business experiences quick growth, the owner might have a difficult time understanding more complex financial and legal issues

We also see successful businesses grow beyond the business owner’s ability to appreciate more complicated financial transactions or legal issues. For example, many business owners don’t understand what “contingent liability” is, as it relates to CC processing, and when accounting mishaps are exposed, they are often too quick to refund using a check, only to be dinged with CC chargebacks afterwards. Also, they will sometimes try to settle a dispute with a check thinking that settles things, only to find themselves in a lawsuit anyway. They might also spend tens of thousands of dollars (or more) on a website, thinking it’s theirs, only to find out later it’s not.

It’s truly heart-wrenching. Legitimate small business owners, doing their best to meet payroll and survive, many using up their life savings and everything they own for the sake of the business, to fall victim to business failure just as the fruits of their labor start showing some signs of success.

Is There a Way to Avoid Failure?

Unfortunately, the possibilities of business failure are so varied and complex. If I can offer any advice on how to avoid failing just as your business starts becoming successful, it would be the following:

  • Don’t assume you know everything about your business and be open to outside advice.
  • Make sure you’re on a first-name basis with a good business attorney, CPA and banker, and make sure you talk to them regularly.
  • When confronted with something new, seek advice and counsel.
  • When you start taking larger risks, talk it over with your business lawyer, CPA and banker, and do NOT dismiss their advice.
  • Make sure your CPA reviews your accounting procedures, including how you’re invoicing and recognizing revenue and expenses.
  • Make sure your business lawyer gives your customer / client contracts a once-over and cleans them up according to your business practices.
  • Don’t enter into important relationships without a good contract to govern that relationship.
  • Make sure you talk to your banker about lines-of-credit (LOC) and proper CC handling procedures, including refunds and chargebacks.
  • Don’t try to cut corners by doing things yourself. If you’re trying to settle a dispute, get your lawyer involved to make sure you do it right.
  • If something sounds too good, it probably is. Nothing beats good due-diligence, and your CPA, lawyer and/or banker can advise you as appropriate.
  • Never commit to anything, until the ink on the contract dries.

Owning your own business can be an exhilarating and rewarding experience. The successful business owners will create a lifetime asset that can be passed down to their children, or provide a strong retirement fund, but only if they don’t let their businesses fail.

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