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What Is Business Failure? What Does Failure Mean?

My aim is to help you to survive in business and then to prosper.

Mere survival isn’t good enough for the longer term.

But to do that, sometimes we need to look at what happens if a business doesn’t survive but fails.

What happens when a business isn’t a viable going concern?

The Often Quoted Business Failure Statistics

I see a number of different statistics quoted but rarely with their source.

Things like

“80% of new businesses will fail in the first five years.”

I’ve even seen this quoted as within two years. Of course it is in the interests of business experts to scare you into buying their advice and training.

I thought this article was interesting.

Startup Business Failure Rate By Industry – http://www.statisticbrain.com/startup-failure-by-industry/  Source: University of Tennessee Research

% failed by end of year 1 25%, year 2 36% and year 3 44%.

By the end of year 5, these statistics say 55% of businesses have failed.

It also has some interesting information about why the businesses fail.

Another website, http://startupdispatch.com/startups/reminder-95-percent-of-new-businesses-fail/ quote Harvard Business School…

“95 percent of new businesses fail if failure is defined as failure to meet a set projection. This rate falls down to 70-80 percent if failure is defined as inability to get adequate return on investment. The rate goes down further to 40 percent if we define failure as investors losing all or most money.”

This website http://www.ritholtz.com/blog/2012/01/small-business-successfailure-rates/ has a nice infographic that indicates that 50% of businesses fail within five years.

The Two Types Of Business Failure

The information from the Harvard Business School hints at two very different types of failure:

  1. Businesses that go bankrupt. They are forced to close.
  2. Voluntary closures where the business owner decides he or she can earn much more doing something else.

What Happens When Different Types Of Business Close

The three main types of business structure are shown below. This draws on what happens in England and Wales but I expect similar things to happen elsewhere in the world. Leave me a comment below if it doesn’t represent what happens where you are.

  1. Sole trader – the business is an extension of the private finances of the owner who is called a proprietor.
  2. Partnerships – two or more people form a business together. The business owners are called partners.
  3. Limited companies – these are separate legal entities, distinct from the owners who are called shareholders and the management team who are directors.

If a sole trader business closes, the net assets that are left after paying all the liabilities return to the owner.

If there are more liabilities than assets, the owner has to make up the difference. If the business liabilities overwhelm personal assets, the individual is declared bankrupt or goes through an individual voluntary arrangement where creditors receive a few pence in the pound.

If a partnership closes, things work out in the same was as sole traders. The only difference is that when I was taught partnership law, partners were jointly and severally liable. Creditors can chase any or all the partners for all the money they are owed.

If a limited company closes, the net assets after paying all the liabilities are returned to the shareholders.

If liabilities exceed assets, then provided the company hasn’t illegally traded whilst insolvent, the creditors can’t chase the owners for the remainder of their money.

However groups and honourable individuals may ignore the limited liability aspect and, to protect their good name and reputation, provide the company with the money to pay all the liabilities.

This leaves us with two types of business failure:

  • Where creditors get paid in full
  • Where creditors don’t get paid or only receive pennies in the pound for what they are owed.

The Impact Of Business Failure On The Owners

The financial impact.

Failure can lead to financial ruin where the business has lost a lot of money. Banks probably have personal guarantees to provide additional security on any loans and overdrafts and this can lead to the force sale of personal assets including houses.

On the other hand, if the financial loss is small, the owner can move on and either start another business which may be successful or return to paid employment.

The stigma and embarrassment.

Failing is embarrassing.

You’ve made a public commitment that you will do something and then you stop, either voluntarily or because you don’t have any choice.

You probably called in favours with friends and associates to get your business started and to keep it going. Some will have been coaching and mentoring you, giving you advice. Some will have given you help on the supply side. Perhaps you’ve employed some friends or friends or friends. Others will be customers.

Strangers who you didn’t know before, become friends through business. Being in business widens your social circle and gets you better known.

If you’ve covered the financial losses yourself, your friends may be inconvenienced. Your employees will be the worst affected since they relied on you for their monthly income. Hardship may await those who need time to find new employment.

Much worse is if you have been forced into bankruptcy. Some of the people who have helped you will have been owed money. Your loss becomes their loss. If the amounts are large, one business failure can cause a ripple down the line, like dominoes, one falling into another. Even relative small losses can be the “straw that breaks the camels back”. If you can’t make the payroll by £1,000, you can’t make it.

Then there’s how your failure in business will affect your future prospects. Will you be able to get trade credit? Will a bank lend money to you? If owning your own business isn’t for you, will it affect your ability to get another job with the clear evidence that, somewhere, you weren’t good enough?

Different people are going to have different views on the stigma of business failure.

Personally I admire anyone who tries to go into business on their own. It shows an ambition and a willingness to take control that is missing in many employees.

Not risking failure often means not taking a risk.

Can you live like that? I can’t.

Nothing is 100% certain. We live in a world of probabilities and whilst we work for success, we need to be aware of the possibility of failure.

Many famous entrepreneurs have failed, either before they became famous or afterwards.

Bill Gates and Paul Allen started a company called Traf-O-Data to process data from traffic counters. If it had succeeded, the world might not have Microsoft.

Henry Ford started the Detroit Automobile Company. It failed, Ford became one of the most famous industrialists ever.

http://grasshopper.com/blog/2011/11/the-early-failures-of-famous-entrepreneurs-and-what-they-learned-3/

Richard Branson has endured a number of failed ventures after he became successful.

http://venturevillage.eu/epic-fail-entrepreneurs

The Learning Experience

“There is nothing that teaches you more than regrouping after failure and moving on. Yet most people are stricken with fear. They fear failure so much that they fail. They are too conditioned, too used to being told what to do. It begins with the family, runs through school and goes into the business world.”  Charles Bukowski, author of The Captain is Out to Lunch and the Sailors Have Taken Over the Ship

You will rarely learn much from doing the same thing over an over again.

Starting a business is a unique experience. Even if you are a serial entrepreneur, each time is different – the market, the product or service, the customers, the people involved are different.

It will take you completely out of your comfort zone.

The feedback on good or bad, success or failure is brutal and uncompromising.

The market doesn’t care about you.

But provided you look for lessons, you won’t find a better learning experience.

You need to be honest with yourself and face up to realities. Bad luck may have been a contributing factor but, with hindsight, what could you have done to reduce the impact of the things that went wrong.

http://blog.ted.com/2013/03/04/8-talks-about-learning-from-failure/

Shortly after I left the accounting profession I had a “cradle to grave” experience with a business.

I was a new group accountant and three months in the PLC board decided to start a new venture and my services were lent to the two people brought in to start and build the business. They had many years of experience in the trade. The group directors believed they could do what they said and back an ambitious business plan that had a high break even point.

The cost forecast was close. The sales and margins achieved were a long way short of the forecast and the business lost a lot of money. The strategy focused on independent retailers was changed to the big and well known department stores and mail order organisations.

The break even gap was closing. Some months were profitable. I gave up my group responsibilities because the new business was too big to do on a part time basis. Within days, the group fired the chief executive and ordered the business to be closed. The other person brought in resisted and left.

I was left with the instructions to get the group out of the business as quickly as possible. I found myself sitting in front of rapacious retail buyers hungry for a great deal but I was able to strike a deal within my authorised limits. The rump of the business was sold to another in the trade. Through good fortune, I didn’t have to make anyone redundant as we had time for people to find other jobs and some of the excellent people found jobs elsewhere in the group.

Hindsight showed a number of mistakes were made from the choice of basic strategy through to how it was implemented. Each has been burnt into my memory as I thought about how, with hindsight, things could have been very different.

Facing Up To The Closure Decision

If you’ve got to stop, it’s often better to recognise this sooner rather than later.

Author Chet Holmes talks about pig-headed determination. It’s a quality I admire but sometimes you have to recognise that you’re fighting a losing battle.

Remember the saying

“He who fights and runs away, lives to fight another day.”

You need patience to support a viable idea.

You need the honesty to get out of an unviable idea quickly.

The difficult thing is to differentiate between the two but we’ll talk about that on another day. I like the Marketing laws created by Doug Hill in his book Jump Start Your Business Brain.

You should also read about how to make difficult decisions by taking yourself back to the original decision with all the extra knowledge that you have now.

Ask yourself “Knowing what I know now, would I…?

This is the zero based thinking idea popularised by author Brian Tracy.

>>> Zero Based Thinking Clarifies Difficult Decisions

Get To Know Me

Paul Simister is a business coach who helps business owners who are stuck or struggling, to get unstuck. You can then start attracting, converting and keeping more customers. If your business is based in the UK and you feel stuck, get a Business SOS consultation (please click) with me to get you unstuck.

Don't forget to download and read my FREE Report - The SIX Steps PROFIT Formula: The Simple Rules That Every Small Business Owner Needs To Know available to download at Six Steps Report (Please click).

 

 

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