Small Business – A Recipe For Success. Why small businesses fail and how to avert failure. By Uri Galimidi Issue #4, August 2009   Back to Newsletter Archives     A US government’s Small Business Administration (SBA) survey shows that 56% of new small businesses (with employees) do not survive past their fourth year. We can only assume that the percentage of new businesses that do survive, but fall short of their owners’ expectations is even higher. What are the reasons for this high failure rate, and what can be done to improve the rate of success?   The purpose of this article is to review the symptomatic reasons that may cause a small business to fail, as well as the underlying core reasons leading to the failure. I will then recommend a simple approach that will help increase the probability of successfully establishing and operating a new small business.   Numerous articles and books address the reasons for the failure of new businesses. Their authors include Michael Ames, Gustav Berle, Patricia Schaefer, Naz Daud, Evan Carmichael, and Jamie Brown. The top five reasons for failure mentioned by most articles and books are: (ranked by frequency of mention):   1)     Insufficient capital. The underlying problem is that the new business owner typically underestimates the costs of establishing and operating his / her business, and overestimates the ability of the business to generate net profits within the first one or two years. Consequently, the initial capital reserves run out prematurely. 2)     Poor location. Not all businesses are sensitive to location, but if location is important to the business, a poor location could easily lead to its failure. The problem is that many business owners do no thoroughly research the quality of their business location and compromise on an inferior location. Failure to thoroughly research the customer traffic, parking convenience, proximity to highways, etc. could lead to the downfall of the business. This research is simple to do, yet many business owners neglect to do it. 3)     Poor management. Business management covers many disciplines, including financial management, sales management, operations management, and people management. Often the business owner is experienced in some, but not all areas of management. Early in the life of a small business it is not possible to hire experienced employees for each of the key business areas. This sometimes results in poor and sometimes fatal management practices. 4)     Lack of research and planning. Although this is number four on the list, chronologically it is the first management activity that must occur. Sadly many entrepreneurs are good at generating brilliant business ideas, but are very impatient when it comes to detailed research and planning. They often make unfounded assumptions regarding capital requirements, costs, revenues, location, time, market conditions, competition, etc. Research and planning cannot guarantee success, but they can certainly reduce the risk of failure. 5)     Poor branding and marketing. New business owners are often so consumed with their business idea, that they do not take the perspective of their intended customer. They fail to define and convey to potential customers a unique compelling reason why the customer should buy their product or service, rather than buying their competitors’ product or service.     The underlying core problems   Let’s further examine the above reasons for failure. Is it possible that some of them are only symptoms to other underlying problems? Is it possible that if we knew the underlying root causes, and if we were prepared to address them, some of the new business failures could have been avoided? An analysis of the reasons for failure mentioned in many articles has lead to their classification into the following three categories:   Uncontrollable circumstances.  By definition, these are circumstances which the business owner could have done nothing to avoid. For example, if a large retail chain unexpectedly decided to set up shop next door, there may be nothing that could have been done to avert failure. The small business owner should be prepared to take such risks, and be prepared to withstand the consequences of such an event without personal financial ruin. Personal traits and qualities. Most articles and books on the subject mention a well balanced spread of the following personal traits and qualities that the business owner should possess in order to succeed: physical and mental stamina, passion, drive and determination, decisiveness, self-confidence, courage, ability to develop a vision, attention to detail, patience, and inter-personal skills. Clearly it is a tall order for one person to possess all these qualities in a well balance manner. Some of these qualities such as attention to detail, and inter-personal skills can be acquired or enhanced through training. Others, such as self-confidence, are more inherent to one’s personal makeup, but not impossible to develop. A suggested approach is to conduct an honest self-assessment of the qualities mentioned herein. Better still, you could conduct a 360 degree assessment, in which you could ask people who are close to you and are willing to provide candid input, to give you their assessment of how well you’re doing with respect to each of these qualities. Once you have the assessment, you could decide which qualities you may wish to develop, and which qualities you may wish to complement by hiring others to key roles in your business. Lack of experience. This group of core reasons for failure is the easiest to address. The first step is to recognize that there is no substitute for experience. There are very few new business owners that have experience in all the management fields needed to ensure the success of their new business. The trouble is that most new business owners are too “entrepreneurial” or too proud to seek the advice of others. Nevertheless, you owe it to yourself to take whatever steps are necessary to enhance the success of your business.   Enhancing your success.   Of course, success cannot be guaranteed, nor can failure be avoided with certainty. But the probability of avoiding failure can be greatly enhanced by taking certain simple steps. My recommendation is threefold. First, educate yourself in the skills of small business management. Second, find yourself a trusted advisor to give you the kind of guidance only experience can provide.  Third, find yourself a coach that will help you develop your management qualities and lead your business to success. Let’s expand on each one of these.     Educate yourself. Information on successfully establishing and managing a small business is abundant and often free. It is highly recommended that you take the time to educate yourself about all the management topics pertinent to your business.  SCORE is a non-profit organization, dedicated to educating small business entrepreneurs. SCORE (www.score.org) was established in 1964 and has more than 11,000 volunteers throughout the USA. SCORE offers extensive information on establishing and managing a small business. A second useful resource is the Small Business Administration (www.sba.gov). The SBA offers free online training in establishing and managing a small business. Additionally most states and provinces in the US and Canada offer information and training on establishing a new business. Another website that offers free comprehensive information and tools for the business owner is Tool Kit (www.toolkit.com).   Find a trusted advisor(s). An advisor is a subject matter expert such as an accountant, a lawyer, or a marketing expert. Ideally, they should have expertise in your chosen industry. For example, marketing advice might be significantly different for an internet-based business than for a food business. Your advisors should be willing to review your business strategy and plans, and take the time to advise you not only about the action you should take, but also about the reasons. Some advisors are inclined to dispense their advice sparingly and quickly. Embarrassed to ask for clarification, you often leave their office with many unanswered questions. While most entrepreneurs hire a lawyer and an accountant, few engage a marketing expert. And yet poor marketing and branding is one of the top five reasons for the failure of 56% of new businesses within their first four years. Whether it is a restaurant, a raw material supplier, or an internet-based business, a marketing expert can make a significant positive impact on your business. Other disciplines in which expert advisors can help are a technical expert in your business field, a website development expert, and an online advertising expert, especially if your business has an internet-based component. Consider a business coach. So what is the role of the coach, as opposed to that of the advisors? Just like in the corporate world companies hire coaches to help them develop the leadership qualities of their top managers, and / or to help them facilitate their strategic planning process, so would the entrepreneur benefit from the services of a professional coach. Your coach will help you in three key ways. The first is to help you brainstorm your business strategy and operational plans, and help you ensure that they are aligned with your vision and core values. The second is to help you assess your management skills and enhance them where necessary. The third most common role of your business coach is to help you prioritize the myriad of tasks on your plate, maintain the level of motivation required to execute the “less exciting” tasks, and upkeep your self-accountability to execute the plan to which you have committed yourself. Remember that the corporate environment provides a framework of motivation and accountability that does not always exist in a small business. The role of your coach is to help you close that gap.   To summarize, I believe that most new small businesses can significantly enhance their chances of succeeding if they take the time to educate themselves and engage a team of experts that will help them complement their talents in areas where their experience may be lacking, and provide a framework of creativity, motivation, and even challenge where necessary.