By Mike DuBose
Entrepreneurs dread those terrible words. My grandmother said “Hope for the best, but plan for the worse!” Thus, we should plan from the beginning to fail in order to succeed. We know this as SWOT analysis—regularly assessing strengths, weaknesses, opportunities, and threats when planning and running a business.
I thought back to 1985 when I told my shocked employees and family that our once successful businesses were about to close. I looked into the mirror hundreds of times since then, kicked myself, and asked – “How did I ever get into this mess?” The following two years would become my worst nightmare marked with depression, worry, and enormous struggles. That dark, terrible period eventually became a great gift from God because I learned the hard way how to properly run a business. While we are now successful beyond my wildest dreams, our success is built on failure! I could give Webster’s definition, but my failure was a combination of blind greed, arrogant thinking, dumb decisions, and being in the right place at the wrong time! This article does not address the “whys” but rather “to dos” when it hits the fan.
Company Failure Signals: Your business will emit dying signals which include: minimal or no profits; poor cash flow; borrowing money frequently to pay bills; high staff turnover; diminishing customer base; declining sales; and many unhappy customers. If you have the proper financial structures and budget tools in place, they will detect problems early. Look for patterns and don’t put your head in the sand!
When to pull the plug? Many owners end their business prematurely, while others wait too long to close the doors and keep throwing good money and time at a failing business, foolishly hoping things will turn around. The timing of closing a business is critical. But, how do you decide when to make the final decision? That is an article in itself! Since my closings in 1985, my businesses have since emitted those danger signals three times over the last 20 years. I know to go into quick but careful crisis management which typically includes cutting non-essential expenses. You need to look after your employees, but your ultimate goal is to put that tough owner’s hat on, make hard and painful decisions, and cut expenses to save the business sooner rather than later. And, sometimes, even then, it may be too late.
Solicit the right expert help: Many business owners cannot make good decisions or think clearly when their prized ship is going down. They see the world through “gloom and doom” filters and want to “run for the hills!” Solicit advice from accountants, lawyers, consultants, and business owners – then, LISTEN! Don’t rush this important decision since timing is everything. For example, you never want to close a retail business, like I did, right before your busiest season of the year. Keep your closing quiet: Be careful about alerting employees, vendors, creditors, or the public prematurely. Once this news hits, kiss them goodbye! Even your most loyal employees will desert when you need them the most and vendors or bankers will tighten credit. Try to pay your smaller bills and communicate with creditors when accounts payable are approaching 45 days overdue to prevent them calling your employees and demanding an answer as to why you are not paying bills.
Consider selling your business: Secure the services of a professional business broker to value and sell your business. Even with a loss, this may be a preferred route. But, this is a slow process that takes months. Think about competitors that could buy your inventory and customer contracts.
Seek legal protection: When closing a business, carefully examine exposure like personal guarantees, lease agreements, etc. Make a list of your liabilities and examine all contracts. You should pay all debts over time, but you need to temporarily fall behind the protection of your legal structure to buy time to regroup. Be prepared for an immediate attack from your creditors as they scramble for your assets. You want to pay off your liabilities where personal assets are exposed first. Secure competent bankruptcy attorneys and accountants. You may not go bankrupt, but these experts will guide you in following the law, brainstorming payment plans and problems, or preparing for disaster. Bankruptcy laws have tightened because of the national credit crisis, so you need to know your rights.
Develop an asset sales plan: Make a list of assets and a plan to sell them. A gradual sell off is always better versus a fire sale. Keep in mind that your once expensive assets will now be worth about 20% of their original cost! And, keep in mind that your creditors may have liens on your assets.
Negotiate: Creditors would rather receive something and may be willing to negotiate for a lesser amount. Landlords may be willing to accept a lower payoff of a lease. Bankers may re-negotiate better loan payment terms with adequate collateral. But, even the friendliest bankers grow horns on bad loans. Don’t panic and fall on your sword! Get a plan together.
Maintain your mental and physical health: You need decent mental health to make good decisions. Exercise daily and watch excessive alcohol consumption. If you find you are: thinking gloom and doom; sleeping poorly; crying with feelings of helplessness and unhappiness; being angry or irritable; feeling low with no energy; or finding it difficult to get out of bed, see a physician or mental health professional for counseling and possibly anti-depressant medication. Don’t try to be the “tough guy or lady!” I went without help and that was another dumb mistake. My stress led to diabetes! Sometimes, we need temporary help and long-term stress is not worth it!
Stay focused: Going out of business is a job. I developed an exit plan (as I did when I began my businesses). The plan needs to be orderly and structured. Failure is not the American way. But, it does happen to the best of us. But failure can be a great teacher, if we learn from it! Remember the Boy Scout motto “Be prepared” and then add two words to that saying “to fail!” And, when we do fail, for some of us, dust off your pants, learn, and start again on that rough road to success!
