Why Businesses Fail

November, 2007 Op-Ed Article

Why Businesses Fail

Lenders and investors know that approximately half of all businesses fail within the first four years. Here are some of the most common reasons why.

- Lack of a formal business plan, which is updated quarterly and shared with lenders and investors. Business owners who throw surprises at lenders or investors are headed for trouble.

- Inadequate cash flow. Business plan should include 3-year cash flow projection, by month for the 1st year, by quarter for years 2 and 3, which shows the business consistently achieves a debt service coverage ratio (DSCR) of at least 1.25. This means that real net profit per month, divided by the loan amount, per month, must be 1.25 or higher. If the DSCR falls below 1.25 as time progresses, the business is generally headed for failure or loan default.

- Accounting system does not provide timely monthly P&L statements and balance sheets.

- Poor location. Even the best manufacturing plant, hotel, restaurant or retail store will fail if it’s in the wrong place.

- Inadequate analysis of competition.

- Inadequate marketing plan. Lack of direct in-person contact with current customers, and potential ones. Failure to monitor and adapt to changing customer needs.

- Failure to attract and retain key employees. Business plan should definitely include resumes for persons in key positions with the company.

- Lack of versatility. A successful business owner must wear many hats, including operations, hiring, marketing, accounting and human resources, just to name a few.

- Lack of responsiveness to change. Every business owner will experience some surprises, like discovering that many of your own ideas are wrong! Look for business consultants who monitor your monthly statements and provide suggestions for a recovery plan. Network with your competitors, sometimes they can help you, sometimes you can help them. Develop a subcontractor relationship, meaning they can handle your overflow, or you can handle theirs.

If you know of a business owner who’s thinking of selling or buying a business and who might benefit from a free consultation with us, have them contact me, or any of the M&A professionals at www.bradwaygroup.com.

Mike Ertel, CBI, M&AMI
The Bradway Group
813.299.7862 Direct
ertel@bradwaygroup.com

© 2007, J. Michael Ertel, PA

I own a business that I would like to see transferred into the next generation of my family. Will I have to surrender complete control in order to do this?

Q: I own a business that I would like to see transferred into the next generation of my family. Will I have to surrender complete control in order to do this?

A: Absolutely not. A business succession plan can allow the owner to release as much control or retain as much control as they are comfortable with. Typically control is not relinquished until the owner is retired and the successor is comfortable with the role in the business.

I have been in business for 25 years. My business has a positive cash flow of $100,000 per year. If I want to determine the company’s value, couldn’t I merely multiply the cash flow by 5 to determine the value?

Q: I have been in business for 25 years. My business has a positive cash flow of $100,000 per year. If I want to determine the company’s value, couldn’t I merely multiply the cash flow by 5 to determine the value?

A: No. The IRS does not recognize any multiple or series of multiples to achieve a value that is accurate and reliable. Valuation is a complex procedure that requires hours of professional time. Only then can a value be determined. Also, attempting to value a business under an arbitrary multiple could result in a tremendous loss of value to the owner of the business upon transfer of the business because the value may be far greater than what the multiple suggests.