Business Failures

An Analysis by: Patrick W. Wisman, CTP

9/12/2002

The Common Thread

After working over thirty plus years in banking with troubled loan customers and owning a consulting practice aimed at helping companies in crisis I gained a new appreciation for the situations companies found themselves in and how they got there.

The Research

To determine why a business fails you have to begin your research with the founding of the company and analyze the evolution of the business to the ultimate liquidation. Just taking a snapshot view of the business after it gets into trouble can be misleading and just identifying the symptom and not the underlying real reason. Businesses find themselves in trouble for reasons too numerous to go into in this article.

After working with these companies for a number of years I was asked at a conference while serving on a panel "What's the main reason for business failure." My answer was "many". After that conference I decided to analyze all the companies that I had had contact with directly or indirectly to find the similarities in the real reasons for failure. Some information of interest was that first generation businesses that are successful are closely managed by the founders and reach a level of success commensurate with the management's ability to manage. If and when a business transitions to new management the company does not exist for the same reasons that it was founded and either is more or less successful in a short period of time. In the majority of business failures, a sale or liquidation would bring a greater return to the owner or investor if prompt action was taken when it was first determined the company was failing. Most of the businesses evaluated were not as productive as they could have been and suffered from smaller gross profits than their peer's.

The Common Thread

In the over 100 companies researched there was a common thread. It wasn't visible on the Profit and Loss statement or the Balance Sheet. It wasn't visible in the organizational structure or production through-put analysis.

It was the fact that the owners, throughout the life of the company, were offered advice by their family, accountant, attorney, banker, management, and sometimes vendors and customers. Can you see the pattern? These are all people who have a vested interest in the business and most times they are not willing to sever their relationship if their viewpoint is not at least given some respect. This is the COMMON THREAD that I have found that runs through almost all business failures.

In so many interviews I heard "Well, I told him his overhead might be somewhat high". I asked, how many times they had told the owner that and the answer was

"For the last twelve years up until they failed."

To prevent this from happening to you I recommend an outside Advisory Board be formed in addition to whatever Board of Directors is currently in place. It should be made up of professionals from different areas that are representative of the business. It could include consultants, accountants, industry experts, etc. The key is that they aren't beholding to you and will tell you the truth even if it's not what you want to hear. Being objective and open is one of the keys to success.

Patrick W. Wisman, CTP is a Certified Turnaround Professional and is currently serving as Vice Chairman, President and CEO of SouthwestUSA Bank in Las Vegas, Nevada. His email address is pwisman@swusabank.com.