With around half of businesses failing within their first five years of being in operation, it’s critical to pay attention to signs of distress. Most business owners are, by default, oblivious to the signs that might cause their businesses to fail.
As an investor, I often acquire businesses from leaders who are looking to exit their businesses. Through this experience, I’ve seen that there are hundreds of reasons why a business could potentially fail. The majority of the U.S. economy runs on small- to medium-sized enterprises, which means that business owners who are within that category need to appropriately assess any risks that might put their businesses in danger. With that said, here are five signs of a distressed business I’ve observed (and a few tips on what you can do to solve these challenges):
Burnout And Exhaustion
In my experience, it’s not uncommon to see business owners becoming increasingly exhausted due to the long hours they put in. But this eventually can cause them to burn out, which can then affect the rest of the organization.
If you’re beginning to experience the signs of burnout, it’s important to reassess your business’s situation and find ways to help take part of the load off. According to the Harvard Business Review, you can alleviate burnout by prioritizing self-care, finding coaches and mentors, and more. I recommend selling or seeking a management partner who is willing to give you some space. This additional help can clear a good chunk of your schedule while still allowing your business to operate and flourish.
Lack Of Financing
Unfortunately, another common reason why I’ve seen businesses fail is inadequate capital or financing. This lack of secure financing might result if you don’t have sufficient assets, your personal savings don’t satisfy underwriting requirements or your business isn’t creditworthy, among others.
If this sounds like your current situation, seek help from accountants or financial advisors. You can also look for specialists in your industry who can provide some direction and clarity in terms of what the next steps should be.
However, capital alone isn’t enough. There are other considerations.
No Succession Planning
Business owners constantly face the question of retirement. For example, baby boomers are retiring at an unprecedented rate, so more and more businesses are being squeezed in terms of their values, as desperation from the owner’s side kicks in. A good part of that desperate sell comes from being obliged to retire due to health concerns, burnout, frustration or the lack of proper succession planning.
It’s not the end. Perhaps your children aren’t interested in owning the business or committing to the responsibility that ownership entails. Let’s face it: Many business owners often struggle to achieve a work-life balance. This can easily be a big factor and a red flag for those in the line of your business’s succession.
If you don’t create a succession plan, you can sell your business to a buying group or investor who understands the motivation behind the sale. This way, you’ll avoid the frustration of dealing with long months of negotiations, only to not sell your business. This often happens when the valuation becomes unreasonable due to a business’s financial performance declining.
Personal Financial Challenges
Sometimes, business owners also have personal financial troubles they have to deal with. This includes obligations of current debts that they carry. This can translate into the business if you choose to exhaust a lot of your business’s financial capacity to stay afloat on a personal level.
Although some accountants might have a creative way of structuring tax obligations, taking on too much from your business to satisfy your personal challenges could be a big reason why your business is in distress. And, even worse is that personal challenges don’t always go away fast.
Another issue that arises from this is that business owners are personally guaranteed on a lot of their business loans. This means that should you ever default, your personal assets are now directly affected and will possibly be seized or foreclosed on to satisfy the creditor’s balances.
If you’re experiencing these issues, you can seek professional financial guidance. Or, you could even decide it’s time to sell. In my experience, debt and financial issues often only get worse unless you sell or come across a heavy liquidity event.
Competitors With More Financial Viability Are Stepping On Your Toes
If you’re a business owner, you’ve probably faced a situation where a competitor opened up a competing store or business in your local region. You’ve probably also faced the challenge of keeping some of your existing customers. This is the law of nature when it comes to business. Competitors are bound to pop up once in a while, and you must accept that reality.
The best way to overcome that is to reassess your business’s current values, improve your customer service, deliver a more refined and concentrated product or service and engage your customers to understand their frustrations.
Hopefully by understanding these reasons of how you can overcome distress in your business, you’ve found some clarity. Don’t be afraid of going back to the drawing board to innovate. It’s important to get a fresh perspective once in a while.