Business Failure is never at the top of your mind when chasing your Startup Dreams! Starting a business is exciting and rewarding, from naming your business, setting up the website, meeting that first potential client, and reaching your first R1 million in sales. It seems every step is a milestone. But not all businesses succeed, and closing down a business is a reality. The failure rate varies. Some reports say 50% of businesses do not make it in the 1st year, and others say 6 out of 10 businesses shut down in the first two years, and up to 80% of companies do not make it after five years.
Yet, despite these reports and statistics, we don’t talk enough about closing down the business. It seems this stage of the life of a business is something most entrepreneurs, managers, and executives would rather avoid and hope to fade away.
This article will examine the hard truths of why businesses close and explore alternatives to closing down a business.
Common Reasons for Business Failure and Why Businesses Shut Down
Running a business is not an easy task, and there are many reasons it fails and closes down eventually. Some reasons are voluntary, such as business owners deciding to retire and sell the business to a 3rd party. Some are involuntary, such as insolvency, failure to comply with regulations (non-payment of taxes or permits), etc. However, here are common reasons why business owners shut down businesses:
Business Failure Reason (1) – Poor or Non-existent Business Plan. Would you build your dream house without any blueprints? Will you hop into your car and travel to your dream destination without a roadmap? Of course not. It would help if you were treated the same for your business. A business plan lets you see if your business has a chance of making a profit, estimates how much you’ll need to raise money, and defines your market, suppliers, customers, and competitors. A business plan contains a lot of details about your business. You leave too many things to chance and eventually close down a business without it. There are Easy Arguments Against and For Having a Business Plan. Find Out More Here.
Business Failure Reason (2) – Weak Sales and Low Profits. Competitors offering better prices and value, failure to capture the key market, overdependence on a single customer, etc., are only a few causes of weak sales performance. If management fails to increase sales, this may further translate to low profits. The inability to generate enough profits to pay employees, suppliers, and creditors and invest back into business by purchasing new equipment, hiring more staff, etc., will lead business owners to shut down businesses.
Business Failure Reason (3) – Lack of Capital and Resources. Producing goods and services require capital and resources (land, equipment, raw materials, skilled labour, etc.). Without these, businesses cannot sell products to customers, cannot invest in Research and Development, and managers cannot expand to other markets, etc., which in the long run will lead to closing down the business.
Business Failure Reason (4) – Poor Management and Leadership. A ship without a Captain is dead in the water. Likewise, a business without competent management is highly likely to fail and shut down business Management’s expertise, experience, and vision manifest in the business’s financial performance. Conversely, a business under strong leadership can navigate the landscape of changing customer taste, entry of new competitors, the rising cost of doing business, etc.
Business Failure Reason (5) – Inefficient Supply Chain Management. Sourcing the right materials for a business’s goods and services involves getting the highest quality materials, sourcing from key suppliers, or buying it at the right price and adapting to new technology. Adapting technology to streamline a business’s supply chain can lower transaction costs, shipping costs, etc. Eventually lowering a good or service’s cost base and maximising profit. On the other hand, failing to adopt technology will affect the bottom line and competitiveness. In the long run, this will cause the closing down of the business.
Business Failure Reason (6) – Abrupt and Unsustainable Expansion. For business owners, growth signals are signs of success. With growth, managers can generate more sales and profit, reduce risk, influence market price, etc. But growing too fast too soon can ironically cause businesses to shut down. Over-hiring staff, decline in product quality, lapses in customer service, etc., are only some of the effects of rapid business growth.
Business Failure Reason (7) – High Leverage. Zombie companies are businesses burdened with a large amount of debt and can still manage interest debt payments but are unable to pay the principal. However, these kinds of businesses do not have funds to invest and grow, making them on shaky ground. From the outside, these companies seem like a well-run businesses and continue operating for years but eventually will shut down a business.
Business Failure Reason (8) – A downturn in the Economy or an External Shock. Small businesses are hit the hardest during an economic slowdown compared to large companies. Weak sales, budget constraints, limited access to funding, inadequate financial preparations, and not to mention emotional stress can lead a business owner to shut down businesses. Think about the 2008 Financial Crisis and, more recently, the Hard Lockdown period due to Covid-19.
Business Failure Reason (9) – Changes in government policies. An increase in the minimum wage and input costs (e.g., fuel, electricity, etc.) can burden small businesses. In addition, a rise in corporate tax rates, sales tax, and tax rates for imported raw materials can affect businesses’ profits. But if businesses are not well-prepared to comply with these changes or too much regulation in the industry, businesses will likely shut down.
So you are faced with Business Failure. Here are some Alternatives to Closing Down a Business
Closing down a business is a very difficult decision, so all options must be exhausted. Before closing the doors to your business, try asking yourself these simple questions:
- Does my business make me happy?
- Do I still have the passion for seeing it succeed?
- What risks am I ready to take?
- Do I have my partners’, investors’, and creditors’ support?
- How likely will the business turnaround? How long before it does?
If you still want to see your business succeed and have weighed the risks, consider these five alternatives to closing down the business:
Alternative 1: Adopt a New Business Model. Business owners must identify what is working and isn’t in their current and original business model. Then management can adopt a new direction or strategy, such as selling via e-commerce instead of a brick and mortar store, offering different price points to suit customer budgets, etc. Consider updating or shifting business models versus a business shut down. Here are 15 Alternative Business Models you can choose from.
Alternative 2: Restructure the Business. Restructuring a business involves revamping and realigning the organisational and financial aspects. New investors and partners add equity to the business, renegotiate loans with the bank and other creditors, reorganise the workforce, and streamline processes are some of the steps to do aside from an entire business shut down. With additional capital and new partners, restructuring the business can be a brand new start. This can be a better step other than closing down the business.
Alternative 3: Consider Temporary Closure. A temporary business shutdown is done to prevent further losses or expenses and can last for weeks or months. During economic downturns and external shocks like the Covid-19 pandemic, a pause in the business may be a better option than a fully closing down a business. When the economy rebounds and consumer confidence bounces back, depending on the industry, business owners who choose to close versus fully shutting down the business temporarily have a slight head start.
Alternative 4: Merge with a Competitor. Businesses and companies merge because it’s cost-effective, prompts growth, increases market share, obtains competitive advantages, etc. For these reasons alone, merging is a good alternative to a shutdown business.
Alternative 5: Sell the Business. If the business is not struggling financially, it can be sold as a going concern. The new owners can expect the business to operate for the next 12 months without any threat of closure. If the business is not entirely profitable, a strong customer base, major contracts or licenses, unique systems, IP, and processes are some key points that add value to the business.