Fifty percent of businesses fail by their fifth year of operations. Serial entrepreneur, investor and lawyer Patrick Esposito wanted to know why. Esposito, president of ACME General Corp. and author of The Structure of Success: A Framework to Help Build Your Business Better, interviewed 100 leaders in a wide range of businesses including tech, manufacturing, consulting and retail. He uncovered the five most common causes of business failure. He discovered that businesses that thrive build internal structures that focus on the key areas of management, governance, disaster preparation, infrastructure development, acquisitions and exits. Companies implode because of disputes between co-owners, inability to pivot the business model, poor execution of a planned merger, acquisition or sale of the business, lack of internal infrastructure to support growth and failure to respond to difficulties or disasters.
- Disputes between co-owners. “Too often, business owners fail to make decisions when they first form their company about how to handle disputes between and among each other. When money is often tight at the start of a business, our natural instinct is to economize, so we form corporations with very short bylaws and without shareholder agreements, limited liability companies with very weak operating agreements and partnerships without well-detailed partnership agreements. The result is that we do not define many scenarios that we should, including how one owner may choose to leave the company, an equitable way to value the ownership stake upon an exit and how decisions should be made when there is a 50/50 split on a vote of the owners, among others. Small investments—either at the start-up or within the first year of business—in the development of robust legal documents to support how to manage disputes among co-owners can help solve problems before the issues undermine the ability of the business to focus on its customers and team (instead of disputes between co-owners). In these situations, I generally recommend engaging an experienced attorney to assist you as you go through a process to see what needs to be defined to avoid disastrous disagreements that can emerge without a roadmap to resolution.”
- Inability to pivot the business model. “We believe in our business models too strongly and fail to listen to feedback from team members and customers that may indicate a need to adjust or pivot the business model. In many instances, a business model that galvanizes the formation of the business is not the one that sustains it or leads it to attractive acquisition. Developing a process for listening to signals from your team and your customers will enable you to assess when it is time to consider a change. An organized process is critical to assess, decide on, plan for and implement changes, including a business adjustment or pivot. Such a process should focus on listening for, understanding, and analyzing change opportunities but also the engagement of and communications with your team and customers (including prospective customers) to support the strong execution of your adjustments and pivots.”
- Poor execution of a planned merger, acquisition or sale of the business. “Mergers, acquisitions and sales of businesses do not always work out or, even when these plans are executed, result in the creation of value for the integrated business. There is often an assumption that two businesses with complementary business models (including technologies, services offerings and other solutions) will generate a better outcome when combined. Notional strength in numbers, though, often fails to be delivered without an organized process to assess, decide, plan and implement these other than organic growth options. This is especially true when management teams and team members in both organizations fail to be engaged adequately in these processes at all phases and clear conversations with all team members about the future fail to occur.”
- Lack of internal infrastructure to support growth. “The infrastructure—support personnel, technologies and sometimes, equipment—that helped a company start and initiate growth often does not sustain it in the long run. Many business owners and leaders tend to be like me—skeptical of spending money on individuals and products (and instead prefer to wear more “back-office hats” than we should and live with less functional companies) in the name of increasing profits as we increase revenues. Sadly, this is not a sustainable model. As with the other major mistakes, there needs to be a disciplined approach that engages your management team and other team members to assess, decide, plan and implement changes for new hires, new purchases and the development of new processes to provide the infrastructure for future growth without undermining the growth potential.”
- Failure to respond to difficulties or disasters. “While seeing around corners is hard, and crystal balls do not exist, the ability to respond to difficulties and disasters is often tied to dedicating some thinking about future challenges and disasters. Based on the lessons learned from two decades of working with organizations on disaster preparedness, three themes are important to determine how prepared you should be: (1) Identify, assess and prioritize potential disasters and risks; (2) Develop response and mitigation plans for the potential disasters and risks; and (3) Review, experience and update the disaster assessments and plans. Since trusting yourself and your team is a central premise of the structure of success framework, this process is usually conducted by you and your management team and reviewed with your governance team as a second line of defense. Some plans that might be worth considering for being prepared for each of the disasters and risks could require planning and investment, including training key personnel to fill critical roles when other key personnel are absent, implementing technology backup and restoration measures, establishing remote work options, establishing secondary operations centers, identifying alternative suppliers and other tasks (as well as the communications that support these response activities).”
“We often obsess over external factors that can impact our businesses, but the reality is that it is the internal factors that make the difference between success and failure,” Exposito told me by email. “The structural components you use to operate your business will, ultimately, do more to drive positive outcomes and help you to manage risks and threats than most of the other decisions or actions you take in your business.”
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