Not long ago, I had a meeting with an owner of a small business in Milwaukee. Let’s call him "Smith."
He wanted to talk with me about some of the challenges he was facing with a company he was trying to get off the ground. Smith is an interesting person. Prior to his involvement in his current company, Smith had built and sold another firm for a substantial sum of money. The proceeds of the sale allowed him to take a few years off from the daily grind. For three years, he and his wife traveled extensively.
However, after awhile, Smith became restless and eager to get involved in the development of a new business. A friend introduced him to two young people looking for someone to help them get a new service business going.
Intrigued by their business concept and their enthusiasm, he helped them develop a rudimentary business plan and loaned the company the start-up capital he believed the business required. He became the majority shareholder in the new business and assumed the position of president of the new firm. (Let’s call the firm, "High Hopes.")
High Hopes had early success in the marketplace. The contacts and reputation Smith had gained from his earlier business activities opened several doors usually closed to those without these soft assets. From the beginning, sales were brisk, and Smith decided to invest more money into the venture to gear up to meet what Smith believed was going to be fast-track growth. Within six months, Smith leased better office space, hired a top-flight secretary, hired an experienced salesman, built a top-notch Web site and invested in high-quality printed materials.
High Hopes wasn’t making a profit, but Smith believed the future of the company was bright as evidenced by the growth in sales stemming from two of its early customers.
However, after the first 18 months, the company was not achieving the sales Smith had anticipated, and breaking even was looking like it was going to be a long time in coming. During my first meeting with Smith, he seemed tired and without the zeal so often demonstrated by entrepreneurs steering their start-up in the challenging early phases of corporate development. At the end of our first coaching session, I asked him, "Smith, are you ready to call it quits with this company?"
"I’m not sure," Smith said. "I still believe in the concept of the business, but my pockets aren’t deep enough to keep pouring money into this without some clear signs of more progress."
I then knew why Smith had called me. He needed permission to let go of the dream and get on to new adventures. Over the next few months, I worked with Smith to develop and implement a sound plan to wind down his business.
In the lives of entrepreneurs and small-business owners, there can come a time on one, or more than one, occasion when there is a need to put a lame horse out of its misery. A decision needs to be made to close down the business, or find someone who has enough creativity, passion, energy, talent, time and money to make a growing and profitable business out of a floundering affair.
Sometimes this moment occurs when the entrepreneur realizes the strategic plan contained tragic and faulty assumptions regarding market demand. On other occasions it can come about when cash requirements exceed reasonable financing alternatives. Sometimes it is simply a matter of a business owner becoming more aware of the time and sweat equity required for success to be realized.
It’s also common that a problem in the personal life of an entrepreneur is a factor, such as martial problems or health problems, which can sap the lifeblood out of a new company almost overnight. Or, sometimes it’s a partnership conflict that extracts a heavy toll. A myriad of reasons can be behind a business wind-down, and every year there are thousands of business owners closing the doors to their company, and walking away from what once was a dream they held dear.
Capitalism and a free market bring tremendous opportunities for business success but offer no promise of traveling on Easy Street at any time, and this is especially true during the early development stages of a company. Getting a new business off the ground and running it profitably is a formidable challenge, to say the least. However, well before a business owner closes the doors of his start-up for the last time, there are more often than not clear indications that there are serious problems.
For most entrepreneurs, it is hard to take an honest look at themselves and at the progress they are making. Savvy business owners involved with a start-up company know from the beginning that the road to success will be challenging. They know a critical element in leading a new company is leadership with a determination to win. If goods or services are selling, then sometimes it’s hard to accept financials showing that a business is moving rapidly toward failure. And, when goods or services are not selling, then it’s far too often that general market conditions are blamed. Pricing and sales strategies continue without serious scrutiny, and the business owner continues on Disaster Road.
Many owners forget that being honest with respect to the progress they are making in corporate development is critical to sound decision-making.
Even when some problems become crystal clear, accepting realities and taking decisive action to cut losses and exit can become a tough decision. This is true even for owners who have had successful experiences with other start-up companies. Denial and procrastination can become part of an intricately woven web of self-deception. The need to win and succeed becomes more important than the need for clear analysis.
It’s not infrequent that long after the decision has been made to hang it up that a business owner can be heard saying, "I saw it coming. I knew there were problems months ago." It’s not unusual for an entrepreneur to acknowledge that the love affair he or she once had with their business soured quite some time before others knew the relationship was on the rocks.
Closing the doors on what was once a company promising excitement and reward can be tough – postponing the decision to do so can become easier than taking the management action required. But in the end, postponement is a decision.
Removing all of the risk associated with an entrepreneurship is impossible. However, what are some of the steps that can be taken to minimize risk associated with the start-up of a new business venture from the get-go? I offer the following:
1. Run your business concept by trusted advisors. Use people who know you and know your capabilities. An attorney, a colleague, a successful business owner, a banking partner, an executive coach, an accountant, a college professor, etc. These people have something to offer to help you long before a basic business plan is created. Listen to what they say. This doesn’t mean any skepticism they have should result in an entrepreneur walking away from his or her vision. But it does mean an entrepreneur should try to incorporate any concerns and advice they may give into his or her thinking.
2. Do some homework before start-up. It is rare for
a man or woman to have an idea for a business which hasn’t been considered before. Today, a little research can bring a wealth of knowledge and awareness to anyone considering a new business venture. Who else has had the same or similar idea? Who else has tried to make it in the business being considered and failed? And why did they fail? Who else has been successful with a similar vision or concept? And what factors have contributed to their success? There are a host of questions for which answers can be found through the click of a few computer keys or a visit to the library.
3. Draw upon your past learning experiences and success with business development, but don’t count on it to assure that a new business venture will be successful. Past success makes it easier to make some of the decisions any owner of a new business needs to make. But remember, the new business will get going in a world different from what has existed in the past. Sound planning and careful due diligence is required before the journey of business development begins. Donald Trump may make the process of business development look like a cake-walk, but remember he has a highly paid and experienced team to count on for research, advice, and guidance long before any serious money or time is invested in a new business concept. And even Donald closes the doors of a business and cuts his losses from time to time.
4. Start a new company with an ongoing willingness to close it down. This does not mean that a business owner should walk away from their business at the first sign of trouble, but it does suggest that continuing to own a business moving fast to failure is foolish. The wise business owner knows there are always new dreams which can be realized through hard work , sound decisions, and financial investment. They start their firm with clear exit points and strategies for exiting determined well in advance of advance of "kickoff."
5. From the beginning of a startup, develop a group of advisors who are committed to helping you make the best decisions during the early development stages of your company. Too often, business owners are well into problems with their new company before they pull together a committed advisory board. Making the right decisions during the early phases of development of a business is challenging for even the most experienced business developers. Investing in a small, but solid, group of advisors to assist in leadership decisions can help a principal meet challenges head-on and in a thoughtful and timely manner.
My engagement with Smith was rewarding for both of us, and like the pattern associated with many entrepreneurs, he is now on a new business development adventure. This time, perhaps he can apply the same zeal, tempered with the self-permission to call it quits when the numbers speak clearly, he can make it work.
Editors note: Richard Hellan is president of Hellan Associates, an executive and business coaching firm. Richard has moved from the Milwaukee area to Costa Rica. His column no longer will appear in Small Business Times. We thank Richard for his contributions of wisdom to our readers, and we wish him and his wife all the best in this exciting new chapter of their lives.
October 29, 2004, Small Business Times, Milwaukee, WI