Your failed business

[qofcc]

My DH has had 3 failed businesses since I met him.

Business failure #1 – poor accounting practices and failure to get legal advice

He was running a seasonal business and during his busy season he spent a ton of money on parts and had a ton of business where he left an invoice and the customers needed to send him a check, but he didn’t follow up on collections or bill paying until the end of the season. He was “too busy working” to focus on those tasks. He fell behind 13 weeks in his child support so they automatically froze his bank accounts and sent him a letter that he couldn’t buy or sell anything until the court date which was almost 2 months away. He took this to mean that he couldn’t conduct his business. This happened right in the middle of the busy season and he lost more than half the income for the year. Then his suppliers cut him off for not being able to pay his invoices since his money was frozen. He had more than enough money to pay the child support in the frozen account – it was somewhere in the neighborhood of $1,500 and it wasn’t even his ex reporting him – she was ok with waiting until the end of the season for him to catch up - it was an automatic computer thing that he didn’t know about because he didn’t read the legal documents from the support collection unit.

He could have avoided the situation if he had found the time to keep up with the bookkeeping. He found out later that if he consulted a lawyer they would have told him that he could have opened a different account and continued operating the business.

Business failure #2 – jumping in without researching and failure to properly train & supervise employees

We found out about a restaurant for sale, the guy was getting a divorce and was selling the business dirt cheap and going back to working for a restaurant chain to get a regular paycheck. It turns out the owner of the building was also anxious to get out of the landlord business so the building was for sale too. It seemed like a good opportunity, and the guy gave my DH training for a couple of weeks. During the course of the training, he failed to produce the type of documents I needed to feel comfortable about the deal – cost per serving info, stocking plans, food and utility costs, etc. He just kept showing us a notebook where he was recording all of the money he was hiding from the government and not paying taxes on and he drove a brand new car and lived in a fancy house and the place appeared to be doing a good amount of business. I wanted to back out, but DH was sold on the whole thing and we ended up buying it. Then all of the employees quit – it turns out they were all friends or family of the former owner and were working for him as a favor. He hired new employees, but he didn’t want to spend the proper time training and supervising them. He thought they ought to be able to do their job properly and without supervision so he left them to run the place and I found out later that people stopped coming in because the service was too slow, the food was under/over cooked, and orders were being screwed up. He was spending way too much time focusing on fixing up the building rather than managing the business. The employees did a lousy job managing the inventory and we started generating a huge amount of spoilage. Then I did some menu item cost analysis and found that there were menu items we were selling for less than the cost of the food. Then we came in one day and found that someone had stolen a couple hundred dollars of food from the freezer. At that point, he quit and closed the doors and we took a huge loss on the whole stupid venture.

He could have avoided failure by doing all the research of the cost and profitability before agreeing to purchase the business and not relying on someone else’s model and by being there during all of the hours of operation to supervise and manage and protect the business until things were running smoothly.

Business failure#3 – Jumping in without researching and failure to focus on the core business (again)

He had been working as an independent contractor for a company and the guy he was working for lost his license for violating the rules, so this guy convinced my DH to start up the business in his own name and the guy would be his mentor and he and all of the other employees wouldn’t have to be out of work with no unemployment. After they got into it, it turns out that my DH wasn’t able to get the license needed to run the business because it required having been in business for a certain number of years, he was only qualified for the technical licenses for the job he was doing (energy audits). So we paid a bunch of money for him to get the different licenses to do independent audits, but it’s really hard to do that without being tied to a contracting business. Also, he’s very uncomfortable with sales & marketing so he spent a ton of time designing a logo, creating business forms, etc. but hardly any time making business contacts and advertising his business. So he was trying to do side work to bring in more money, but then he was spending even less time focusing on the business and all of these little side jobs were costing a ton of time and gas and overall he was making much less than he could working for someone else so after a year he gave up and went and got a job working for someone else.

He could have avoided failure by not going into business with someone who couldn’t be trusted and when he went out on his own and focusing more on sales & marketing (including building business partnerships) to build the business. He also should have taken a part-time no-brainer job with fixed hours right from the beginning to supplement his income rather than trying to manage 2 side work type jobs that competed with his focus on the main business.

[bring in the new year]

Qofcc,

You are a much nicer person than I am.

Lonewolf,

I've come in on a few businesses in trouble.

To better answer your question, it would help to know what side of the fail are you on. Are you thinking about opening a business from scratch and want to know what to look out for or are you thinking of buying a failing business?

For #1 - Opening from scratch, most business fail because they're under capitalized. So, you need to be able to run the business - this means buy stuff for the business and at the same time pay payroll and you without any income for six or seven months. AT A MINIMUM. If you're borrowing that money off the credit cards, make sure you add the credit card interest to your budget.

If you're doing something small like a hobby you're expanding, you might be able to get away for a little while without registering for everything - but probably not a good idea. A lot of business fail because they don't file required papers with the federal, state, local authorities. That can run from making sure you have the necessary licenses (see qocc's #3) or not filing employment taxes with the IRS because your neighbor told you you didn't have to. Personally, I think it's cheaper to get a CPA and sit down with them for a couple of hours then pay them ten times more to clean it up.

Why do you think people in your area will want this business?

Why do you think people will come to your location? I work right now with an animal hospital - the vet is wonderful and people adore her and we still lose clients because of the parking lot.

How are you going to compete against other businesses providing these goods or services?

If Walmart/Target/Barnes and Noble/Michaels (any national chain) opens up within 5 miles do you think that whatever you're selling/providing can survive?

As qocc said - you need to know what you're selling/providing, how much it costs and who will come to you for it.


If you're thinking of buying a failed business, get a lawyer and not the owner's lawyer, but one of your very own. Double check everything yourself. If you can talk them into an asset only sale go with that.

DO NOT BUY A FAILING BUSINESS if they can't provide you with licenses, copies of tax returns and copies of payroll tax returns. If they have a bank loan, call the bank and verify that the loan isn't secured by the business. Call the IRS and verify that the returns have been filed and there are no outstanding audits. If the owner's spouse has been doing the books, make sure a CPA reviews them.

All of this may cost money upfront, but trust me on this. It's far cheaper to check it up front than to open the mail for the next six months on a business where the owners were doing stuff wrong.

Qofcc, tell your husband always to remember. People who brag about cheating the government are not above cheating you. It's like their own little sign screaming beware.

[bring in the new year]

A few other things.

What's your credit score and your personal background check look like? You should start making friends with a bank just so you can borrow money when you need to, but to do that you're also going to need to apply personally, so clean that stuff up.


A lot of start ups run through their capital for things like nice furniture and letterhead or a full time receptionist in a business that doesn't have a lot of phone traffic. Make sure that what ever you're spending money on is making you money. This doesn't mean to always go cheap but it does mean that to go cheap on the things like letterhead that you can do without.

If you're going to advertise, make sure it's some place where the people you expect to be your customers will be. So advertising a bar in your church newsletter is not a good idea.

How good are you at guessing what other people like? I love bookstores but the one time I worked in one I was terrible at ordering books that would be best sellers. It turns out most of the books I like - not best sellers.

As I said, I've been brought in a couple of times to turn companies around, so things keep coming to me. If you want to give me a better idea of what you're looking at, I may be able to think of some more.

[MN-Investor]

We used to go to a gas station which was once very busy. Over time business dropped off and their hours decreased. I went in one time and asked why they weren't open as much, and the manager said that they couldn't find enough workers. Well, duh, you can always find enough workers if you pay sufficiently! They closed shortly thereafter.

[brdsl]

Jun 6, 2011 12:09:37 GMT -5 @lonewolf said:

The reason I am asking is more out of curiosity than anything.
I watch businesses succeed and fail in our town. Some of the owners of the failed businesses really appear to have it together, yet the business still fails. In talking to them, many don't even know why their businesses failed. You can't always blame the economy, especially when someone comes in behind you and succeeds at the same business you failed at.
I keep thinking that if more people knew the mistakes others made, they could avoid making the same mistakes.
I've already learned a lot by just reading the posts here.

I doubt they knew why...or they found out too late.

Most, even if they know why....are embarrassed to say.

[brdsl]

Jun 6, 2011 12:29:41 GMT -5 MN-Investor said:

Well, duh, you can always find enough workers if you pay sufficiently! They closed shortly thereafter.

I would bet if you saw the books on the gas station, the workers were not the problem. Yeah, they might have found it difficult to find good honest workers, but in all reality, it is a very low profit business.

[bookcrazychick]

Business failure #1 – poor accounting practices and failure to get legal advice

Although I have never had a failed business, I have worked with plenty. (Public Accounting) In my 20 years of experience, this appears to be the main reason I've seen. It's amazing how many people hang out a shingle without consulting any accounting or legal experts. Only when they get into trouble do they bother to do this. Often times by then it is too late.

From my personal perspective, I've seen a lot of our local businesses fail for a variety of reasons. The number one being they are not providing a service that enough people in such a small town can patronize and keep it open. Just because you have 10 friends who are always telling you to open this business, doesn't mean the other 8K residents will become your customer.

[Deleted]

I see a lot of franchises fail but don't know any owners personally. Most of the time this also seems to boil down to not doing enough research and not getting independent legal advice. You're tied into buying certain goods and services from HQ whether you like it or not, if they distribute 99 cent coupons for something that costs you $1.25 you have to honor the coupons, they may or may not have the right to open up an identical franchise 3 blocks away, and the main company may be badly run. All outside of your control. Franchises scare me.

I do know an actuary who had a passion for ice cream and left to open a Cold Stone Creamery. I know he's no longer listed in the actuarial directory so he may still be in the business, but I did hear that he found he had to put in a lot more hours than he expected. It's very hard to get good, honest, dependable help at minimum wage or slightly above, so you end up spending a lot of your own time behind the counter.

There was a good thread on Dairy Queen franchises- was that here or on the old Board?

[8 Bit WWBG]

...:::"You're tied into buying certain goods and services from HQ whether you like it or not, if they distribute 99 cent coupons for something that costs you $1.25 you have to honor the coupons, they may or may not have the right to open up an identical franchise 3 blocks away, and the main company may be badly run. All outside of your control. Franchises scare me.":::...

All of this was a HUGE complaint with Coldstone. Corporate misrepresented the profitability of the franchise, and mandates purchase of ingredients from certain sources even though identical quality could be had for cheaper elsewhere. That coupon thing is a HUGE deal. I remember some Coldstones and Quiznos posted signs on the door saying "we will not honor this coupon". I totally agree, its probably better to lose the sale than lose money on the deal. I personally have never gone into a coldstone without a coupon, so its not like I'm going to get hooked on one sample.

And I just read the 2nd paragraph of athena53's post and see coldstone mentioned. I always figured the employees there were pretty unhappy when they had to sing and act all cheery.

[Sum Dum Gai]

Mine barely counts since the business was tiny and only started to provide me a job as a teenager. While I stuck to that it worked fine. Then I got clever and figured I could hire somebody to do the job, pay them most of the money, and I'd get to keep a little bit for doing basically nothing. It sounded like a decent plan. It even worked all right for a little bit. Then I found out the guy I hired, who was one of my best friends, started seriously slacking and not getting the job done. By the time I got wind of it we were right on the verge of losing our only client. It was a night janitor business by the way. Turns out hiring your 17 year old friend to do a job unsupervised overnight for just a touch over minimum wage is a really bad idea. He was letting other people onto the property he was supposed to be cleaning, getting high, not getting the job done, etc.

Luckily it was one of those service businesses that you can start with almost no up front investment so I didn't lose much.

[Deleted]

I don't know why I said that I didn't personally know any proprietors of failed businesses when my Ex had two.

He went into consulting after he was let go from a job in the precious metals industry. He actually did have some valuable expertise and got 2 clients almost immediately. They lasted about 3 years and things were very good but eventually they fizzled out. He hadn't done any marketing- a classic mistake when you're a small consultant being kept very busy with one or two major clients. He never found any substantial clients after that.

Next, he borrowed $200K from his sister. (His sister could do that without missing it, thank God- she's bent over backwards to try and help him in constructive ways to get his act together.) He spent a lot of money on the fun stuff- new computer equipment, business cards, getting a logo designed, etc. He even had what I thought was a viable business model- buying some equipment from a company willing to sell it, and making compounds that were commercially in demand. He had one partner who contributed mostly MBA-type brains (he had a full-time job elsewhere) and another who was supposed to contribute more money. Husband's story is that that money never came through. He blew through the $200K with initial expenses and paying himself a salary and nothing ever happened. I was busy with my own FT job that paid (most of) the bills and didn't have time to get to the bottom of it. Besides, he got hostile and defensive when I asked questions. I did not, after all, understand precious metals chemistry. Well, he was right about that but I know negative cash flow when I see it.

Unfortunately, some people are not cut out to be entrepreneurs.

[bring in the new year]

Lonewolf - Athena is right. Some people are just not cut out to be entrepreneurs.

Athena, I'm sorry you had to go through that. Did you explain to him that any business model that can't be explained to the spouse has something wrong with it?

MN Investor, I don't know about you but whenever I hear of a cash based business going out of business like the gas station, I assume they didn't have proper cash controls. We don't get a lot of cash in the animal hospital but I make sure every employee knows day one that I tie the cash out daily, and I will make negative assumptions if it's off significantly.

Cash based businesses are rife with fraud. Especially when you don't pay the employees very well.

Lonewolf, okay from the outside, this is how it appears to me. Most people think business is like art - any one can do it, it's just that some people get lucky.

The truth is not every one is cut out to run a business. Some people are so in love with their products, they can't see what will appeal to other people. Some people are so in love with the idea of being in business and having business cards and a nice office and nice furniture, that they burn through their cash months before they're going to show a profit. How many of you know a reader who has always dreamed of owning a bookstore?

You can tell them until the cows come home that independent bookstores are very low margin and hard work, and every one thinks theirs will be different. Everyone of them can give you good reasons why people will want to shop with them instead of Amazon. Most of them will be wrong.

As someone else said, most people who jump into businesses don't hire a lawyer and an accountant before they do anything else. They don't know what they're supposed to be looking at. They look at the checkbook and there's money, so they think they're making a profit. Sometimes they are.

Sometimes, they forgot to budget for returns and maintenance on equipment and the boost in rent when the landlord sees they're doing well.

Most people who want to own their own business are optimists. They assume everything will go well. The best start ups I've been in have had one partner who thinks the sky's the limit and the other one who's waiting to see how this is going to blow up.

It's also hard to work in a business and leave the money in the business if you don't put aside enough capital. You can't always pay yourself and the IRS and believe me, you want to pay the IRS first. I tell clients the business is the baby and the baby eats first. People who laugh and believe me, do better than people who say "I don't get it."

Last, it's hard work and it requires the ability to wear many, many hats. You have to know when to call the lawyer as well as how to market as well as how to do whatever it is you're in business for as well as manage employees and balance a checkbook. Every person you hire to do one of those jobs is another person the business has to support. And in this day and age, when Walmart suddenly decides to start selling books or Petsmart opens a vet clinic or Apple releases an app for making your own travel arrangements, you can have your market share cut even if you're doing everything right just because one of the big boys decided to take over your sandbox.

So the more important question is - how do small businesses do it right?

[bring in the new year]

See if bankruptcy proceedings are on line in your state/county.

Nothing brings failure home like the business owner trying to explain it to the bankruptcy judge.

[Deleted]

My roommate and I had a small business back in college and his girlfriend got in between us. The failure started when I confronted him about the unethical things she was doing and he was started to do. That caused my relationship with him to go down the toilet to the point of having him buy me out. With his parent's backing, he opened up a storefront and started adding employees. For a while, he was turning some nice numbers, but it was all built on smoke and mirrors. When word got out about their unethical practices, the business failed very quickly. A year later he was serving time for tax fraud.

The leason here isn't about partner's girlfriends, it is about ensuring the leadership in your business (which may just be you or you and a friend or spouse starting out) conduct themselves in an ethical manor. They are represending you and what they do will leave either a good or bad mark on your name. In a small community, it takes only one mistake to tarnish you forever.

[shanendoah]

Example 1: Failed Business (that benefited everyone involved)
Before DH and I were dating, he and a good friend of ours opened up a small game store. It lasted less than a year. The reasons it failed are too numerous to list, but can be summed up like this: They were in their early 20s and opened a business based on the hobby they loved with no understanding of how business actually works. Under capitalized doesn't even begin to describe it. Just about everyone in our group of friends spent time behind the counter for disounts on product.
It was a success in other ways. Just about everyone who was involved with the store has come out ahead because of the store experience and the contacts and friendships made while it was running.
We were extra lucky in that while DH funded the business with a small inheritence, his name wasn't on any of the paperwork, so only our friend's credit was ruined.
We learned a lot of what not to do during that experience, and DH and I have considered opening another similar business, now that we know so much more. It hasn't happened yet, but it could in a year or two.

Example 2: It was never meant to last
When my step-dad retired, he strated doing a type of fancy wood working called Intarsia. He made some amazingly beautiful pieces. He and mom started taking them to craft fairs, selling pieces and taking commissions. Because my mom is who my mom is, the business grew very quickly, to where my step-dad was working months and months out.
Then, my step-dad's health started detiorating. He couldn't work as long, then he went on oxygen (it was supposed to be temporary) and couldn't be around the sawdust at all. The let customers know there would be a delay. Some took their money back then. Some decided to wait.
My step-dad died. My mom had been very organized, so everyone got their deposit back. And in the case of the last piece he had finished, my mom bought it back.
During this time, my mom and step-dad's tax returns were audited 2 or 3 years in a row, but my mother kept meticulous notes and receipts.

Example 3: Having everything you need except the demand
My father worked for the VA for his entire career. He had been CO of our National Guard unit. When he retired, he decided to open his own PI business. He had all the contacts he needed, both in law enforcement and the legal communities. He was well known, trusted, and liked. He still couldn't get enough business to do just the PI work, so he also works as a process server.
He still has his business, and its grown some through recommendations, but without the process serving, he'd be working for someone else.

Example 4: Failed entrepenuer (viable business)
This is going to be somewhat vague for reasons I think you'll understand
A good friend is the VP of Sales at a start up whose business model is finding small and independent product companies and contracting with them to be their marketing, sales and distribution arm. The company also has some major licenses which they then contract with those small companies to make the products.
This is in an industry where the few major players make a lot of money, and pretty much everyone else is on subsistance level or losing money. Its an industry that almost no one is in for the money, its a hobby and a love. Even the people who work for the major players see it as a dream job where they get to be around their favorite hobby all day.
So the original CEO of this company had the idea. Given the industry, its actually a really good business model, and he was able to get Angel investors and venture capital.
He made some really dumb hiring decisions at the beginnig- hiring friends to work with him. As the business grew, he started making smarter hiring decisions (bringing on my friend, for example) but still couldn't manage employees he already had, and continued to make very poor administrative decisions.
It all blew up last week when he had to go to the investors asking for more money, because he mispent $500k.
The investors have stepped in, looked over the books, determined that this is still a viable business (and if things can be kept together, there should be a pretty substantial profit this holiday season), so have decided to keep the business open, but are now searching for a new CEO.
Without the business savvy of the angel investors, though, this business wouldn't have lasted long enough to hire my friend.

I will say, that if anyone here is in the Seattle area (or is willing to relocate to the Seattle area) and thinks they have the qualifications to be the CEO for a company in a niche market that specializes in marketing, sales and distribution, send me a private message. Industry knowledge will be helpful, but at the same time, the staff on hand have it in spades. They really need somone who is capable of running a company, of getting things tightened up so that products ship on time this holiday season.

[skweet]

So far so good on my personal business (what is the definition of failed), but I have been involved in assisting many businesses that have or are going to fail. #1 reason is unreasonable expectations. This usually has to do with people that expect to own the business to work less and make more, than they were as an employee. It is a fair estimate that the free market has placed a fair value on your time, for 40 hours a week. To expect to own your own business, and work less than 40 hours per week, is to assume making less money than the free market has valued you. Sacrifice at first, 80 hours a week for less money, and build to the work-less-make-more model of the future. #2 spending too much on operations. A nice new building or machines, is a recipe for disaster. Paying people more than they are worth is hard to avoid, but a killer (especially if you are expecting someone else to manage your business, you being a silent owner). Theft falls into this category, don't fool yourself, if you aren't there, then your employees are stealing from you. #3 under-capitalization (discussed above) #4 Not understanding your own business. #5 Who knows. That is right, the best entrepreneurs, with the best plans and the best strategy fail, for no apparent reason. I once saw a restaurant that was successful for many years, move across the street and fail (same crossroads). The owner did not change anything except (50' different) location, and size (added space for no extra cost). Same name, staff and menu. There are thousands of possible reasons, but every one we explored should not have made a significant difference.