Anatomy of a Business Failure

Last Updated Apr 13, 2011 1:40 PM EDT

"What am I doing wrong?"

This was the subject line of an email we received recently requesting a late night conference call with us. It was from one of our favorite clients -- a really smart guy. He has great ideas, and he develops outstanding relationships with investors, strategic partners, and almost everyone who crosses his path. He is committed to personal growth, and while working continually, he reads and attends seminars at every opportunity.

So why, with these wonderful attributes, would he be requesting a phone conversation that couldn't wait until the morning?

The Problem

Almost by definition, entrepreneurs and CEOs don't just see, but seize opportunities. They are blessed with drive and vision, but many have short attention spans and little or no interest in details. This, without the proper support, checks, and balances can lead to a path of ineffectiveness and ultimately failure.

Our client, we'll call him Dan, fits that pattern. Dan is a serial entrepreneur and started four businesses in two years. The overriding rationale for starting all these business in such a short time was there was some synergism between them and they had the potential to create revenue for each other.

Unfortunately, the synergism was limited to income, not operations. They became like hungry baby birds clamoring to be fed. Each business required its own management team and staff, offices, cash flow and capital for growth. Finally, each had a different business model, all with a steep learning and earning curve.

We talked long into the night, trying to identify what was wrong. Not surprisingly, we discovered virtually identical patterns in each enterprise. As humans need air, water, and food to survive, the three elements businesses need are people, time, and money -- and that's where Dan went wrong.
  • People: Dan had hired managers who knew the business but did not have an entrepreneurial sense of urgency or an understanding of cash management. They focused their time and energy on the things that fell into their comfort zone, not on the critical issues that needed to be addressed.
  • Time: Every moment he spent with one business was time stolen from another. That left no time to manage pro-actively and it left the inmates running the asylum. Dan didn't have time to oversee decision-making, provide leadership, breathe energy into day-to-day operations, or know where the money was going. His time was dictated by the most urgent crisis.We also discovered that one of the reasons he was starting new businesses was to provide a fresh and exciting place to put his energy. Each new business became a temporary escape and adrenaline fix.
  • Money: He started each business with the assumption that there was enough initial capital to cover expenses until positive cash flow kicked in. Those assumptions were based on projections made by managers who had industry expertise but not the ability to drive the numbers home. They were not incompetent, just naive.Revenue projections were unrealistic and costs as always, were significantly higher. As a result, Dan had to drain cash from the one profitable business to keep the others afloat. He was forced to look for additional investors, which diluted both his time and his ownership in the companies. When he asked his wife to mortgage their home in order to raise cash, a domestic crisis erupted.

What Happened?

Pick your cliché: The die had been cast, the cards had been dealt, the bed had been made, or the handwriting was on the wall -- in permanent ink. By the time he reached out to us, it was too late. He lost it all. It was a sad day when, fighting tears, he told his investors that he was shutting everything down.

Lessons Learned
  • Always ask why. Dan responded to each opportunity with "Hey, why not?" Instead, he should have asked "Why?" Success is selective: You can do anything you want but you can't do everything you want.
  • Develop a pre-nup plan. Pre-nups, after all, are easier to craft than divorce settlements. Dan needed a plan upfront that outlined measurable targets to hit -- things like sales, profitability, R&D timelines, etc. This plan also should have included a process that would have let him know when the businesses fell short of these goals, triggering alarm bells so that he could investigate. The point of the business pre-nup plan is to specify logical, pre-determined actions you will take at pre-determined moments and to take any emotion out of the decision-making process.
  • Closing a business costs almost as much as starting it -- and, as Dan discovered, it wasn't nearly as satisfying.
Have a small business finance question for The Money Dept.? Hit the comments or email us using the contact form under our photo.
Flickr photo courtesy of gpoo, CC 2.0
  • Rich Russakoff and Mary Goodman

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