7 Lessons Learned from Business Failures

As a CPA, I've witnessed the highs and lows of various businesses. Some soar to incredible heights, while others face the unfortunate reality of closing their doors. In this blog, I'll share some common pitfalls that lead to business failures and the lessons we can learn from them. If you're a small to medium-sized business owner, understanding these missteps can be invaluable for your growth and sustainability. 

1. Overleveraging During Good Times 

One of the biggest mistakes business owners make is overleveraging during prosperous periods. Remember the 2007-2008 recession? Before the crash, many businesses were riding high, making more money than ever. Loans were easy to acquire, and companies expanded rapidly, often taking on more debt than they could handle. 

The Lesson 

While growth is exciting, it's essential to approach it conservatively. Always consider what your business would look like if revenue takes a significant hit. Would you be able to sustain your debt payments? Overleveraging can lead to a downfall when the economy turns, so it's crucial to plan for downturns as much as upswings. 

2. Relying on Key Individuals 

Another common issue is the over-reliance on key members of the team. Losing a crucial team member can completely dismantle an organization if proper processes and redundancies are not in place. Building a business around one or a few superstars can result in a shaky foundation. 

The Lesson

Create an organization with enough support systems and processes to withstand the loss of key individuals. Ensure you have a solid foundation that doesn’t crumble if one piece falls off. A robust business is not built on one person but on a strong organizational structure. 

3. The Sunk Cost Fallacy 

Many business owners fall into the trap of the sunk cost fallacy. After investing time, energy, money, and even life savings into a business, it can be incredibly difficult to recognize when it's time to cut losses. I've seen business owners take second mortgages, work longer hours without pay, and pump more resources into a venture that hasn't been profitable in years. 

The Lesson 

It takes courage and wisdom to recognize when to quit. If your business hasn't made a profit in several years and there's no clear path to recovery, it might be time to reassess. Knowing when to walk away can save you from further losses and allow you to pursue new opportunities. 

4. The Importance of Real Estate Control 

Many businesses, especially brick-and-mortar operations, face challenges due to leasing issues. If a business owner isn't proactive with their lease agreements, they might find themselves in a situation where their lease gets pulled, leaving them at a crossroads: relocate or shut down. 

The Lesson 

If possible, buy the real estate for your business. Owning the property gives you control over your location and rental rates. If buying isn't an option, make sure you have a solid lease agreement with renewal options, keeping you in the driver's seat. 

5. The Risks of Expansion and Franchising 

Expansion can seem like an attractive prospect, but it comes with risks. When opening a second location, business owners often spread themselves too thin, neglecting their primary operation, which might be the cash cow funding the new venture. Similarly, franchising can be a double-edged sword. Franchise agreements can be suffocating with their fees, mandatory inventory counts, and operational demands. 

The Lesson

Before expanding, ensure you have the infrastructure and personnel to support growth without compromising your core business. For franchises, thoroughly review the franchisee agreements, understand the fees, and ensure you can meet the demands without jeopardizing profitability. 

6. Making Decisions Under Pressure 

Businesses often make the worst decisions when they're in a tight spot. When running from deposit to deposit, owners might delay tax payments or cut other corners, which can lead to severe consequences, like IRS issues, dangerous loans or payroll tax problems. 

The Lesson

Maintaining a financial buffer can prevent these panicked decisions. Always prioritize paying taxes on time and managing your cash flow prudently. Poor financial decisions can escalate quickly, leading to further troubles. 

7. The Danger of Shiny New Toys 

Chasing new opportunities or "shiny toys" can sometimes derail a business. Whether it's a new market trend or a franchise that promises the world, not every new venture is a gold mine. Sellers might not always be genuine, and expanding too quickly without the proper infrastructure can lead to failure. 

The Lesson 

Stay focused on your core business and be wary of distractions. If considering new ventures, ensure you have the necessary support systems and have thoroughly vetted the opportunity. Diversification can be beneficial, but only if done strategically and with proper planning. 

Conclusion 

Business failures can happen for a variety of reasons, but the key is to learn from them and make better decisions moving forward. When you understand these common pitfalls, you can better prepare your business to withstand challenges and thrive in the long term. 

At Kaizen CPAs, we specialize in providing actionable financial solutions to help businesses like yours grow and succeed. Click the 'Let's Chat' button to find out if we're a good fit for your business.