Four ways in which I nearly went out of business

Every day  my Twitter feed is full of people telling me how successful they are, how much money they can make or how many Twitter followers they can promise me. Braggadocio!

In an effort to return to some semblance of normality and in the cause of perhaps passing on some lessons learned, here is a blog about how badly I have done some things. Five ways in which I have contrived to destroy value in my businesses.

1.       Be seduced by the monster customer

Without question my biggest single blooper was allowing a huge customer to dominate our business. At the time our new e-billing company was less than a year old and the customer was Orange! What entrepreneur could resist? Sure enough after a very well run sales campaign we won the contract to build a solution to present Orange’s business bills online.

Don’t get me wrong – I am not suggesting that I wish I hadn’t accepted the business. The mistake I made was in not setting out clearly what we were being contracted to deliver. The consequence was that Orange kept finding ways of improving the solution and dazzled by the glory of having such a mighty customer we kept on building. For a period of time they dominated our business much to its detriment. Eventually we woke up to what was happening and soon crossed a bridge in our minds that to continue like we were could jeopardise our entire business.  Once we had made that leap, dealing with the problem was easy. We put a fair but firm proposition to Orange reflecting the real cost and value of what we were doing. They wouldn’t accept it and to our credit we swallowed hard and parted company with them. It was a great lesson for me.

2.       Believe my own business plan

Somebody wiser than me once told me that you should get three quotes when having building work done – ask for a price and time to finish. Then to get the most accurate estimate of cost and time, add all three together. I think there is a rule similar to this but in reverse when writing your own business plans. Look at the sales growth you are assuming and then double the length of time before the first sale and halve the rate at which you win customers. The trouble is that entrepreneurs are eternal optimists and will always believe the best case scenario. But it never happens that way and the very real consequence in a start up is that you run out of money because you don’t bring revenue (and therefore cash) in as fast as you predicted.

I have done this once and I had to very sheepishly return to investors with my tail between my legs with a revised plan. Luckily we spotted it early before it became a cash problem and we got through. The simple lesson here is “get real”!

3.       Be cheap about paying good people

If I was only allowed to give one piece of advice to someone starting or running a small business it would be – surround yourself with good people. Especially in areas where you don’t have experience yourself. For me that is on the technical side. I would describe myself as a technical entrepreneur – I understand the major concepts – but I not a technologist. I have to admit that on a couple of occasions in order to keep start up costs down, I have been cheap about hiring a technical leader. The result was that what I got was someone who did an OK job at keeping development on track and ensuring the data centre didn’t fail – but when it came to the leadership, the vision, the roadmap, they looked at me blankly. Yet that is the bit that creates value in the business. Let’s assume I saved £25,000 a year for three years – total £75,000. Would a truly talented CTO have created more than £75,000 of value? Without question. The lesson here is, within reason, don’t think about the short term costs, think about the value. In other words don’t be cheap!

4.       Believe I can do everything

A common misconception in a start up is that because you are small everyone must be willing to do everything – including the CEO. I admit I have fallen into the same trap. There is something worthy and inclusive about seeing the CEO put in a shift on the helpdesk but is it really a recipe for the best result?

The CEO is in that role because someone has decided that he is the guy with the vision, the leadership skills, the drive and the knowledge to take the business forward. So ideally you want your CEO to spend all of his time doing things only he can do. That doesn’t include a shift on the Helpdesk. Entrepreneurs are a confident group who think they can do virtually anything. But doing everything is not only impossible it is not right for the business.

 It might seem stand offish, but I am afraid that is the way it is. The CEO is an expert – don’t waste his time. It took one of our investors to point out to me that if we needed an extra person part time on the Helpdesk then we should spend the £15,000 that it costs to hire one so that I didn't spend my valauble time doing it. He had invested in me to grow the business (and his investment) and he left me in no doubt that that was what he expected me to be doing!

It was quite a lesson - now learned and a mistake not to be repeated. The lesson is simple: Whatever you do protect your time valuable time. Work out what you do best and do it. Hire experts to do what you are not good at. And if you are a start up CEO, don’t be ashamed about ensuring your time is protected so that you can be a CEO.

I hope this helps and I also hope it inspires a bit more humility in my Twitter feed!

Create a Brand

Is there possibly a bigger buzz word concept in marketing right now than social media marketing? If there is, it is brand management. What in the hell is a brand and why would you manage it? A company's brand is your mental image of that company. What do you associate with the Chevrolet's name? Old people, like me, think of “baseball, hot dogs, apple pie, and Chevrolet.” What do you associate with the GEICO name? I think of the gecko, woodchucks, and Mary Todd Lincoln's fat ass in a dress. I feel sorry for our sixteenth president. I have just described brand management created by advertising campaigns. Marketing experts tell me that there is no more important marketing activity than brand management. They tell me brand management is about creating an image in your customer's eye, and the path to creating that image is effective advertising – either the old school way using print media, television, and radio or the new media way using Facebook, Twitter, and YouTube.

I don't have a problem with placing great importance on your company's image in potential customers' minds. I just don't believe small businesses build brands through advertising. In fact, I don't believe most large businesses build brands through advertising.

Microsoft is a fine example of brand management. Let's play the word association game. What words come to mind when you think of Microsoft? If you are an average Windows user, you probably think, “Oh shit, I have to reboot again.” Until Microsoft, who knew you needed CTRL, ALT, and DEL keys on a keyboard? And – why would you need to press all three of them at once? We just thought about letters and numbers and the content we were trying to convey. I think I am at least a little more technical than the average user. When I think Microsoft, I think, “Will the END TASK button ever work?”

Their engineers tell me, “Frank you stupid bastard, when you hit the END TASK button, we don't let you end the task ,because that would make the system unstable.”

To which I reply, “Dumb ass engineer, the system is already unstable. That is why I am trying to end the task.” I have been told END TASK will work by Windows, version 2,174 expected to be released just after the second coming of Jesus Christ. It will be part of the version currently code named “Rapture.” I am looking forward to the full support for long file names – no more faking it. It is literally taking the second coming of Christ to get this. What will it take to get rid of lazy programmer bullshit like the system tray and the registry?

The problem with brand management is that brand defies management. Your brand is what you are, not what you want people to think you are. Brand is behavior. Microsoft advertises that the features of Windows 7 were put together by users. Obviously not. Nobody wanted a new user interface – at least nobody I know. There is no reason to favor the user interface of Windows 7 over Win 3.0. To sell the new release of each Windows version, Microsoft needed a marketing message other than, “This time we promise it works.” Thus, we are privileged to struggle with a new and improved interface each time a new version of Windows is released. We ceased begin fooled a long time ago.

The marketing people of Microsoft are so in love with the brand they believe they have created that they have infected products they have acquired with the Microsoft brand. Beginning in the mid 1990's, Microsoft began buying accounting software products. They purchased a number of companies with well established reputations like Great Plains and Navision. In the early 1990's, when someone in the accounting software industry talked about Great Plains, all of us in the industry knew what it did well – ditto for Navision. Microsoft marketers, in love with their beloved brand, took those well known products and created at least a half dozen nondescript versions with no established reputations. Not only that, but the names seem to randomly change each year.

Lest anyone accuse me of being in the Sage software camp – by way of full disclosure, we have been resellers of Sage products since before Sage owned any of them. Sage is a UK company whose US operations have largely been established by acquiring successful US accounting software products. After acquiring a number of successful accounting software products like Peachtree and MAS90, Sage began an expensive campaign of re-branding these products as “Sage”. Unfortunately, Sage lost a legal trademark battle for the Sage name in the US. Oops, what's a few million marketing dollars? They then took one of their acquisitions, Best Software, and attempted a rebuild of the brand around the Best name. Then they purchased back the rights to the name Sage in the US and went back to re-branding all of their products as Sage. Yes, this is a true story. I can't make this shit up. I'm not that imaginative.

When I play word association with Sage, I think, “Don't buy a house.” If you are a top executive with Sage, you will likely have your position for less than two years. Over the past four years, the Sage story of executive purges could rival anything Stalin did in Russia in the 1950's on a percentage turnover basis. Hopefully no torture was involved – other than watching a painful waste of money trying to build a brand. This was brand building in the old Soviet Union. “No, General Secretary Stalin, you don't look fat in that uniform.” This is the same approach successful Sage executives use to advance their careers.

What's the problem with a good corporate house cleaning once in awhile? Nothing until it becomes standard operating procedure. Then you have to wonder if the house needs cleaned or if the house cleaners need to be changed.

Here is a joke for you – how many Sage executives does it take to build a brand?

Answer – It's a trick question. No Sage executive has ever built a brand. To this day, after millions of branding dollars, few people in the accounting business know who or what Sage is. A lot of CPA's remember Peachtree and MAS90. That is the problem. Concentrating on the Sage brand diminished the well established brands they already had like Peachtree, MAS90, Timeslips, and Master Builder among others. Nonetheless, I am still on the Peachtree bandwagon. I just wish some more Sage executives were riding it with me. At least with Peachtree, they backed off the Sage branding a little. Peachtree comes before Sage in the name.

What do competitors like Microsoft and Sage have in common? Not much at first glance. However, they both have the same mistaken ideas about brand building. Brand isn't about marketing. Brand is about behavior. Your brand is the real you, not who you want to be. If you want a better brand, be a better you.

You may be curious how I intend to build the Aniston Outfitters brand and how I am doing raising money to open the first store. I predict that the first store will open before the END TASK button works in Windows. I have been in contact with a number of top flight money people, Any day now, I expect to have the first round of financing in place. Warren Buffet turned me down, but what the hell does he know about money? Jimmy Buffet made more money singing about Margarita-ville. Steve Jobs turned me down as well. In my opinion, he has never been that much of a visionary. Bill Gates said no – but he can't even produce an operating system where the END TASK button works.

So I am turning to you, my dear readers – at least that's what I call you to your face. I need a whole bunch of money really fast. My dear Jen doesn't deserve some crap store like Wal-mart. She is a Tiffany type gal. I need some real bucks. If you are interested, I have a web site set up to aggregate the money, http://www.africanrelief.org/ . Mention “Aniston Outfitters” and you get an extra 1% ownership in the first store. Yes, if I am going to steal from you like Bernie Madoff, I am going to do it for a good cause. To be completely above board, I am on the board of directors of Christian Relief Services (CRS). Bread and Water for Africa is a CRS organization. We CPA's have to be completely above board – don't we? Just like Bernie Madoff's CPA.

Treat Your Customers Like Fools – The Golden Rule of Billing

Last week our washing machine broke. It washed clothes just fine, but it wouldn't spin. Those of you ,who know me, know I am not exactly a domestic God. I don't and can't do squadoosh around the house. If you need a guy to patch your drywall, I ain't that guy. Call a real man. I disclosed this fact to my wife, Laura, early on when we were dating. I told her I do a few things very well, like tax returns, but I am utterly worthless around the house. I describe myself as a thoroughbred. In reality, around the house, I am more like teats (the polite spelling) on a boar hog. No, I have no idea what a boar hog is, but people in Pennsylvania, from whence I come, use this phrase annoyingly often.

We called an appliance repair company to fix the washing machine. Since I don't have any clients, who do appliance repair, Laura found someone on the internet. Google knows all. The repair guy, obviously more of a real man than I, showed up on time and fixed the washer. The problem was a door sensor. It took about an hour and a half to fix it. The bill totaled $369. For that amount we got a fixed washing machine and some snarky advice to Laura to not slam the washing machine door anymore.

Looking at the washing machine door / sensor, I am guessing the part cost about $50 at the most. That means we paid $310 for an hour and a half of labor. Based on my vast knowledge of the appliance repair business, I am guessing $155 per hour is a bit steep. Here is something you should know about Laura and I. We live in a nice house in one of the Belmont communities in Ashburn. We have a half acre lot, which is extremely rare in the suburban utopia of Ashburn. One of the things Laura learned not long after we bought the house is that people assume we are very well off, based on our house. We are pretty well off, but that's not the point. When we call someone for service, which we do quite often since I am useless, they normally try to give us the highest price possible, since they believe we can afford it. It's like we owe them extra money, because they really deserve more from life and we are the people to give it to them. The price isn't based on the job. The price is based on what they perceive we can afford. Sometimes this is done out of outright malice and sometimes it is done from good intentions. Some people assume, incorrectly, that we are always looking for the Cadillac job and won't settle for the Honda Accord. Believe me, I will settle for the Accord. I have a number of clients, who have the same issue.

In our CPA firm, I sometimes run into this problem with new staff. We bill for personal income tax returns by the form completed. There is a minimum charge for the basic 1040 federal form and one state return. Beyond that every form has an additional price associated with it. Very few of our clients have really simple returns. People with very simple returns can do just fine using Turbotax or visiting one of the national franchised tax preparation firms. Most of our clients, at the very least, own rental properties or have small side businesses. On the more complex side, many of our clients own multiple successful corporations and partnerships. They literally can't prepare their own tax returns and most are better off doing what they do in their businesses and not wasting time doing something they aren't very good at – preparing tax returns. We charge about $500 on average for personal tax returns. For a regional CPA firm, this is a very competitive price.

Sometimes, we prepare returns that are really pretty simple but have a lot of forms involved. For most of these forms, there is very little work involved on our part. Our price schedule will show that we should bill $500 or $600 for these returns. That doesn't mean that is what we automatically charge. Paul and I look at the time we have spent on each return and frequently determine that the $500 charge isn't really justified. We may charge $350 or $400 instead.

New staff members find this difficult to accept. If we can get $500 for a tax return, why should we charge only $400? You might justifiably ask why they even care. They care because our staff tax preparers earn monthly bonuses based on their billings. The amount of their billings directly and immediately affects their compensation. They care and they should. You might also be curious why we charge $400 for a tax return when we could collect $500.

The explanation involves my Golden Rule of Billing. I should trademark this phrase. Consider it done. The Golden Rule of Billing states that you should charge only what you would be willing to pay yourself. If I wouldn't pay $500 for a tax return, I won't bill $500. This seems damn generous of me, doesn't it? Well, not really. I do it for very selfish business reasons.

If I charge $500 for a service with a going market rate of $400 what happens? I lose the client either immediately or pretty quickly. What would I rather have, $500 this year or $400 per year for at least the next five years if I treat the client well? The last time I checked $2,000 is more than $500. Nonetheless, this concept seems to elude some of our staff at the start. They soon learn from experience, however. The client they charged $500 either complains, which is the best case, or he / she quietly leaves, which is the worst case since there is nothing we can do to save him / her as a client for the future.

The Golden Rule of Billing may at first seem altruistic, but it is firmly grounded in economic incentives. Laura and I didn't enjoy paying an outrageous amount for our washing machine repair. Our CPA firm clients don't enjoy being overcharged either. If I hate one situation, I have to hate the other. The fastest way to lose customers, other than providing poor service, is to overcharge them. Do you think we will be using the appliance repair company that overcharged us again? Does anybody know a good appliance repair shop?

Thanks for reading. Our main S&K web site is http://www.skcpas.com. My blog there is considerably less snarky and primarily covers important tax topics. Please take a look.

Interviewing and choosing good salesmen

Finding a good salesman is a tricky business - but getting it right is worth all of the effort. The problem is that there isn't a formal qualification that says: "This person is a fully trained fully qualified salesman". The only thing you have to go on is their track record. This post does not describe a comprehensive selection process, but having recruited many sales people over twenty years it gives some useful tips that I have learned through experience:

1. Interview lots of people at first interview stage and just go on gut feel. Are they nice people, do you get along, do you find them interesting, engaging or funny? Don't get too hung up on sales stuff just yet. After all people buy from people so the first thing you want is someone who gets along with people.
2. Use the first interview process to build a short list of three - then task each of them with doing a short presentation to you and a couple of colleagues. Give them a simple brief like: "Please tell us in no more than 10 minutes why we should hire you and what you are going to do in your first 3 months to be successful". What you are doing is putting them in a sales situation - seeing if they can sell. Think of it as being a bit like test driving a car.
3. In the Q&A ask them this question: "Rank the following 5 attributes of this role in order of importance to you - 1) career prospects 2) job title 3) job satisfaction 4) money 5) good working environment. You are only interested in one thing - that the answer in money! A salesman who is interested in any of these attributes ahead of money isn't a salesman. You want your sales guy foaming at the mouth at the prospect of making a big commission cheque - not worrying about his status in the company or his next career move.
4. Finally when you have chosen your man take up references. Don't use his - insist on your own criteria. I recommend you get a minimum of three 1) His last boss 2) A current customer and 3) A current work colleague. Spend time on these conversations. What was he like, was he punctual, was he easy to get on with, was he sociable, did his customers like him, did he make his targets? You can find out a lot from innocuous question. Always ask if they would re-engage with your candidate - i.e. would you hire him again, would you buy from him again. Listen to how much conviction is in the answer. They will all say yes - but how they say yes is what you are listening for.
5. If your candidates previous company say they don't give reference you should smell a rat. That may be a company saying we may give a bad reference and don't want to do that.

Finally on a practical note make sure you build in some terms and conditions with your recruiting partner to protect yourselves when things don't work out. I always insist on a free replacement if the candidate leaves, for whatever reason, in the first three months. Don't sign anything that says you only get a rebate for the first few weeks. If your recruiter is doing his job (i.e. sending you good people) he shouldn't be afraid of this. Good luck

How can I help?

I am lucky enough to have been successful several times with start-up and early stage businesses (there's a topic - was it really luck?).

I aim to put something back by offering advice of any description to today's entrepreneurs and small business leaders. This blog is designed to oil the wheels of that process by discussing the issues that I think were important to me in building my businesses and that are important to the current generation of entrepreneurs.

So please ask, post comments or follow me on Twitter @theclearhead.

Hire Your Relatives – A Biblical Story

Get out a box of Kleenex. This is a really sad story. I mean that sincerely. This situation upset me more than any other business situation I have endured over more than twenty years in practice. You may already be familiar with this story.

Adam was an elderly gentleman, who owned a landscaping services company located in the Garden of Eden. He had two sons, Cain and Able, who each owned ten percent of the company. Adam had retired fifteen years earlier and left the operations to his sons. Able ran the office, created proposals, and was in charge of sales. Cain ran the field operations and took care of the main customer, Jehovah. The company had been profitable since nearly the beginning of time.

As Adam neared age sixty, you can take the Bible ages and knock a zero off, he retired and put the company in the hands of his sons. Adam, however, kept his eighty percent ownership in the company. He reasoned that if his sons mismanaged the company, he could take back control and right the ark. Noah hadn't been born yet. Adam also owned the grass hut that the company used for office and warehouse spouse. He didn't get a big salary out of the company in retirement, but he took enough to live on. He also charged the company rent on the grass hut office space. He certainly wasn't wealthy, but had enough income to live comfortably in retirement. Fortunately, financial planners had not yet come into existence.

Adam planned on passing on his majority ownership of the company to his sons at death. However, after a few years, Cain and Able grew unhappy. They wanted to own the company right away. They weren't willing to wait for Jehovah to transfer Adam out of the Garden of Eden into heaven. They had no intention to cheat Adam. They just wanted to purchase his ownership stake for a fair price right away. That purchase price would allow Adam to continue living at his current level in retirement.

You might fairly ask why the sons couldn't wait for Adam's death since they pretty much already controlled the company. Able was in his forties, and Cain was in his late thirties. They simply didn't want to wait another twenty years potentially to own the company. I thought their plan made good business sense. The purchase agreement could even be written so that Adam could reclaim the company in the event the sons defaulted on the agreement. Over a period of a couple years, the sons presented their plan several times, but Adam wasn't interested. They told him that his name could be removed from any company guarantees, and he would have no further personal risk in the company. He would continue to get his income and rent for the grass hut. Nonetheless, Adam wasn't interested, which was his right.

Able was quite a skilled business manager and salesperson. He had helped the company grow substantially in the years he had managed it. Since the company was an S corporation (LLC's weren't invented until several hundred years later when Moses delivered the eleven commandments, the eleventh of which was “Thou shalt create limited liability companies to eliminate personal liability.”), in theory Adam got eighty percent of all the profits Able worked so hard to create.

Able wasn't willing to wait any longer. He left the company and went out out his own creating a company to build residential huts in Eden. The company's stockholder agreement was set up so that Able received basically nothing for his ten percent ownership share and many years of hard work. Able left anyway, since he knew he could recreate his success with his new company.

That left Cain in charge of the company. Since he had been the field manager, he didn't have experience in the other areas of the company. Adam was well aware of this. He asked me, the first CPA in Eden, to keep a close eye on the company's financial operations. I was a little reluctant to take on so much responsibility. I knew their main customer, Jehovah, wasn't a big fan of CPA's and money changers in general. Five thousand years later, his son threw us out of the temple. We know the Garden of Eden existed five thousand years before the birth of Christ, because Sarah Palin tells us so. She discovered this fact around the time Al Gore discovered the internet. (I am an equal opportunity political basher.)

For the first few months, the company performed pretty well operationally and financially. I met every month with Cain and his bookkeeper, Ruth. I was responsible for Ruth's hiring, and I knew her well and trusted her. She was one of the ten percent of bookkeepers, who are competent. (Please refer to earlier blog entries to get my opinion on bookkeepers.) I knew Ruth would keep me informed.

Early on in Cain's tenure as head of the company, he asked me if I planned to report everything he did to Adam. He told me he didn't want to be micro-managed by his father any more than Able did. I agreed that I wouldn't run to Adam with an account of every event. However, I did tell him that I would report anything I saw that was significantly out of order.

A couple months later, I got a call from Ruth. To obtain a big job, Adam had contributed $250K to secure a contract for bonding on a job. A bond company was guaranteeing to Jehovah that the company would be able to complete a very large project. If the company failed to complete the project, the bonding company would pay to complete it. Of course, the company had to pay the bonding company for this guarantee. In addition, the bonding company required the company to place $250K in an account that could be accessed by the bonding company in the event Adam's company failed to complete Jehovah's job. Jehovah doesn't mess around. Since the company didn't have $250K lying around, Adam put his personal money into the account. Ruth called me to tell me that Cain had taken most of the money out of the bonding company account without Adam's knowledge.

I called a meeting with Cain and Ruth. I told Cain that taking out the $250K without Adam's knowledge was a significant event that I felt obligated to report to Adam. He told me he would put the money back into the account within two weeks. He did.

A month later, I got another call from Ruth. She told me Cain had again taken the $250K out of the bonding company account. I didn't know this at the time, but a snake had approached Cain with the idea of opening an apple farm. You may have heard that the snake approached Eve, but most serious Biblical scholars (including Sarah Palin) have concluded that since women were not taken seriously five thousand years ago, the snake definitely approached Cain. Of course, Cain knew nothing about growing apples. What the snake really wanted was access to the company's cash and a steady job.

This time I called Adam. Of course, he was unhappy and immediately met with Cain to review the financial status if the company. I was not invited to the meeting. As a result of the meeting, I was fired as CPA, and Ruth was fired as bookkeeper. Later Adam told me, that since he had put Cain in command, he felt obligated to let him make his own decisions.

A little over a year later, I heard from Able. He told me that the company was in bankruptcy,and that I should expect to hear from the attorneys the company had been using under Able. Of course, Cain had fired them as well. They hired me to try and determine what was left of the company's finances and to complete any unfiled tax returns.

I walked into the biggest business mess I have ever seen. Cain had taken the $250K and a lot more to invest in the apple farm with the snake. The snake didn't come alone. He brought with him a weasel as financial controller and several other vermin he placed in key management positions. The new company was a miserable failure. Taking the money out of Adam's company left it desperately short of working capital. Working capital was so scarce that the company was unable to complete Jehovah's major project. The bonding company had to step in and pay all of the unpaid subcontractors for the job as well as pay for the final completion of the job. They weren't happy people and were suing the company and Adam as the guarantor of the performance bond.

At the time the bonding company came after him, Adam's assets consisted of the $250K he had set aside in the account for the bonding company, his personal grass hut, and the grass hut he was renting to the company. Of course the $250K was long gone thanks to Cain's foray into apple farming. Adam sold the hut that served as the company's office space, but that wasn't enough to repay the bonding company. He was forced to move out of his home and move he and his wife into a small rented apartment. Even that wasn't enough to satisfy his obligation to the bond company. He filed for bankruptcy. At age eighty, he was financially ruined. If only he had sold the company to Cain and Able a few years earlier. He would have eliminated his personal risk.

Now you know why this story is probably the saddest series of events in my career. Of course since this is all about me, as all of you know, I still haven't recovered. What lesson can be learned from Adam's story besides never trust a snake? The obvious lesson is not to be in business with our family. That is the nominal lesson I wish to convey, but there is another lesson to be learned. When it is time to leave your business, leave your business. Adam's time in his business was past. He should have sold out to his sons. Maybe they would have succeeded together. Maybe they would have failed. I believe Able's leaving killed the business. Nonetheless, Adam could have left the business without any personal risk. In the end, he left all his chips on the table and lost his entire financial life in a business he no longer controlled. I am truly, and will always be, sorry for his loss. He deserved far better.

Thanks for reading. My search engine optimization guy has made me promise to mention the Stitely & Karstetter web site http://www.skcpas.com. We have a more informative blog there and you don't have to deal with my snarkiness (is that really a word?). Redskins fans – Aaron Rodgers was drafted immediately before Jason Campbell. Doesn't it make you want to vomit? I am headed to the bathroom now.

Why buy a failing business?

A SCORE client told me recently that a friend of hers suggested that she consider buying a business that was not doing well. She asked me why she would ever want to do that.


Well a failing business might present an attractive investment opportunity for any number of reasons. When businesses for sale are failing, i. e., they have low or negative cash flow to the owner, you need to look under the cover to see what’s really going on in the business. The reasons the business is struggling could be correctable by the right buyer. And, if that’s the case, you need to make sure that what you are buying, with the necessary adjustments, will fit into a business plan that you believe will be successful.

Actually, the evaluation you should conduct is not much different than if you were considering buying a business that is profitable. You may find that the strong earnings of a successful business is based on factors which are temporary or depend on skills which you don’t have or are difficult to acquire.

A business may be failing because of owner mismanagement. Perhaps the owner doesn’t have the marketing skills needed to boost sales or maybe is not managing inventory in a cost effective way. This could create an opportunity for a motivated buyer with the capability to properly manage the business.

The owner may just be burnt out and may not have the energy to make the adjustments needed to improve the business. For instance, a business owner I visited recently has been running his business for a long time. His market has changed but he doesn’t want to make the investment in time and money to advertise and take orders over the internet even though the rest of his business infrastructure will support this. Again, this could be a good opportunity for the right buyer.


Sometimes early stage businesses fail because they run out of cash and can‘t raise more capital. This can happen even though their sales volume is growing nicely and can reasonably be expected to continue to grow. But a seller may have a long term lease or a loan payment that he or she can’t support any longer. A buyer with the financial resources and the know-how can treat the business as a startup but with a head start, thereby, avoiding many of the headaches entrepreneurs normally encounter when starting from scratch.

Of course, your evaluation may discover that a business is failing for reasons that can’t be easily resolved. In this case, you just keep looking for that good investment opportunity. There are many of them out there.