What the Experts Say: Why Small Businesses Fail

Recently, the SBA published a report entitled “Financial Difficulties of Small Businesses and Reasons for Failure”. It is instructive to review these causes, in examining your own business. (Keep in mind that there can be more than one reason for a business to fail–the statistics indicate what percentage of the small businesses attributed a certain factor as contributing to their failure).

  • 39% of small business failures are due to outside business conditions, such as new competition rent increases insurance or other costs
  • 28% of small business failures are due to financing, whether it is high debt service, loss of financing, or inability to get financing
  • 27% of small business failures are due to inside business conditions, such as mismanagement, decline in production, a bad location, or loss of major clients
  • 20% of small business failures are due to tax problems, with either state or federal authorities
  • 19% of small business failures are due to disputes with a particular creditor
  • 17% of small business failures are due to personal divorce, or health problems
  • 10% of small business failures are due to calamities, such as loss of goods or equipment in a natural storm.
  • 6% of small business failures are due to some “other” cause

A quick glance at these percentages shows that the significant majority of business problems are issues which the entrepreneur can control. Although he cannot control health problems or divorce, weather conditions or outside business conditions, he has some significant control over financing, inside business conditions, tax issues, and disputes with other creditors. Often times the entrepreneur is not “focused on the obvious” as he deals with other problems which come up daily. Nevertheless, we all must make sure financing is in order, and that the business is run in a businesslike way, so that the taxes are paid, for example, or those debts negotiated. Small businessmen must also stay in communication with creditors to avoid lawsuits, liens, attachments, garnishments, etc.

In order to prevent these obvious problems from occurring, small businessmen should pay particular attention to business formation issues, especially when business partners are involved. The structure and organization of the business should emphasize efficiency, profitability, and good tax treatment. In addition, a solid business plan never hurts. When a solid business plan falls apart and the projections are wrong, at least we can tell which assumptions need to be corrected.

In addition, communications with employees, vendors, suppliers, and customers is critical. Good contract drafting and solid negotiation skills help in formulating stable processes for all of these individuals upon whom we rely.

Of course when significant problems such as disputes with the IRS arise, they must be dealt with quickly and honestly. Resolving these disputes in a cost-effective manner is a central concern, as every business (particularly when cash flow is bad) attempts to conserve cash.

Do you have questions or concerns regarding any of these issues? Please do not hesitate to call me at (317) 266-8888 for further discussion of these matters.

Debt Settlement Success Stories

Debt settlement can have fairly broad applications, as the examples below indicate. Whether in a divorce proceeding, a business workout, or an individual consumer’s return to solvency, debt settlement can be a very useful tool.

Recently an entrepreneur came to see us–the franchise he had purchased wasn’t making enough money to stay afloat. We negotiated with the franchisor, so that the franchise could be relinquished. In addition we negotiated with the landlord to make sure any claims he had were settled. The most difficult matter was the SBA loan: $220,000.

Fortunately, we were able to negotiate the SBA loan down, working with the bank and obtaining Small Business Administration consent, so that 11% of the debt was tendered in cash, after which the loan was considered paid in full. The entrepreneur is now back running a successful CPA practice, and much happier than he was trapped in a dying franchise operation.

In another case, an entrepreneur came to see us regarding his small business–again, his cash flow had dried up and he was going to be forced to shut down. After doing some cash flow analysis with us, he realized that although he was running three separate businesses, only one was profitable. He arranged to sell off the other two lines of business, and continue operations with the third. However, he had substantial lines of credit which were appropriate for debt settlement. These debt settlements were done on his behalf at approximately 40%.

When he first came to see us, this gentleman was in his mid 70s. He is now in a position to retire, as he preserved some retirement savings. He’s no longer burdened with unprofitable lines of business. As an added benefit, because his outstanding debt was significantly reduced, his credit score actually increased!

If you have these kinds of practical concerns please do not hesitate to call our office so that we can counsel you on the “ins and outs” of debt settlement. If you’re worried about these issues, call our offices now at (317) 266-8888.

Ownership Disputes

Ownership Disputes

It seems like a great idea to go into business with old friends or family–so much warmth and love spread all around. Unfortunately it doesn’t always seem like a great idea years later. This can be true whether or not a business is profitable, as the following cases will illustrate.

In one case that I handled, the shareholders were family, trapped in a situation lawyers are quite familiar with, called a “deadlock”. In a deadlock situation, none of the shareholders win, because no one has a majority of the shares. Of course, contractual provisions such as voting trust, proxies, dividing up the directors, or electing particular individuals as officers with specific powers, can all be used to move around a deadlock. But most people never consider these things. They move into a business, happy to be making a profit, without anticipating that loved ones or trusted friends can embezzle funds, take vacations on corporate time, or make poor business decisions for which all partners are liable.

Obviously, all partnerships and corporations, including LLCs, should have a detailed agreement to protect all parties concerned. In the case where this has not occurred, many people can be hurt and embittered. In addition, partners and shareholders can be driven into bankruptcy, with subsequent stress such as poor health and broken relationships.

In another case that I handled, the chief officers of the corporation embezzled funds to which they had no legitimate right. Of course, those who are dishonest will rarely admit that fact. These types of cases usually go before the court, with great expense for all concerned. In the event that a financial audit is done, often the dishonest party can be proved to be liable. Nevertheless, with significant bank loans against the business and the individuals, it can be a long painful struggle getting out of this financial quagmire.

For this reason, setting up, continuing, or dissolving business relationships should be done with counsel from attorneys with decades of experience in these matters. Otherwise things can get much too expensive and discouraging for all parties involved.

Does this sound familiar? If so, please do not hesitate to call and ask a few questions. I should be able, within a short phone consultation, to assess if I can be of service to you. Please call (317) 266-8888, and ask the receptionist to speak to Mike Norris personally. Or, you can email me at mike@mikenorrislaw.com. Looking forward to hearing from you soon.

Bank Workouts

While negotiating debt workouts with banks in the last few months, I’ve noticed a number of clients coming into my office with a significant financial problem: the bank has a lien on all of their assets, and they don’t have the cash flow to ensure that everyone gets paid, including the landlord, the bank, and other general creditors.

In these situations an old saying by Donald Trump seems appropriate: “When you owe the bank 1 million bucks and can’t pay it, you have a problem. When you own the bank 10 million bucks and you can’t pay it, the bank has a problem.” In other words, when cash flow is tight, the entrepreneur needs everyone involved to work with him.

Of course, if everyone can work together, the hard-working entrepreneur can pull his way out of a slump. However, sometimes in such a situation despair can set in, and the entrepreneur becomes filled with apathy, losing his drive. The obvious solution is to give the debtor a little breathing room, so that he can get back to focusing on what’s most important to resolving their financial issues: cash flow.

In a number of recent situations, my first approach was to sit with the bank, once learning they had collateral and all the assets of the business. This may seem like a precarious or risky position, but actually it is to the small businessman’s benefit. When the bank has the first claim on all the assets, there is nothing to fear from general creditors, who have no claim on assets due to the fact the debt is unsecured. As you can see, keeping the bank happy is critical.

But just because the bank is happy doesn’t mean the debtor’s problems are over. The debtor must continue to work hard, and work steadily. Creditors need to be alerted to the fact that bankruptcy is possible, if workout discussions are not productive for all parties. The debtor’s attorney will need to handle all lawsuits, and everyone involved needs to be given enough information to understand exactly what’s going on.

Are you worried about these kinds of issues? Call me on my small-business hotline, to discuss these matters, or schedule a consultation in the office by calling (317) 266-8888. We will try our best to get to the bottom of your issues, and help you to solve them quickly with minimal aggravation.