The top 4 reasons that small companies and businesses fail

The idea of being your own boss, making your own hours and profiting from your own personal innovations is appealing to nearly everyone. This is why, according to Forbes, there are nearly 28 million small businesses in the U.S., employing over 50 percent of the entire workforce. Yet while starting a small business is relatively simple, keeping it going can be complicated and taxing, resulting in two-thirds of personally-owned companies closing up shop in the first ten years.

Here are some of the most common reasons that small businesses fail – and how to avoid them:

Insufficient or improper planning
Having a dream or a vision for your business is important and will be what gets you through the tough times – but not having a coherent business plan before hanging out your shingle can make things tougher than they need to be. Before you go into business for yourself, consider how your business will be structured, what kind of resources will be required, and how much capital you will need. Research demand for your particular product or service in the area. What kind of competitors are you going to be going up against and how are their businesses doing? Are you starting an LLC, corporation or partnership? What sort of permitting will you need?

Hiring legal counsel while in the planning stages can not only identify what sort of questions you will need to ask yourself, but also answer them. Crucially, it can help you avoid some of the major – and costly – legal pitfalls that can turn your dream into a nightmare.

Unsustainable or out-of-control growth
Say you open up shop and your business is an immediate hit. Sales are booming, and customers are flowing in faster than you can even handle them. This may seem like a good problem to have, but for many businesses, out-of-control growth can be fatal. Over-expanding, opening up a second location in an unfamiliar market and taking on new employees to meet demand all means higher overhead and more organizational and managerial challenges. If sales slow, you may find yourself with an unwieldy business, unable to stretch profits and personal resources to handle your newly bloated company. 

To avoid running into a wall following a dramatic upswing, take every step slowly and consider an expansion carefully. Think about all the logistics involved in growth, including that more of your time may be spent managing the business than producing products or delivering service. 

Entrepreneurs can't do everything
Just because a person has an innovative product or service to bring to market doesn't mean that they have the business acumen to sell it effectively. True, a good product sells itself, but a successful business has many invisible moving parts that help the entire machine move forward. Do you know about staffing or office management? What is your experience with accounting or advertising?

Delegation in a business is key. Recognizing your limitations when it comes to your experience and know-how in specific areas of business management will keep you from overextending or making costly mistakes. This is where business partnerships come in handy, with each partner bringing skills to the table that the other may lack – all for the greater good of the business. 

Lack of capital
Businesses are rarely profitable within the first few years. This leads many small business owners to dip into their own savings, take out loans, mortgage their homes or max out credit cards. While all these can provide essential funds, personal asset protection is crucial since, by drawing from or leveraging personal assets, the failure of the business could effectively wipe out any remaining savings or equity you accrued.

The key is to make sure that you understanding what you are getting into before you start your own business. The Law Offices of Donald W. Hudspeth, P.C., have years worth of experience guiding entrepreneurs through the formation of new businesses. Call us today to learn more. 

Categorised in: Arizona LLCs, Asset & Liability Protection, Business Law, C-Corporations & S-Corporations, Dissolution & Partnership Disputes, International Business Law, Starting a Business in Arizona

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