How to Avoid the 9 Stages of Business Failure
In my coaching and advising work, I help owners improve the bottom line, increase sales, and solve problems that affect the success and morale of the business. Sometimes, however, by the time an owner or family member consults with me, the business may be in a downward spiral.
How do owners get to this dangerous point, where their companies and their finances are truly in jeopardy?
First, let’s think about what makes the owner successful. In the early years, we ran our businesses on intuition, energy, guts and opportunity. In fact, because we had little at stake, we made strides by taking calculated risks and relying on hunches.
However, as the years passed, we started believing we could handle everything ourselves. We thought we were invincible. We stopped asking for feedback from employees or listening to vendors, colleagues and peers. We climbed into our echo chamber and listened only to our own voices, our own ego.
The problem is this: Ego can propel you, and it also can dismantle you.
Once owners are ruled by their egos, they become ensnared in a series of thoughts or actions that feed back onto themselves. This feedback loop causes a situation to become progressively worse. I call this the “Downward Spiral,” and it must be halted before the business fails.
At any stage, an owner can break free of the spiral, yet many inch toward the cliff of unplanned closure, bankruptcy or a hasty and unstrategic sale, simply because the owner is too proud to ask for qualified and unbiased advice.
Nine Stages of Business Failure
In a downward spiral, business owners may not be aware that their perceptions are off. As you read the list below, ask yourself if your ego is putting your company in harm’s way:
1 Attention. The owner notices a negative pattern that is not part of the regular ups and downs of the business. Maybe it’s the loss of a key account. Perhaps there’s a new cost center that’s draining profits. Although the owner notices and gathers information about it, nothing significantly changes the root cause.
2 Flurry. Once the problem becomes obvious or chronic, the owner approves special projects or initiatives. I call these “one-offs,” because they are usually Band-Aids. The owner may use the situation to make changes that have been brewing, such as laying off problematic employees or buying a pet piece of equipment. Or, the owner may fund Band-Aid projects with money earmarked for solid and ongoing business development, thus robbing the company of true solutions.
3 Postponement. If the Band-Aid doesn’t achieve the desired outcome, owners decide to “wait it out.” I’ve talked to owners who have waited decades for an issue to miraculously resolve itself. This is common in second-generation family businesses where siblings will pass the hot potato back and forth.
4 Avoidance. As the problem gets worse, the owner avoids opening bank statements, reading financial reports, reviewing receivables, and approving cash flows. They may sign checks but not mail them. When I work with owners who are at this stage, I know things are serious.
5 Denial. The owner starts quoting their income peak (usually from many years ago) as their “average annual gross income.” The accounting department stalls on providing current financials because they want to “protect” the owner from bad news. The bookkeeper postpones payments and re-ages receivables to make certain months look profitable. This is pure co-dependent delusionalism.
6 Panic. At this point, owners make all decisions around cash, fearing that they will lose access to their credit line, be placed on C.O.D. by suppliers, or have equipment repossessed. To hoard cash, owners may sell off assets or borrow money on terms that are disadvantageous.
7 Shame. Owners may fire a CFO or bookkeeper who has knowledge of the situation. They may misappropriate funds to hide their losses. They may fund the business from their own pocket without telling a spouse or business partner. They may rob Peter to pay Paul, kiting money between accounts and paying creditors in full one month, and then letting the balance trail out to 90 or 120 days.
8 Depression. This stage is disastrous for a company. Once an owner becomes emotionally detached, it’s difficult to recover. The owner may stop showing up at work, spending days drifting. I have known of owners in this stage who became addicted to distractions such as drugs, gambling and affairs.
9 Acceptance. If the owner takes action soon enough, he or she may be able to turn things around by seeking guidance from a qualified adviser. Acceptance can happen at any point in this list, and the sooner it happens, the more likely the business can be saved.
Once the owner accepts that his or her own actions are not enough to reverse the tide, the next step is to set the ego aside and ask for help.
Who can help? Ideally, you want to bring in someone who is committed to the success of the company, rather than someone who has an agenda for themselves.
For example, even rainmakers such as turnaround CEOs will protect themselves and their reputations first. Tax professionals and business bankers give advice based on their sphere of knowledge, and often they are very conservative in their solutions and not particularly creative. Bankruptcy attorneys focus on preserving personal assets, but they may not care if the company fails. Investment bankers may be scouting for easy pickings for their private equity buyers. Family members may want to protect their inheritance at the expense of the business.
From the advising side, I believe an owner will have a better outcome if he or she pays a professional for impartial advice. The first reason I say this is that people are more likely to take action and follow advice that they pay for. Second, if you do not pay for advice, your adviser is going to be compensated somewhere else, possible with a commission at your expense. That means you want to choose someone who has an untainted agenda to help you succeed.
In the financial world, this type of adviser is called a fiduciary or a fee-based planner. These types of professionals work for you, for your benefit, and you pay them for their unvarnished advice.
In the business advising world, you’ll want an adviser with appropriate credentials, specific industry experience, high personal ethics, a stellar personal and professional reputation, and a caring heart. Above all, integrity matters.
Whomever you choose, your adviser must be able to keep a clear head and steer you through.
Ultimately, owners need to be prepared to set their egos aside and take ownership of their business problems. Being self aware and recognizing your own habits and patterns of avoidance is the first step. If you see yourself on the list above, ask for help, not only for your own peace of mind but for those who rely on you.
This article was originally published by Label and Narrow Web, the ongoing home of Rock LaManna’s business insights. For more visit: LabelandNarrowWeb.com.
For decades Rock LaManna has empowered and educated print business owners to make better decisions in an increasingly complex business world. Whether you are planning a major change in your business (buy, sell, succession) or simply want to operate more competitively, LaManna Alliance can help. Visit RockLaManna.com to inquire about services or start a confidential discussion.
Rock LaManna empowers business owners with strategic growth expertise. He’s a consultant with more than 35 years of print industry experience, a degree from Harvard Business School, and was an innovation partner with 3M. Today Rock enjoys turning your problems into possibilities, whether it’s growth, succession planning, or exit strategies. He is also featured on The Printer’s Edge Podcast and is a certified provider of the Value Builder System. For more information, visit RockLaManna.com.