“How to murder your company in 10 easy steps”.
1. Take on too much debt. Companies usually go bust because they owe the bank too much. If you have no borrowings, you can survive a lot. We have lived through an era where it made sense to borrow and buy if you could; now everything has changed, and certain lenders are taking no prisoners. If there are problems looming, move early to raise capital. If you leave it too late, there may be nothing left to save.
2. Choose the wrong business partner. Plenty of companies hit the wall thanks to disputes between owners. It happens even between siblings. If you go into business with someone, be cautious before taking the plunge and have a proper subscription agreement – and keep communicating, even if you disagree.
3. Become overdependent on one customer. Most small non-consumer businesses have just a few clients. If they lose a big one, they are likely to fall into sharp loss. The answer is to diversify if you can, and try your best to be an irreplaceable supplier so that you can never be dumped.
4. Get ill. Many small businesses sink because the founder gets sick or injured, and therefore can’t work. So take exercise, eat sensibly, drink in moderation, stop smoking, buy insurance and try to plan management cover in the event of an accident or other enforced absence.
5. Make a mess of a major IT project. I have seen companies hit the rocks because they spent fortunes on computer systems that did not function properly. I’m not suggesting you never invest in technology, but make sure you take expert advice, and embark on such a move only when the time is right.
6. Get into a price war. Companies frequently undertake suicidal contests with rivals in a desperate attempt to seize market share. This tends to be a zero-sum game that benefits customers only, and leaves the operator with the least cash broke. I prefer to sell on quality or other differentials. Discounting is a dangerous pursuit.
7. Sign a burdensome property lease. I have witnessed many professional services companies go under because they signed a long-term lease on too much office space at the wrong rent – and then revenues collapsed. It must be the main reason for accountancy, law and architecture firms having to dissolve. Now would be a great time to start such a business if you can generate the orders.
8. Forget your customers. I am constantly surprised at how often one experiences poor service, especially in competitive fields. Almost everything is a repeat business, and if you are treated badly by someone, you don’t purchase from them again – and you tell your friends not to go there too.
9. Never evolve. Successful companies can fall into the trap of saying “If it ain’t broke, don’t fix it” to every innovation that comes along. They grow complacent and allow newcomers to eat their lunch. Long-term winners are always improving, questioning, adapting. No commercial formula lasts for ever.
10. Don’t bother investing. Certain proprietors strip their business of every penny of cash, starving them of capital. But every undertaking requires maintenance and refreshment – otherwise the facilities grow tired and inefficient, and new product development evaporates. If you dividend everything out, you will eventually discover that you own a wasting asset.
Learn from Luke Johnson, the Chairman of Channel 4 (in the UK). He runs Risk Capital Partners and has backed companies guilty of all of these mistakes.