Businesses are inherently risky. Though the widely-cited statistic that 90 percent of startup fail within the first year is false, the real numbers aren’t exactly reassuring; about half of businesses fail within the first five years of operations, and about two-thirds fail in the first decade.
Q1 hedge fund letters, conference, scoops etc
So what’s responsible for the fast decline of an otherwise healthy, thriving business? In business, as in life, you’re prone to unexpected, devastating events. If you’re hit by one at the wrong time, or if you’re underprepared for it, it could force your business to close its doors prematurely.
Fortunately, there’s almost always a way to protect against these threats.
The Most Destructive Events
Let’s take a look at some of the most destructive events a business might face:
- The death of a key person. Most companies have at least one “key person” of critical importance to the business’s survival. For example, you might have a creative genius who consistently comes up with innovative ideas to keep the business agile, or a charismatic face for your company who keeps bringing in more sales. If that person dies unexpectedly, and your business doesn’t have a plan to replace them, the entire business could start tanking—and fast. That’s why so many entrepreneurs have key person insurance policies, which provide a lump sum of cash upon the death or incapacitation of a key person in their enterprise. This can be used to recruit and train a replacement, or just provide enough cash to keep the company running.
- A PR disaster. Big companies can recover from a PR disaster in the span of just a few years, but for a small- or mid-sized company, it can be a death sentence. Suppose one of your products, which has been seeing increases in sales for years, is revealed to have a key flaw that makes it dangerous to children. You offer a recall for the product, which costs hundreds of thousands to millions of dollars, but the damage may already be done—people have begun to associate your brand name with a lack of safety, and you may not be able to repair your reputation in time to make a difference. Being proactive can help you mitigate the effects of a PR disaster; be transparent and apologetic, and empathize with your key demographics.
- A cash flow shortage. A whopping 29 percent of failed startups cited “running out of cash” as a key motivation for their business’s demise, making it the second-most common reason behind having “no market need.” Cash is the lifeblood of your company, and if you don’t have enough of it available, you’re going to fail—even if you’re profitable on paper. A sudden increase in your expenses, such as hiring new staff or expanding to a new location, may be unsustainable—especially if you don’t have the income or backup capital to support it. Opening up a new line of credit, or seeking a late-stage investment may be able to bail you out here.
- A legal issue. An expensive legal issue could wipe out your company’s reserves, or force you to close altogether. For example, if your company is found to have violated a patent, or if your product has a serious defect that results in personal injury, the legal fees and damages could be enough to ruin your company. Fortunately, most product liability and general liability policies are enough to protect you from this fate—so long as you invest in them proactively, long before a legal issue arises. Working with a lawyer to prevent legal issues from arising in the first place is also an important move.
- The emergence of a competitor. Even if you think you have an original idea, you probably already have a competitor on the market. If you don’t, one will inevitably arise. If that competitor finds a way to offer what you offer, but cheaper, faster, or better, they could quickly take over your market share. The best way to guard yourself against this possibility is to keep a close eye on your competitors at all times, and never grow complacent with your current offers; always keep innovating and improving if you don’t want to be outcompeted.
Slow-Burn Problems
All these events are examples of sudden occurrences, oftentimes unpredictable, which could threaten the health and longevity of your business. But don’t forget, there’s also a host of problems that could drag your company down slowly, such as not having the right team in place (responsible for up to 23 percent of failed businesses) or not listening to your customers’ needs. You’ll need to be wary of all these threats, both unexpected and gradual, if you want your business to survive.
