Signs of a Failing Business: The Indicators One Business Owner Missed

Seeing the signs of a failing business aren’t always easy. Especially when it’s your own.

We set up shop in 3,000 square feet of sublet space with a toolbox and a computer. It took us almost three months to ship our first order of scaffolding, but the orders kept coming. With a lot of hard work, we did $950,000 in sales our first year in business…and still…we failed. But let’s start this story at the beginning. One day while waiting for our wives and kids as they wrapped up a play date, a friend and I started talking about his business.

signs of a failing business

The partnership begins

He told me how, as a small, backyard inventor/manufacturer, he’d developed a number of labour-saving products for the body shop industry. As business began to grow, he’d hired a sales rep that started selling one of his products to local drywall distributors. He went on to explain he’d also found another partner and began making scaffolds out of a rural shop.

On my end, I shared with him how I’d just finished developing and managing a successful direct mail sales campaign for a national health food distributor. With few changes, I thought it might work for him in the States. Both looking for a new adventure, we shook hands on the idea, and I started putting a campaign together that following week.

Orders piling up

Within the first month of launching the campaign, we’d collected more US orders than the partner could possibly produce. It turned out it was a perfect storm of opportunity. Our marketing campaign hit US dealers just a couple weeks after a major fire hit the leading manufacturer, and they were 8-10 weeks behind on orders. We had to gear up—fast! And we did.

As time went on, the stress built up within the partnership. The relationship with our partners began to disintegrate. Signs of a failing business started to show. The question was, “What should we do now?” A vulnerable market was right at our fingertips!

Going all in

My friend and I agreed to partner 51-49 and go all in. I shopped the business plan around to friends and raised $35,000 to start a manufacturing company. If you’re frowning now, you probably already have an idea where this story is going. We set up shop in 3,000 square feet of sublet space with a toolbox and a 386 computer (yes, it was that long ago.) He ran the back; I ran the front. It took us nearly three months to ship our first order of scaffold, but the orders kept coming.

But as it turns out, setting up a manufacturing company with $35,000 in start-up capital isn’t a great idea. It’s a sign of a failing business. Cash flow was really tight that first year. I didn’t know why until I took our year-end paperwork to the accountant. I returned only to hear the dreaded words, “You’re bankrupt.” But how? We did $950,000! I left the accountant’s office thinking he was some kind of idiot. But several indicators showed I was the one who was wrong. I had missed these signs of a failing business.

Indicator #1: The Cash Problem

Upon my return to our office I told my partner we needed to find another accountant. Since I was running the front end, that’s what we did (but of course, not until the next year-end.) That second year we were still strapped for cash. I tried to get around this cash issue by:

  • Putting off payables
  • Extending credit limits
  • Looking into a new contractor market
  • Developing a new prototype to diversify our market

We did what we needed to do believing our hard work and determination would persevere and everyone would be fine. We continued with the special kind of optimism granted to salesmen and turtles trying to cross the road. And we always went the extra mile—which kept us cash poor. Determined to find a solution, we turned our attention to another contractor market, developing a prototype product we’d plug into our manufacturing process – one that would diversify our market.

We figured we’d be able to offset the cost of our overhead with a second product line – one that would take advantage of the manufacturing capacity we already had. Good idea, right? We’ll never know. We spent so much time perfecting the prototype it never got to market and it remains on the shelf to this day. Nothing seemed to be working, and the cash issue was never solved.

signs of a failing businessIndicator #2: Distraction from Responsibility

Other signs of a failing business began to show. Our persistent drive for quality kept us from launching a very popular and unique solution to an everyday problem. But the prototype was a bust, and we realized the distraction had hurt us even more. We were losing money almost every month. At this time, we looked at the big picture and saw:

  • We were subbing out a number of our key manufacturing processes and giving away a significant portion of our margin
  • We’d dipped into the pockets of our silent partners for the last time
  • It was time to factor our receivables

Our drive for diversification had drawn our attention from dealing with a critical responsibility.

Indicator #3: Sustainability

Self-confidence, creativity, and the determination to never give up carried the company for almost eight years—until it folded. It simply couldn’t sustain itself any longer. Reflecting on it now, a number of mistakes are apparent. Hindsight shows:

  • We failed to have an exit strategy in place
  • Our cash limitations limited growth opportunities
  • Straying from our original product had cost us dearly

There are exit strategies like IPOs and selling the business, but there’s another kind, too. It’s around what to do when things (in spite of all your best efforts) are failing. And we didn’t have one. Our lack of sustainability meant the business finally collapsed, and we had no plan in place to save us. We had ignored the signs of a failing business.

Takeaway: Be passionate about your business, but dispassionate in its evaluation

It wasn’t in my character to stop trying until the last possible option to save the business had been exhausted. While that will is a great strength, in this case it proved very expensive—for many others and for me. Had we established a stop-loss point when we developed our business plan and carefully monitored the health of the business, we’d have made the rational decision to sell the good will we’d built much sooner.  But we didn’t – and the business failed.

But remember: A business failure doesn’t mean you are a failure.

I heard that line several times after we lost the business – but there was no way I could accept it. My business failed. I was a failure. That anchor hung heavy from my neck for two years.

Moving on

Of course I still had to eat – so another friend and I started a business one month after the demise of the first. I faked it. I was told how valuable my insights were and how worthwhile my experience was, but I didn’t believe it. I went about my daily responsibilities with my dirty little secret, hoping no one would notice. Then, after a time, we started having success. I thought less and less about the failure of the past, and started accepting the success we were having. I started drawing on the experiences I’d had, doing things differently, and things were working out. I could help others identify the signs of a failing business I had missed in my own past.

Over ten years have passed since the failure of my first business. In the intervening period, I’ve started and sold a successful business, grown other businesses, and advise several more. Clients are taking my advice and they’re saving time and money with them.

Real world success proved to me that I’m not a failure. Finally, I can accept it. A business failure didn’t mean I was a failure – so long as I learn and successfully put those lessons to work.

The moral: Never give up. Never quit on yourself.

Have you ever been part of a failed business or seen it happen to someone? What signs of a failing business put up the red flags for you?


Photo credit: olga.reznik

Michael Maguire

Michael Maguire owns Michael Maguire Consulting, a business management solutions company. He does a little business, shoots a little pool; can't golf worth beans but claims to have been OK years ago. You can find him on Google+ in the mornings sometimes, when he's not traveling. Chat with Michael on LinkedIn and Facebook.

Speak Your Mind