How to Avoid The Seven Biggest Causes of Business Failures

The Success Margin

Friday, November 7, 2003

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I’ve never seen or heard anyone identify the true reasons for nearly all business failures.

Especially misleading in my view are university courses and statistics published by the government.

The following article could be entitled, “What They Don’t Teach You About Business Failure at Harvard, Wharton or Stanford.”

Here are the biggest causes of business failures and how to avoid them as I see it.

1. Putting the product first, with marketing second.  This is the exact opposite of what’s necessary for success. Smart and successful entrepreneurs identify the market first.  Then they create and/or focus on the product.

Tip: To succeed, you must find out whether people actually want your product, can or will pay for it, and how much.  The very best proof is not a focus group or survey but an actual market test.

2. Overemphasis on image. A fancy office with high overhead or an expensive logo will do little or nothing to facilitate success. And it could drive you out of business fast, as many businesspeople painfully discover.

Tip: Keep overhead low. Operate from a home office or very modest one when you start out. Most of your prospects and clients couldn’t care less.  Carefully invest every available penny in marketing. This dramatically increases your chances of success.

3. Bad business partnership.  Many entrepreneurs rush into partnerships with little knowledge, communication, or diligence.

I submit that a business partnership is even tougher to make work than a marriage.  Most fail in misery.  And in bankruptcy.  And if this isn’t bad enough, lifelong friends often wind up hating each other and estranged forever.

Tip: Avoid partnerships completely if you possibly can.  But if you have strong business reasons to form a partnership, make sure right
from the start you know your future partner’s strengths and weaknesses very well.  And, most importantly, clearly define in detail exactly
what you and your partner will be responsible for in the business.

4. Business model is too complex. The best business models are simple. Employees, customers, even suppliers, should be able to immediately understand the nature and goals of the business.  For example, “When it absolutely, positively has to be there overnight.”

5. The business attempts to pioneer a new product or industry. Entrepreneurs are often attracted to businesses that are pioneering a brand new product or industry. (I personally must resist this tendency as well.)  While a precious few are successful, most fail.  Businesses that are radically different from existing known businesses can even scare off customers rather than attract them.

Tip: You can achieve extraordinary business success when, instead of being a pioneer, you simply do something far better, faster and/or cheaper than existing businesses.

6. You and the business are driven into bankruptcy by a lawsuit.  You can be fully and personally liable in the event of a lawsuit which goes against you.  You could lose all your assets, including your home, savings, cars, etc.

Tip: Never operate a business without the protection of a corporation.  Operating through a corporation gives you a “corporate shield.”  You actually keep your personal liability limited to whatever assets you choose to put into your business. Worst case, in the event of
a lawsuit simply fold your corporation and start another one.

Talk with a good lawyer and accountant and discuss your personal situation including tax aspects. You can probably eliminate close to 100% of all potential legal threats which could go against your personal assets.

7. Divorce. Untold businesses come to a halt each year when marriages fall apart.  In many cases financial disagreements wind up in court.

Tip: Before getting married, and no matter how unlikely it may seem at the time, have a good attorney prepare a prenuptial agreement which spells out exactly what will happen in the event of a divorce.

Avoid the above pitfalls and the path to business success will become much smoother for you.

Warm regards,

Ted Nicholas

P.S. “The secret to success, in life and in business, is to work hard at the margin. Relentlessly.  It’s as powerful as compound interest, the eighth wonder of the world. Those little marginal extra efforts wil inevitably grow into something big.” –Bill Bonner

Little things mean a lot.

“God is in the details.”

Copyright 2003 Nicholas Direct, Inc.