Editor's View

Failure is always a danger

Dec 06/Jan 07 issue
 

I’m in a good mood this festive season, which is why I’d like to remind you that the odds of your business sinking or running aground are scarily high.

Statistics from the Federation of Small Businesses show that after three short years, over 35 per cent of business start-ups are no longer afloat. Others in the industry put the three-year failure rate at 80 per cent.

A more general – and equally unappealing – statistic on corporate collapse is the rate of annual insolvencies. In 2005 there were just over 18,000 in the UK, and in the first six months of 2006 there were over 7,000, a reduced but still intimidating number.

And even if your business is in a healthy state and ready to take the mergers and acquisition route to success in 2007, you’re still not out of the choppy waters. A report that landed on my desk a few weeks back referenced research from professional services firm PricewaterhouseCoopers that claimed up to 70 per cent of acquisitions fail to achieve the benefits set out before purchase.

Reasons to be cheerful
However, as I said, I’m actually in a good mood. Why? Because behind these dreary statistics is a simple fact (which I’ve unfortunately learnt from experience) – the mistakes that entrepreneurs make are embarrassingly basic. And therefore easily avoidable.

For instance, in the early years cash flow is king. But how many businesses fail to have decent reporting systems, or sound financial controllers, or adequate debt-chasing systems? Far too many.

It’s a similar story with regard to issues such as customers (young ventures often rely upon a handful of key accounts and fail to diversify), IT systems (so many choose the cheap-and-cheerful but ultimately unscaleable approach) and contracts (habitually badly negotiated). And this is all before you try to solve the tricky issues of clever management. As Chris Ingram points out on page 48, the skills and systems needed to establish a business at start-up are not sufficient when your business matures. But countless otherwise intelligent people don’t grasp this. Or they fail to seize the simple fact that a great product is nothing without a great sales and commercial team to turn its merits into money.

Overcoming the ego
As for mergers and acquisitions, the main problems – time and time again - are people based, not product. Acquisitions fail because of personality clashes, culture clashes, differing leadership styles, power struggles or post-deal decision-making paralysis. Without ego and emotion, a newly conjoined venture should be on easy street.

So, if you’re at the helm of a business with potential, my advice is to embrace the possibility of failure. What often goes wrong is uncomplicated – if you can just remember this and learn the simple lessons of growth, you’re halfway to success.