Jul 28, 2008

Tips on Running a Struggling Small Business

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This is part of a series of posts in which - for what they are worth - I dispense with the knowledge and wisdom I acquired in a decade of slugging it out in the trenches as a small business owner.

While I enjoyed a number of financially-rewarding years as a business owner, I also experienced the unenviable trauma of having to fold a business I built up over a decade. In addition, I made a number of critical mistakes during the downward spiral my business took that - in hindsight - might have doomed me.

It is with this caveat that I offer some advice intended to help struggling small business owners understand their situations and - more importantly - their options. Feel free to with in with any of your own experiences or advice.

1. Know what your absolute limit for losses is. In one sense, owning a small business is just as much of a gamble as rolling dice on a craps table or playing poker. While you are probably an expert in your own niche, there are all sorts of unforeseen calamities that can turn a profitable business into a losing one. When you reach your limit of red ink, you must be willing to get out of the business, even if this means you will lose a ton of invested money. Otherwise, you are no better than an addicted gambler who runs up credit cards and cashes in life insurance policies to feed his addiction.

2. Never, ever, ever use withholding taxes as a short-term loan. Ever. I personally made this mistake when a new competitor came to town and my sales nosedived for a few weeks, and I convinced myself that things would shortly return to normal. Instead, this additional competition simply cut the market share of the existing competitors, and sales were slow to rebound. By delaying the payment of withholding taxes, I simply added the IRS to my list of creditors, and the feds charge the kind of interest rates that would embarrass a Mob loan shark. Moreover, as the company president, I was subject to the Trust Fund Recovery penalty, and it took me seven years after the end of my business to pay off the IRS. No matter how tempting it might be to "borrow" such tax monies to ease a cash flow crunch, don't go there.

3. Reduce inventories to an absolute bare minimum. In my old business I had unit managers who placed weekly supply orders. While I had some reliable folks working for me, it was nothing for these individuals to order quite a few extra few cases of expensive supplies. When I anticipated cyclical cash flow problems, I found that micro-managing inventory could free up many thousands of dollars that belonged in the bank.

4. Make the tough decisions on personnel. I always struggled with being the sort of owner who could make payroll cuts, especially with employees of long standing. However, in retrospect my loyalty to my high-priced senior employees contributed to my business not being able to withstand competitive challenges and unexpected commodity spikes in certain supplies. When I finally threw in the proverbial towel, such unwillingness to make needed payroll cuts brought me nothing beyond the gratitude of these ex-employees, and that ended the day I was no longer the owner.

5. Keep open your exit strategies. Never get so wrapped up in a business that you are not in a position to be successful after the business fails. In my case, I left with almost no cash, few prospects for similar work, and with the tag of "entrepreneur," which is the kiss of death in the corporate world (ex-business owners are seen as too independent and too resistant to authority). Swallow your pride and quietly put the word out to trusted contacts that you might be looking for a "real" job soon, and never spend your last nickel on a dying business. While I am not advising business owners to loot the corporate bank account on the way out, be sure to have access to a few months' worth of cash until you get some kind of work.

6. Remember - it's just a f**king business. A large part of my identity was once intertwined with my business, and after I got out, I no longer knew who I really was. You can always start another business, should you be a glutton for 80-hour workweeks, or you can use the end of the business as an opportunity to find a more fulfilling career. I found writing and academia to be a million times more satisfying than I ever did as a business owner, and - while I felt lousy and almost suicidal in 1999 when I started over - having my business fail was one of the best things that ever happened to me.

6 comments:

Anonymous said...

Is there anything you HAVEN'T done, Mike? Sheesh!
Oh, good post though.

SensorG said...

Mike - you've written alot about owning your own business. Exactly what local company did you own?

historymike said...

Anonymous:

Heh. I was in the "Job of the Month Club" for a while, so I suppose my work experiences are quite diverse.

historymike said...

Sensor G:

I owned or co-owned a few businesses in the area: a party store, a resale shop, and a small coin business. However, my longest and costliest stint was as a five-store franchisee for a national pizza chain, the one that advertises a $5 hot-and-ready pizza. I bought some existing restaurants that were a bit rundown and under-marketed, and I revitalized them, remodeling them and doubling unit sales in about five years.

However, I was also young and reckless, and I managed to nearly double my debt load, so the net result was that I was in a precarious position when my business got hit with a new national competitor (Papa John's) and a near-doubling of cheese prices in 1997-98 due to a combination of droughts and high beef prices (dairy farmers sent a ton of moo-cows to the slaughterhouse because feed grain was outrageous and Bessie was worth more as ground beef and strip steaks).

Que será, será. As my 10-year franchise agreement wound down, the franchisor wanted another huge chunk of change for the franchisee fees, plus a bunch of back royalties and national advertising contributions, and there was no way in hell a bank would touch that debt-laden business. Besides, even if I managed to swet-talk my way into a new loan, why the hell would I work 80 hours a week for a measly $30 or $40 grand, along with all the big-time headaches asociated with owning a business?

I was burnt out, chewed up, and plain old tired, so I just tossed them the keys and left with hardly a nickel. I was more concerned about paying off every two-bit vendor than I was about feeding my family, and that was a bad mistake.

BTW - I came up with that $5 program and name in 1997 locally here in Toledo, and it eventually became a winner. However, as a franchisee you automatically waive any copyright claims for products or promotions you develop, so I have doodly-squat to show for that piece of smart marketing.

Yet I learned a lifetime worth of lessons while wearing the owner's hat, and - though I regret losing almost all my savings - I am a better person for having survived the roller coaster ride that is owning a retail business.

Mad Jack said...

A good friend of mine owned his own business for a while. He employed 70 people and made more money than he knew what to do with - literally. Today the place is boarded up, the last employee having been fired a year ago. He tried his best to retain employees by seniority, to no avail. In hindsight, he should have sold the place just prior to the business apex. On the slide towards the drain, he could have closed up shop.

Older, wiser, broker.

Anonymous said...

It is a helpful post and very useable tips for the small business! Thanks for sharing!
Small Business Advise