Title: Five key reasons why businesses fail

Sub-title: Learning why businesses go under, can provide key insights into how to stay alive.

If you need advice on how to weather tough economic times, Bradley Berneche, president of Alouette Homes, is a good guy to ask. Canada’s residential construction industry has been gradually bouncing back from recessions lows in recent months, spurred by continued low interest rates and gradual increases in housing starts, But Berneche, who took over his father’s prefabricated home business in the early 1980s, is taking the struggle in stride.

“Construction, like many industries is cyclical in nature,” said the veteran entrepreneur, who has lived through several recessions. “That means you need to need to plan for the long term, and to take both the good times and the bad times in stride.”

According to Steven Karpenko, Director of Small Business Markets at the Business Development Bank of Canada, compiling a definitive list of the main reasons that businesses fail is difficult. “Business bankruptcies often involve a combination of events, that play out simultaneously,” said Karpenko.  “These include external factors, poor financial and risk management, insufficient or poor industry knowledge, excessive focusing on the short term and poor planning.”

According to Karpenko, understanding why businesses fail can pay off big time for entrepreneurs. “If you can quickly identify the reasons that businesses around you are having trouble, you may be able to prevent the same thing from happening to you,” says Karpenko. “That’s why it’s particularly important to watch other key players within your own industry or sector.”

Over the years, Alouette Homes has navigated tough times better than most. Its 175 employees, portfolio of 20,000 completed homes and significant geographic and product diversification, have long provided a good foothold from which to bounce back. However Berneche says he never lets his strong fall back position blind him into taking undue risks.

For example during the mid-1990s, Alouette Homes was asked to build six modular constructions for a Chinese reseller. The deal represented a huge ground floor opportunity to get into an exploding market. But Berneche was cautious. He asked the client to be paid up front, and only agreed to ship the order in stages. Despite his precautions the deal soured, but Alouette, emerged unscathed. “We simply took the balance of the unshipped merchandize and sold it to another client,” explained Berneche. “When we take a risk, we always try to limit the downside.”

According to Berneche, one the reasons that the deal fell through was related to fact that Alouette Homes’ Chinese client, was new to the construction and home assembly business. As a result, he was not able to obtain the get the appropriate paperwork and land rights approved to install the new homes.

Berneche’s client isn’t alone. In fact lack of basic industry knowledge, by entrepreneurs who move into fields that they know little or nothing about, is likely the single largest contributor to business bankruptcies. As BDC’s Karpenko notes, “It’s a competitive world out there. Being merely enthusiastic, or even good often isn’t enough. You often have to be the best at what you do, or to offer an unbeatable value proposition. You can’t do that if you are new to an industry.”

Sidebar: Key reasons why businesses fail

1. External factors. Recessions, clients moving out of town, the death or displacement of a key partner or employee, the emergence of a new competitor, or another unforeseen events.

2. Poor financial or risk management. Taking on undue risk relative to potential gains. Improperly assessing cash outflows, or badly scheduling tax and regulatory filings.

3. Insufficient industry knowledge. Far too many entrepreneurs form startups, after doing little more research than visiting a trade show or two or getting advice from a few friends or contacts. To succeed in business you need to know your industry inside out.

4. Short term horizon. A huge percentage of businesses failures occur during the first year. A longer term vision enables entrepreneurs to ride out that initial hurdle. After that, success potential increases dramatically.

5. Poor planning. A huge percentage of business failures can be traced to poor choice of location, a poorly designed product, inadequate assessment of product demand, or other examples of poor or inadequate planning. An ounce of effort at the planning stage, equals pounds of success at the execution stage.

Peter@peterdiekmeyer.com

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