A Banker’s Perspective on Why Businesses Fail

Posted on March 21, 2013.

As a commercial banker, I was fortunate to be able to meet hundred of Entrepreneurs, CEOs and Business Owners.  I’ve seen the best in class and witnessed several implode. There may be a myriad of reasons these owner/CEOs give you when they fail, but when you peel away the BS, it almost always comes down to one thing:

Poor Management

Owners often blame industry factors and a weak economy, but the reality it that it really comes to down to this one reason. Poor Management leads to all these predictable causes of failure:

1.     Too much leverage.  When business I booming, it’s easy to want to expand, which often means adding more debt. Bankers are only too willing to help you add this leverage in good times.. Of course, when the downturn hits, you now have debt service on top of all your other fixed expenses.  Even companies in the best of industries risk failure with too much leverage, as we all witnessed in the last recession. A strong CEO/Founder will be sensitive to the risk that leverage puts on a business and proceed with caution.

2.     Expanding too quickly.  This is common in the retail industry, although I’ve seen it in others as well.  We all know that great neighborhood restaurant that has such a booming business so they decide to expand and ultimately fail. For retailers that spend a fixed amount of advertising revenue in each market, it makes sense to open as many locations as possible. But the growth needs to be well planned and strategic. Plus, too often the company is adding leverage to complete the expansion. So you have double the risk. Again, decisions to expand ultimately rest with the person running the company.

3.     Failure to recognize key talent.  Or lack thereof. I’ve left many a bank meeting shaking my head wondering why the company hadn’t fired the CFO, COO or other key part of the management team. I think maybe because these people are often with them from the beginning that they fail to see the weaknesses.  The management team that can run a company from $0- $25million is often not that same team that can take it too the next level. But it’s hard to see when you’re in the middle of it.

4.    Failure to recognize what you don’t know.  It takes a certain ego to start and run a company and so often your greatest strength is your greatest weakness.  Successful top executives are willing to admit what they don’t know and seek the talent that fills the gap. Failure to do so will ultimately lead to disaster. I’ve yet to see a successful entrepreneur that could be both a great marketer and effectively run the internal operations of their company. Do you think Mark Zuckerberg could have built Facebook without someone like Sheryl Sandberg?

5.     Failure to stay ahead of the game.  I once had a large client who built “clean rooms” for the large computer storage devices companies needed back in the day. By not realizing where the market was going, the owner failed to see the impending obsolescence of these rooms as the devices became smaller and smaller.  As a business owner, you always need to be aware of who’s building the next mouse trap and what the impact will be to your business

These may seem like very divergent reasons for a company’s failure, but if you think about it, it really does come down to poor management.  So if you’re a business owner or a manager that can make some of these decisions, take a step back and maybe take a minute to self assess.