Despite popular myths, starting and growing a business is hard work. If most small-business owners actually could calculate the high risk they take when going out on their own, fewer would chose to start a business.
Scott Shane, entrepreneur professor at Case Western University analyzed the latest survival rate figures for small businesses by sector from the Census Bureau’s Business Dynamics Stat. The highest failure rates are in the areas of construction, communications, finance, insurance and real estate where almost 65 percent fail in the first 5 years. Retailing and manufacturing’s survival rate after five years is 48 percent. These are not particularly good odds when taking any gamble.
Keeping a business going for five years is tough, but coming back to run another successful company after failing at the first, is even more difficult. Business failure happens for many reasons: The stock market crashes, partners and family members pass away or the market totally shifts away from your product. The test of a true entrepreneur is what you do next.
For three small-business owners, the road back from small-business ruin was paved with lessons for eventual success.
When Your Market Disappears
When Reenie and Stan Feingold founded Visual Horizons in 1971 in Rochester, NY, they had strong links to Kodak in this pre-digital age. It was a prosperous time for their slide duplication business. By the late 1980s, they had a staff of 35 people and offered a wide range of services, including photography, a photo lab, and a variety of original training programs. They produced over 55,000 slides per day for large organizations including Xerox, Smithkline The Smithsonian and NASA.
Reenie says that in the early 1990s, Kodak held a meeting for about a dozen key companies in the slide business. They were told that the slide business would be gone in less than 10 years. The Feingolds were in disbelief, but by 2000, their booming business had all but vanished. With almost no income, Reenie and Stan turned their focus to the accessories that went with slides, including binders and media kit packaging. They took out loans and reinvented their company as StoreSMART to sell organizational products for businesses, schools and scrapbookers. The company is now growing again with 12 employees, 10,000 products and millions of dollars in sales. Reenie says she learned to never again ignore a trend and always have a strategy to respond to it when necessary.
"I need to listen and work together with outside business partners," Reenie adds. "Business diversification is the key to success."
When the Economy Crashes
Paul Lachance is a technology entrepreneur that founded a software company in the 1990s. As he tells the story "I got caught up in the hype of the Internet bubble" and sold his corporation to a larger Point of Sale (POS) company in 1999. Much of this transaction was done in stock, hoping that the larger company would go public. Lachance and his partner, Dave Peelstrom, lost control of their product line, and were "forced to fire employees that were like our family" when the larger company changed direction.
"The millions of dollars they were to receive from the buy-out of their company evaporated when the market crashed in 2001," Lachance says.
Lachance and Peelstrom decided to start over with a new company called, Smartware Group. They built a next-generation solution called Bigfoot CMMS (computerized maintenance management system) that was easy for customers using the original CMMS to migrate to, with the same team that serviced them before the acquisition. Bigfoot CMMS helps customers organize all maintenance tasks, issue work orders, set up preventive maintenance calendars, manage replacement parts inventories and track equipment history to determine whether to replace or repair an older machine. Lachance says that they are proud to bring in new customers.
"We are even now part of the Inc. 5000 list and grew to about $2.5 million last with 27 employees," he adds.
What Lachance learned from this experience was that during the lifecycle of every business, there are good times and bad. Eventually the high-flying times end, and Lachance believes that every entrepreneur should be prepared for the lows. Based on the "dot com euphoria" and the assumption that business revenues would only climb, Lachance now frequently asks his management team, “Even though our business is growing, what would you do if your department had to cut the budget by 20 percent?” He adds that a company has to grow by using its revenue to finance any expansion.
"A company should remain debt free to keep full control," Lachance says.
When a Partner Dies
Kathy Laurienti’s husband, John started the Paisano Sausage Company in Denver almost 40 years ago. After 10 years, she joined the business in many roles such as a part-time salesperson, office manager and sausage stuffer.
In 2001, John was diagnosed twice with cancer and had several surgeries over the next few years. He fell into a deep depression and Kathy could barely keep the business open. When he died in May 2011, Kathy knew in order to survive, she would have to change the direction of the business.
She started to develop a dry Artisan Sausage which needs no refrigeration and could be sent anywhere in the world. At that time she heard about a marketing contest called Project Rev. sponsored by Deluxe Corporation. She won $15,000 worth of marketing materials from Deluxe. Laurienti was also provided with a mentor from the contest that helped her develop a long term marketing plan. Deluxe designed her logo and e-commerce website. Her marketing mentor told her to enter her sausage in contests and to sell at trade shows. She won third place in a contest sponsored by the Colorado Association of Meat Processors. Now Laurienti is in the process of doubling her capacity for making this dry sausage.
What Laurienti learned was that without a tremendous amount of focused energy, a small business will fail. When her husband became sick, she should have taken action sooner. Kathy credits here success with a local trend.
"When I adopted a local North Denver tradition of drying sausage, it is actually what propeled me nationally for the first time!" she says.
Preventing a Crash and Burn
These three cases illustrate that the most common causes of business demise is the disappearance of your market, an economic downturn and the death or illness of an owner or partner. Diversification of your product line, cashflow and leadership structure can help reverse or prevent the premature end of a small business. It is also helpful to keep up on the trends and latest developments in your industry to stay ahead of the curve.
Barry Moltz helps small businesses get unstuck. His latest book is called Small Town Rules which shows business owners how to plan for zero, diversify their business and go local to build their company.
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Photos: Thinkstock, Bigfoot CMMS, Paisano Sausage Co.