If you had ten thousand dollars and I were to offer you the opportunity to invest in a situation that required: 10 hours of your work day (and some weekends), large amounts of additional stress, the potential to lose your family, friends, and your peace of mind – all with a 90% chance that you would fail, would you invest in it?
Then why in the world do entrepreneurs invest so much in a small business?
Thriving in Failure
The greatest lesson that real life can teach us is that, when it comes to a business enterprise, many of our attempts will fail, while a very few will succeed.
Now, this article is not only about the prevention of business failure, but also about how to overcome business failure – because it is bound to happen at times.
There is an essential principle that exists that can enhance the lives of business owners even if they fail. And that is:
“Great businesses plan for the worst, yet hope for the best.”
By hoping for the best, yet preparing for the worst one can prepare for and even survive the devastation of business failure and become all the better and smarter for it.
You see, if an entrepreneur can survive failure, they will only be smarter, more experienced and more determined the next time around. Since it is in the nature of business leaders to continually create new ideas, it will only benefit them to fail, and to learn valuable lessons from their mistakes.
History is full of business entrepreneurs that had countless failures before the idea or idea that propelled them to greatness was finally discovered. Yet, this is only possible if an entrepreneur can survive the devastation of failure.
What are the ways to survive and thrive even in failure? Though there are many I will focus on the most important ones which include, managing expectations, limiting liability, avoiding personal guarantees, and having adequate cash reserves.
What expectations should a business leader have in their mind? The reality is that there is a very great chance that their enterprise will fail. By accepting this fact, one is less likely to cross emotional boundaries by investing an unwholesome amount of time and energy into an enterprise.
One would be less likely to skip a child’s birthday party, or be late to a dinner appointment with a spouse. One would be less likely to invest the family’s life savings on an idea that may or may not be successful.
Yet, one would be more likely to be prepared for the forces beyond ones control, such as an economic downturn, or a new and stronger competitor – and be able to make the best decisions that will prepare the organization to overcome whatever challenges that come against it.
I believe this simple step can practically save a business owner from the vast majority of headaches and heartaches that those who do fail have to endure. The idea is to structure the business enterprise in such a way as to protect the owners from the potential liability that exists when dealing with the public.
The first method is to obtain sufficient liability insurance, to transfer all of the organization’s liability to a third party (insurance company) for a portion of the cost. The additional legal and business assistance of large third party insurers can also benefit an organization when facing challenges brought about by the consequences of liability.
The second method is to take on a legal form designed to limit the liability of the organization due to its structure. Establishing the organization as a C-Corp, S-Corp or Limited Liability Company automatically provides liability protection to the owners, for most situations with few exceptions.
A third method is to create multiple corporations in order to separate the assets of the organization from the entity that do business with the public. If ever a liability issue arose with the entity doing business with the public, it will not be legally entitled to go after the assets because they are owned by a separate entity.
Avoiding Personal Guarantees
There will be many opportunities in a business life when the business leader will decide on a course of action and will be required to put up collateral. He or she will be asked to pledge assets to guarantee a loan or other agreement to secure the arrangement for the lender by making it less likely of default. Usually those assets will either be business assets, personal assets or both.
The truth is that if there is a potential for default, then most likely, it will happen. In order for the business leader to avoid bringing the pain and challenges home, they will do well to avoid giving any personal guarantees.
Now this may mean that you may not get the loan, for the lender does not want to take a chance on a deal unless the business owners give a personal guarantee. So be it. To best protect for the worst possible situation, it is best for the owners to never personally guarantee any loan, or any arrangement that will bring recourse against the business owners in case of default.
Is it worth losing your house over an idea that had a slim chance at succeeding anyway?
The truth is that if a loan cannot be acquired, or an arrangement cannot be made without personal guarantees, then a wise business owner would patiently wait for safer and more lucrative opportunities to arrive without selling their soul to the devil to do it.
Having Adequate Cash Reserves
The main cause of the failure of most businesses is that they run out of money. The truth is that this happens because of a lack of proper money management by the organization’s leader.
The main area that can tip an organization in either direction is the efforts the business leader makes to have an adequately funded cash reserve. As a matter of fact, a sustainable business enterprise should not be started until an adequate cash fund of at least six months to a year’s worth of business expenses is held in reserve.
As the organization operates, additional funds are added to the existing cash reserves. Then reserves are invested to continue growing the organization’s cash position, so that in case of emergencies, the cash reserves can be utilized and replenished by the returns on its investment.
During difficult economic times, or if new opportunities are available, the cash reserves would be able to adequately meet all of the organization’s financial needs.
The other result of having adequate cash reserves is the less dependence on debt. An organization with a well funded cash reserve can also better determine the optimal use of debt in its financial strategy to obtain the optimal capital structure that will maximize its potential to better achieve its organization’s mission.
In conclusion, failure is an inevitable progression of business ventures, but business greatness can be maintained in the midst of failure. As a matter of fact, business greatness grows from the ashes of business failure if an organization is properly prepared in attitude, structure, and its cash position.
The business leader must accept the reality of the challenges of the marketplace – and though he or she hopes for the best outcome from their endeavors, they need to diligently prepare for the challenging realities that surrounds the environment of business.