Is Your Business Failing?

business_failingA recent study by the Brookings Institute revealed that U.S. businesses are failing faster than they’re being created.

The study examined the rate of business creation and business failures from 1978 through 2011.

The following chart presents a capsulized view of the time line and rate of business creation related to the rate of firms dissolving:

 

biz chart2

 

The Alarming Aspect Is …

While the above graph reflects a very sharp decline in the share of new firms being created, it also highlights that the share of firms dissolving is at the highest rate since the late 70’s.  The alarming aspect of this trend is starting in 2008 where for the first time businesses were dissolving faster than they were created. The trend continues and in fact accelerates through 2011, the last year of the study.

It should be noted that the crossover between business creation and business failures coincided with the beginning of the Great Recession in 2008. The pace of business failures started in the late 70’s and the trend continued through the next 40 years. The Great Recession only accelerated this trend however was not the start of the trend.

While the economy has certainly improved since the study, one fact indicates that the trend is continuing. That fact relates to the level of competition among banks to make business loans. Banks are struggling to find qualified companies for the large amount of funds they have available to loan. As a result, both rates and terms remain very favorable to borrowers. And while M&A is trending up, both private equity and venture funds are having difficulty identifying qualified investments. As a result, valuations for those investments are reaching new highs.

So the question has to be asked; why are firms failing at a significantly faster rate and what should business owners be doing to make sure they are not joining the club of those that have failed.

 

The Highlights Of The Study Are …

First, we should look at some of the highlights of the Brooking Institute study:

  • This accelerating rate of business failures has been documented across a broad range of sectors in the U.S. economy, even in high-tech.
  •  The study shows that the trend of accelerated business failures have occurred in all fifty states and in all but a handful of the more than three hundred and sixty U.S. metropolitan areas during the last three decades.
  • Business failures occurring across the states and metros has become increasingly similar over time. In other words, the national trend in business failures has been a widely shared experience.
  • The reasons explaining the acceleration of business failures are still unknown as they were not addressed in this study. The authors state their belief that if this trend persists, it implies a continuation of slow growth for the indefinite future unless some action is taken to remedy the underlining issues.

 

What Business Owners Should Be Doing…

Back to the part about what business owners should be doing to protect their businesses and in many cases their family’s entire wealth. We have addressed this issue many times in our past articles.

Our advice ranges from understanding the need to anticipate change, having a plan B if your current business plan is not working; understanding the early warning signs of business decline and regularly planning and managing cash flow.

While this advice is sound, we find that many times the issues related to business failure are not recognized until they significantly damage a business and sometimes beyond repair.

No company is invulnerable to this type of oversight regardless of whether a company is family owned, funded by venture capital, private equity or publicly owned. It is the responsibility of the CEO and the board of directors to proactively manage the business and make course corrections as frequently as is required.

 

What We Do Know Is …

What we do know is competition, inflation, interest rates and economic change will continue to pose significant challenges and in fact could further accelerate the rate of business failures. Businesses must be proactively managed to insure they not only survive but also improve in the face of these obstacles. Business owners and board of directors must take the responsibility to understand these issues and recognize if their business is in a state of decline. If they find it difficult to develop a satisfactory plan to identify and overcome these issues, it might be helpful to bring in an outside resource to help.

So back to the question, IS YOUR BUSINESS FAILING? If you don’t know the answer to this question then most likely your business is headed for tough times!

If you would like to read a summary of the study or down load the entire research paper please click the following link:

http://www.brookings.edu/research/papers/2014/05/declining-business-dynamism-litan