Monday, July 11, 2011

Four Reasons that New Businesses Fail and How to Avoid Them


Small businesses are the backbone of the US economy. Just how important are they? According to the Small Business Administration, small firms:
·               Represent 99.7% of all employer firms
·      Employ half of all private sector employees
·      Generated 65% of net new jobs over the past 17 years.
And in 2009 during the current recession: an estimated 552,600 new employer firms opened for business. But the story doesn’t always end happily. Thirty percent of new employer firms fail within two years, 50% within five years, and only 25% stay in business for fifteen years or more.
A close look at key reasons new businesses fail reveal important steps entrepreneurs can take to make sure that they are among the survivors.
Writing in Financial Edge, Michael Deane describes how to address six main reasons that businesses fail (Financial Edge October 29, 2010).  Let’s examine the four reasons that most clearly apply to real estate investing.
1.     Poor market research.  It is key to carefully investigate your market. For investors in rental properties that would include learning the occupancy rates, rental rates, average yearly rental increases, employment statistics in the area, and worker demographics.  And also to assess any trends or future plans such as large employers moving in or out of the area, government programs, new public transportation (metro or commuter train stops), to name a few.
2.     Inadequate business plan.  It should come as no surprise that poor planning is a key cause of business failures. To be effective your plan should include financial projections as well as your target customer, how to reach them, what differentiates you from the competition.  You should develop short term and long range goals, envisioning where you want your business to be in five, ten, fifteen years.
·      The SBA website has tools for filling out a solid business plan.
3.     Too little financing. You will need enough money to cover problems such as unexpected repairs or assessments, tenants who are late paying rent, and vacancies.
4.     Expanding too fast. When it’s time to expand, Deane points out “you should treat the expansion as if you’re starting all over again” with the same careful planning, financing, and long range goals. Otherwise, the expansion could threaten your original business.

One other factor that can make or break your business is whether or not you have an entrepreneurial spirit. Are you a risk taker? Can you cope/function when things go wrong? Are you willing to do whatever it takes to make your business a success?
Soon we’ll be looking at the key qualities of a successful entrepreneur.  In the meantime send in your ideas on what you feel an entrepreneur needs to succeed. 

2 comments:

  1. Nice post. Under-capitalization is particularly dangerous for real estate investors. It only takes a few slow months and/or a bad tenant to sink an R.E. company that is not properly financed.
    Keep up the nice work!
    Charley

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  2. Thanks Charley! That is good advice. I definitely need to watch out for that!

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