The Entrepreneurial Distressed Business: Assessing the Business Failure Signs

The Entrepreneurial Distressed Business: Assessing the Business Failure Signs

The Entrepreneurial-Based Business

The competitive dominance of entrepreneurial driven companies have historically forged the path of economic growth. Now at the time when such dominance is needed with a vengeance for prosperity and employment,  such owners are working hard to stay afloat and survive especially after the recent financial meltdown and the great recession.  The fundamental issue is that tools and the conceptual frameworks that work for traditional businesses must be modified to meet the challenges, operations, and new business models of today’s entrepreneurial-based companies.

When dealing with an entrepreneurial-based business, when the company is in trouble, recognizing this fact will give the owner more options for dealing with the problem to save the business. However, by waiting too long, being in a state of denial, not taking decisive action will leave the entrepreneur with little options other than shutting down the business or bankruptcy. Furthermore, the longer the owner waits, the likelihood that the owner’s personal finances will be affected, in the event that the owner’s are personally liable for the business debts. This can leave the entrepreneur filing for personal bankruptcy protection.

Signs of Distress

Every business is different. So the signs that the business is in trouble may not be the same for one company compared to another. However, certain warning signals are clear. The business may be in trouble if:

  • Revenue has been trending down for the past several quarters and below the budget.
  • Demand for the products or services have dropped off.
  • Loss of one of more important customers and being unable to find replacements
  • Finding it harder to fund working capital needs as cash becomes tighter and tighter.
  • Struggling to fund payroll
  • Being unable to service the debt or even meeting just the interest
  • The company’s debts being turnover to collection agencies
  • Creditors asking for more cash collateral
  • The bank is unwilling to extend additional credit or threatening to call the loan.
  • Using collected payroll tax money to fund operations instead of sending it to the government. [A major no…no!]
  • Key managers and staff have begun to quit

Bad to Worse

With symptoms like the above, conditions can transform from bad to worse. For example

  • The IRS is beginning action to levy company bank accounts and following other avenues to enforce collections
  • Suppliers and creditors threatening to sue to collect owed moneys
  • Secured creditors liquidating collateral
  • Eviction notices received covering rented facilities
  • Key suppliers requiring cash, no credit

Entrepreneurial Options

Options that may be to the entrepreneur include:

  • Selling of the business in entirety
  • Liquidating the business through bankruptcy
  • Selling off parts of the business
  • Saving the business through restructuring or a bankruptcy reorganization

When the business is heading towards the “zone of insolvency,” the entrepreneur needs to first decide whether or not to stay in business. This is an important decision. Deciding on whether to cut off a cancerous limb to stop the infections or to treat it must be made.

Decision Factors

For an entrepreneur, emotions and egos must be set aside. Issues to be considered must include the welfare of the family and self.  Moreover, reflections must be made questioning:

  • The ability to raise fresh capital, and
  • The capacity to obtain the capabilities needed to turn around the business, which is like changing the direction of a battleship whether it is a small, medium size business or large corporation. Can enough momentum be directed toward business renewal?

Not all distressed businesses can be saved. Knowing if the company can be salvaged and which ones have little or no chance of survival is important.  The sooner that decision is made; the sooner steps can be taken to either begin the process of business turnaround or winding down the company.

Turnaround Basic Questions

Basic questions or requirements that are needed for a successful turnaround must have four characteristics:

(1)  Does one or more viable core businesses exist within the enterprise?

(2)  Can adequate bridge financing be obtained?

(3)  Does the company have sufficient organizational resources and skills

(4)  Can the company secured a turnaround manager (leader) to facilitate the daunting restructuring task?

Professional Advice

Having poured their hearts and souls in to the business, the entrepreneur must try to be objective about the prospects for the future. Although emotional attachment is there, they should seek professional advice from other entrepreneurs, lawyers, and accountants for recommendations of turnaround professionals. As a start, the membership of the Turnaround Management Association comprises of specialist (Certified Turnaround Professionals) in the area of business turnarounds.

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For a  free online accounting mini course “Cracking the Accounting Code” designed for entrepreneurs go to http://AccountingMiniCourse.com

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