What to do when your business stalls
It maybe a safe bet to say business bankruptcies will be going up in the near future given the U.S. economy slowing down to the global government debt crisis to the over-par Canadian dollar.
Of course, this increase will happen in any event because lately business bankruptcies have been abnormally low. Indeed, according to Bankruptcy Canada, business bankruptcies have been falling for the last 10 years and today they are 65 per cent lower than a decade ago. This is truly surprising in the wake of the Great Recession of 2007— 2009 and its aftermath, but it is likely the result of low interest rates, businesses cutting backs and the draw down on reserves rather than anything inherently positive.
However, a key question is: why do business bankruptcies happen at all, especially in established company situations? According to the 1997 Statistics Canada study Failing Concerns: Business Bankruptcy in Canada, “almost half of the firms in Canada that go bankrupt do so primarily because of their own deficiencies rather than externally generated problems.” As to the other half, it maybe fair to say that at least half of them could have survived as well if they had reacted more appropriately to what was going on in their marketplace. So, with most businesses dying unnecessary deaths, how come?
Seeing business danger clearly: the challenge & the solution
Tony Johnson president of Compass North believes the answer is two fold:
1) Business owner / operators in companies of all sizes are too used to when things go right, and because of this, when things start to go wrong they fail to recognize and react early enough to their business risks and negative developments; and
2) Because of misplaced concerns over expenses, struggling-company owner / operators typically treat business turnarounds as a DIY project despite how they have little to no training, experience, expertise or practice in dealing with such stressful, confusing, complex, rapidly-changing circumstances when time is of the essence and their ‘business baby’ is falling into ever more steep decline.
Johnston’s solution to this double problem is similarly two fold:
1) Provide an easily-visualized model of how businesses fail so company owner / operators can better picture the dangers and difficulties their business face should they ever start to stall, spin out of control and crash; and
2) Educate these same people why the DIY approach just invites ‘death’ and how the smart play is to call in a business turnaround professionals early on.
What happens when businesses start to fail : they stall
Johnston believes that thinking about airplanes is a great way to picture what happens to businesses when they turn from being healthy (flying well) to being challenged (stalling), to being in declining (spinning out of control) to going bankrupt (crashing).
He thinks this because this imagery also helps to point out what happens to those who are in control, why even the best of them easily get overwhelmed by such situations, why doing what needs to done for recover often comes too late, and who best should be in charge of taking corrective action.
Johnston points to the June 1, 2009 Air France Flight 447 crash to explain both how the five stages of business failure mirror the five stages of an airplane crash and how even professional pilots, supposedly well trained, didn’t have the right skills and experience for the rare, unexpected, but deadly-dangerous situation they faced.
Further, Johnston points to the 1997 Statistics Canada report on business bankruptcies mentioned above to explain how most such failures are caused by management. He believes that most business miss seeing and avoiding going beyond their ‘point of no return’. And while having a better way to visualize this can help, he says that without those in control taking the right, situationally-correct actions at the right time, struggling business will still crash and burn. For this reason, the psychology driving those in control is the most critical of issues.
Unfortunately, the vast majority of owner / operators of struggling business mismanage threatening situations and all too often react far too slowly because: (i) they are too used to ‘flying’ when the weather is calm and clear; (ii) they have no effective and practiced training in how to keep their ‘aircraft’ under control and pointed in the right direction when ‘bad weather’ hits or difficulty or crisis develops; (iii) too often for ego issues, over-confidence or ignorance they don’t properly or effectively react when their business goes into distress; and (iv) most importantly, they don’t get help from the right type of professionals early enough on when the situation is still controllable and when there is still ‘air-room’ to effect corrective action.
Where to get the right help
Surveys tell us that the outsiders who business owners and operators most often turn to when stressed are first their external accountant then their lawyer.
However, these are not the right people to turn to because it’s like talking to your dentist when you have a medical problem or calling the car-dealer when your home’s air conditioning breaks down.
No, Johnston argues that for this type of intense, ‘life-of-the-business-in-the-balance’ situation the right type of professional to call in is a business operations professional trained and experienced in turnaround and crisis management (i.e. a turnaround executive or consultant).
Of course, have been a corporate banker, CEO of a venture capital backed technology company, CFO of two public companies, leader of five turnarounds with an 80 per cent success rate to his credit, he knows because that’s the business he’s in.
Tony Johnson is president of Compass. Compass North helps companies in transition succeed by providing turnaround management, interim executive and corporate consulting services.
By: Mark Borkowski, president of Mercantile Mergers & Acquisitions Corporation. www.mercantilemergersacquisitions.com