12 Reasons Why Your New Business Will Fail

Apr 12, 2017|General counsel
Rodriques Law

About one third of new businesses fail within the first two years, the main cause being a lack of experience. One thing is certain, businesses don’t fail by themselves. A business almost always fails because of the owner. In many of those cases the business owner is unaware that he is failing until it is too late. However, with the availability of professional counsel and advice, inexperience should not be a reason to fail. So, before you launch your new business, stop and ask yourself: “will I be making the following common, but damaging, mistakes?”

  1. 1. Lack of business planning

Whether you’re developing your first commercial video game, mobile application, digital media venture, talent management company, booking agency, record label, or making an independent film, it all begins with planning. Before you launch your startup, and ideally, from the idea stage, you want to ask yourself, what is your go-to-market strategy?

Planning helps you to focus. Without careful planning, including, failure to seek outside professional advice, you could become engulfed in a world of darkness, blindsided by factors you did not anticipate. A lot of risks can be averted, but only if you plan for them. Some of the reasons you need to plan, include:

  • A written business plan helps you to focus on who you are, what you can do, how well-prepared you are to do what you say you are going to do, and demonstrates any potential for a return on investment (ROI).
  • You will need to decide what entity to form for your particular business needs, whether an LLC, partnership or corporation. As startups and emerging companies are often short on both cash and management resources, they will need to carefully consider the ongoing needs of the enterprise and carefully weigh the benefits and burdens of a particular business form, including income tax matters. 
  • Any serious entrepreneur, business partner, joint venturer or investor will expect a certain level of detail and planning from you before investing in your business venture. For example, a potential investor will want to know (1) the capitalization for the venture; (2) what other types of equity you have acquired; (3) whether you have some skin in the game; (4) what state subsidies or business tax credits the venture plans to take advantage of; (5) a clear picture regarding how any profits from the venture will be allocated, and the order in which investors will be paid; and (6) if the investor is to have any controlling rights.
  • A well-researched and customized business plan helps you to maximize revenues, market, and impact.
  • A good business plan will ask and answer the question, is there enough demand for the product or service at a price that will produce a profit for the company?
  • Are you employing the latest and best technology? Will you be able to keep up with the trends?
  • Who is your target market? Is there a customer base for this product or service?
  • Helps you to test your business model to see if your idea works. How long would it take to bring the business to market and at what cost? You don’t want to be wasting time on an idea that's a dud or is ill-timed, because you haven't done enough testing, market research or sought the advice of professionals to find out.
  • Who is your competition?
  1. 2. Lack of Knowledge

Many new business owners fail because they lack business savvy and relevant leadership experience in areas such as organization, structuring, strategy, networking, hiring and managing employees, compensation, capitalization, and uncovering and assessing the hidden risks and exposures associated with operating a new business. Not having the know-how to negotiate terms that are reflective of today’s economy may leave a company uncompetitive.

Entrepreneurs are often unaware of their mistakes until it is too late. If they really knew what they were doing wrong, they might have been able to fix the problem, and even save the business. Learning from failures as a strategy can be very costly. Not only may you lose your business in insolvency or bankruptcy, if you’re setup as a sole proprietorship, you’re personally liable for the business debts. That is why the most successful entrepreneurs do their research. They study, learn, and reach out to mentors, lawyers, accountants, and other professionals to help structure their business, and improve their understanding and business skills. 

  1. 3. Lack of Product/Service Differentiation

Many new businesses fail because they provide a product or service that is not unique or in demand. In business, the product that is the most marketable generally has some sort of “edge” in the marketplace. Before you launch your new business, ask yourself if your goods or services are something that no one else is making or providing better, or which set you apart from competitors. For example, if you are launching a technology company, the technology should not be readily available in the market. It should be sufficiently unique and proprietary to exclude competitors from entering. If there are not a lot of businesses doing what you do then your product become the most obvious choice.

  1. 4. Poor Management and Operations

You cannot be in control of a business if you don’t know what is going on or you lack an understanding of the various processes within the company, especially, with respect to local and global trends, customer demand and the availability of resources (including, staff and labor, materials, equipment and technology). Poor management and operations often lead companies to fail financially, or forced to dissolve through litigation. Other signs of poor management include:

  • failing to observe corporate formalities;
  • working without standard or systems;
  • making personal use of business funds: treating your business as your personal bank account. In general, this practice makes it more difficult to convince outside investors to finance your business;
  • failing to obtain necessary license and permits;
  • failing to carry insurance coverage (including, general liability, workers compensation, and errors and omissions (E&O) insurance);
  • lack of compliance with state and federal regulations (including SEC, FTC and FCC regulations);
  • failure to pay taxes or file tax returns;
  • failure to assign or transfer assets owned by the founders that are to be used by the business;
  • failure to protect intellectual property rights relating to the business, including, copyright, trademark and domain name registrations, and patent applications; and
  • lack of focus, vision, planning, and everything else that goes into good management. 

Entrepreneurs who exhibit poor management often have the tendency to procrastinate when it comes to solving legal problems, thinking, that once they get funding and the business is up and running they will hire the right lawyers. But it costs much less to take care of legal problems at the beginning than to try to fix them later (often after long and expensive litigation).

On the other hand, successful entrepreneurs often work with a business lawyer, commencing at an early stage, who advises businesses on issues affecting, planning, financing, operations, risk management, growth and strategy. Outside professional advisors provide practical advice for entrepreneurs to make prudent business decisions.

  1. 5. Not Knowing What Customers Need

Whenever you launch a new business before you understand clearly if customers want, or believe they need to buy, your product or service, you set your business up to fail. Do you know if potential customers will actually pay what you plan to charge? Businesses also fail because the entrepreneur fails to respond to negative customer reviews, follow up with customers to ensure the products or services meet quality and functionality needs, or take customer feedback received and use the relevant information to improve the product, service or pricing strategy.     

Knowing and understanding customer needs is also a sign of good management. Once you know what customers want and why they need you, you can use this knowledge to persuade potential and existing customers that doing business with you is in their best interests.

  1. 6. Lack Access to Capital

Starting a business will give rise to the need to raise capital, whether it is your own money or someone else’s cash. Lack of capital makes it difficult to pay your bills, loans and other financial commitments. Therefore, lack of access to capital and an inability to attract investors will affect your capacity to grow or scale the business.

Many new businesses fail because they lack profitability, run out of money, fail to raise the right kind of funding at the right time at the right valuation, miscalculate the amount of financing required, or underestimate the cost of borrowing money. Running out of cash is a symptom of other problems as well, such as, a lack of business planning and poor management.

To ensure you have a successful company, you will need knowledge, careful planning, sound management, know how to value your company, and access to capital at a valuation that is not less than ideal. 

Financing for your new business may come in any or a combination of family and friends, angel investments, venture capital or private equity funds, hedge funds, mezzanine funds, equity crowdfunding, business loans, and tax credits. How you raise capital, and any tax consequences for your business, will depend on several factors, including, the amount of money being raised and your type of business entity. All security transactions are subject to the anti-fraud provisions of state and federal securities laws and laws governing the advertising of securities or offering to the public.

Always consult a lawyer if you plan to raise capital, and if you operate or plan to incorporate or organize your business as a corporation, LLC or partnership. Formulating, structuring and implementing an effective capital-raising plan, including, the professional presentation of disclosure documents (such as PPMs, financial statements, etc.), can be vital to driving the fundraising process, ensuring compliance with state and federal regulations, improving buyer confidence and meeting investor expectations. 

  1. 7. Lack of Exit Strategy

Most new business owners don’t have a planned exit strategy. While they are focused on growing their business, the last thing they want to focus on is how they will end it. However, waiting until you need to retire, or when you receive an unsolicited offer, or where you have to sell because of insolvency or bankruptcy typically limits your return potential. In addition, if you are looking to raise capital, investors, especially venture capitalists, usually insist that a carefully planned exit strategy is included in a business plan before committing any capital. Another very important reason to have an exit strategy for a business that is solvent is risks mitigation.

An exit strategy is a contingency plan to terminate a business venture in a way and at a time that will maximize benefit or limit losses. The entrepreneur should plan to sell the business at a profit or liquidate the company when the return on investment (ROI) is no longer attractive. Without a planned exit strategy, the entrepreneur often will fail to make decisions that will ensure that the company is saleable (at the time), and/or realize that the company is approaching (or has passed) the optimum time to exit. The most popular exit strategies are IPO (Initial Public Offering), M&A (Mergers and Acquisitions), and closing (voluntary liquidation).

  1. 8. The Wrong Partner

Having the wrong business partner can hurt your company. When partners constantly bicker, and undermine each other, eventually the business will fail and/or the relationships deteriorate to a point where they must terminate the business and walk away. According to statistics, 65 percent of businesses fail because of problems within the management team. Constant conflict can destroy a team's morale.

As recruitment of key talent is vital to a successful business, so too is having the right partner. You can leave day-to-day operations to the right partner, while the remaining founders are the silent partners and investors. Addressing these issues early on can leave you room to focus on running a successful business.

Founders can reach agreement on terms that help create trust and stability in the new business. They can create written organizer agreements and other founder arrangements, such as, a shareholder agreement or operating agreement, and service agreement. These agreements specify the founders’ financial and managerial rights and duties, the rules governing the internal operations of the business, equity incentives (such as, stock options, stock purchase plans, and employee stock ownership plans, etc.) Usually these agreements require a qualified business lawyer.

  1. 9. No Online Presence

Having no website and a social media presence are a reason why many new businesses fail.  

Marketing your business is an important part of attracting new customers and selling your product or service. Having a website, a social media presence, good SEO, and great content, are a great way for you to tell potential customers who you are and what your business is about. Social media sites like Facebook, Twitter, Pinterest, and LinkedIn can be used to help new customers find you or your website. Even if your product or service is not sold online, it is still important to establish an online presence.

To be able to engage current and potential customers in a digital age, it is essential to have a mobile-friendly website. Statistic show that more than 50 percent of web searches are completed on mobile devices.

Despite the cost, if you want to have a successful business, you will try to include website, SEO and social media as part of a bigger marketing plan.

  1. 10. No Marketing and PR

No or poor marketing - coupled with disharmony among the founders, and the wrong team - will cause a new business to fail. Businesses that lack the marketing budgets to try new advertising and marketing strategies often fall behind the competition and run into financial failure.

Everything you do in marketing is to drive awareness for your product or service. That’s why every business requires some degree of marketing. Smart business owners get the word out early and often via all available media, such as, digital media, broadcast TV commercials, and print. As Digital, mobile, social media, online video, and over-the-top (OTT) content marketing continue to mature, smart entrepreneurs will increasingly use these platforms as their key distribution, customer engagement and revenue sources.

  1. 11. Significant Market Changes   

Market changes often affect revenue. Book stores, music stores, record labels, movie theaters, Home Video (DVD and Blu-ray discs) distributors, printing businesses and many others are dealing with changes in technology, consumer demand, and competition from huge companies with more buying power and advertising dollars.

  1. 12. Lack of Concern About Cybersecurity

New business owners often do not take cybersecurity as seriously as they should. They do not devote sufficient resources and in-house expertise to deal with cyberattacks. No wonder the majority of all targeted cyberattacks are directed at small and midsize Business (SMBs). Statistics show that the owners of such firms handle cybersecurity matters themselves roughly 83 percent of the time, and just 29 percent of such firms know the steps needed to improve their cybersecurity measures, and even fewer have written policies in place to respond to a data breach. The result? Time wasted, service interruptions and thousands of dollars lost. An estimated 50 percent of small businesses go out of business within six months after they suffer a cyberattack.

Even with limited resources, new businesses can take certain steps to better address the persistent threat to their cyber defenses. Founders can routinely back up their data, and have written policies in place to respond to a data breach, including, guidelines regarding privacy and data security in connection with the use of emails and digital media platforms used to communicate with fans and consumers.