What if your business idea goes wrong?

 The thought of launching a great business idea and working for yourself is something many people aspire to. But of the small percentage of people that take the plunge and actually get their business idea moving, 90% of them fail in the first year. That’s a high percentage but there is good reason for this. Business ideas usually go wrong because most startups move far too quickly and they often don’t see the risks that are in front of them or they make the wrong decisions on expenditure, both via revenue and capital and hence, run out of cash.

Of course, sometimes failure can be down to the simple fact that the businesses idea has a poor product or service, which doesn’t fit the market in terms of location, timing and demand. It might also surprise you to learn that some startup founders don’t do enough ground research in the early days or they don’t have the right level of experience in the marketplace they are entering. A lack of business management skills can also lead to business failure in the end.

Failing in business
How do I know this to be true? I speak from experience because business failure happened to me. It was my second business and in hindsight I brazenly went into it far too quickly after launching my new venture off the back of growing a large contract catering business. I wanted to get some retail experience in restaurants and so I conducted quality research. Using a celebrity chef as the food pull and a young team of previous employees (and a new FD) I believed I had everything I needed to hit the ground running; but we got hit twice (and not in a good way).

Because I took the decision to fit out the restaurants too exclusively, with things like air conditioning, luxury furnishings and so on, this hurt the business on depreciation. Our research timing was also bad because public attitudes in the late 1990s changed from the demand for a local-based £30/£35 per head Conran style experience, to a £15 per head demand for pizza and pasta.

We had to work extremely hard marketing-wise to push up our income for almost a year while we found a buyer for the assets, and in so doing we managed to claw the money we borrowed back for the bankers at least. Experiences like this are hard lessons in businesses but they are lessons to learn from, to build greater confidence from and to take responsibility for where you went wrong and why.

Lessons learned
In this case, I had tried to take a step back from the business a little, to let the younger team build their confidence and in many ways that was a mistake. Although the team fought with all they had to keep us afloat during the darker times, our FD left the business. The previous company wasn’t a capital hungry business and as I had always surrounded myself with good finance people I was sheltered from most of the more tedious (but vital) finance work. However you learn quickly, because it wasn’t quite so tedious when we were bitten by the depreciation.

It got very scary actually and whilst we did generate significant sales by changing our approach to the restaurant offers, that depreciation meant that we were never going to be able to fully pay back the debt. We had a great relationship with our bank though. Thankfully the bank understood where we were in terms of targeting its debt to pay it back and they fully supported us.

I did an MBA (Masters in Business Administration) at Surrey University over the course of a year after the experience, because I had created a large catering business on just an HND in hotel and catering management, with no research during the previous eight years (I had been working in it for six years). I wanted to use this opportunity to see whether I could have done anything differently. These days, something I will always look for is longevity in a market and how the economy, technology or public sentiment looks.

No regrets
Business failure hasn’t changed me as an entrepreneur at all. I am still happy to take a risk if I know that I have a better than even chance of getting that business off the ground. I call it the ‘CLICK’ effect; Creativity, Leadership, Impact, Confidence and Knowledge. I don’t regret my past business failure, because it is a learning curve – it had to happen. We had a lot of fun, had a good idea and the right business plan but we made some costly mistakes.

Should you ever walk away from a business? My advice is no. You never walk away from a business (if you ever want to be trusted again). Yes you can put your hand up if something is fundamentally wrong. But customers, employees and investors don’t value a coward, or someone who just gives up. You can and ultimately will make mistakes in business and if you do, you HAVE to own up. Never try to pin the blame on someone other than yourself if you are the founder because it is your venture and all of the responsibility and risk lies with you.

Come back bigger and better
Failure does make you a better and stronger entrepreneur though. I think that has certainly been the case for me. I am now about to launch my next 10-year plan on the eve of my 60th birthday. This latest venture is one for the future generation. There is nothing quite like solid experience to help build a young team, and I will go back to the failed business lessons because the same risks are there, albeit within a different industry. But the outlook on all fronts is more positive.

How do you know when something can be salvaged? For me, you have to model your idea and see where the risks are by discussing the results with colleagues and/or advisors. From your business model, you will see both risk and opportunities. Internally you also have to learn as a team how to recognise and maximise up and downside. That’s how you gain confidence and teamwork.

Don’t let your cash dry up
Getting your funding in place with a clear knowledge of what your business could be worth in three years’ time is also important. That way, both funders/investors and the originating shareholders all feel that the ‘deal’ is right and properly funded. Then you need really good financial and management control with experience and advice on hand - although without too much influence, otherwise you won’t grow.

The big one for failure though, is that you absolutely must control your cash. You also have to monitor and achieve your cost of sales, put sensible sales forecasts in and make sure you save and delay costs by bootstrapping at every opportunity, at least until you start to generate positive cash.

Jerry Brand is a serial entrepreneur and founder of entrepreneurs’ charity, The Brand Foundation (www.brandfoundation.co.uk)