What causes entrepreneurial companies to go out of business? To find out, we took a hard look at Inc. magazine's archives. From October 1996 to December 2000, Inc. magazine has profiled 50 defunct businesses in its monthly Obits feature. We studied those stories to see what trends they reveal about the circumstances that kill companies.
The collection of 50 business obits includes a range of businesses and industries -- a hospice, a concert promoter, retailers, manufacturers. We broke down the most common causes of company death into five general categories. From those five categories, we've developed a set of key questions that you can ask yourself to determine if your company could be in danger.
Are there problems with your strategy?
Of the group profiled, the #1 reason for failure was some type of strategy that didn't pan out. Problems relating to expansion were particularly common. For example, Industry.Net Corp.'s attempts to expand rapidly ended in failure.
A new customer service strategy backfired for Yellow Cab, once the leading taxi company in Boise, Idaho. Drivers forged strong relationships with customers -- and then left and took the business with them.
Customers of educational retailer Learningsmith perceived its stores as a fun place to browse. The company offered a broad range of products -- too broad, actually. Learningsmith's lack of focus led to its demise.
Is the way the company is being run leaving it vulnerable -- particularly where money is concerned?
Packaging company PTP Industries Inc. faced more than $2 million in outstanding accounts receivables. Relying heavily on one client's business left the company with cash flow problems when that customer stopped paying.
To make up for lost business, former Boston advertising and public relations agency Burnieika Bearfield Emerson bid low on contracts in an attempt to secure them. And because the low payers were also late payers, the business did not survive.
After machine builder American Dixie Group Inc. seemed, according to some who knew the company, to focus more on sales than on management, the company was forced to declare bankruptcy. "Instead of keeping customers happy, [ CEO Clay] Cooper was shooting to get the biggest contract he could," one customer recalled.
Are any key relationships frayed?
We found that, in a number of cases, business owners' failure to maintain key relationships harmoniously led to the failure of their businesses. Problems with franchisees, ill-fated labor negotiations, or failure to renew a key contract are the kind of difficulties that can help bring companies to their knees. Consider the case of laser tag franchisor Q-Entertainment Inc. In 1996, when revenues had grown to more than $48 million, the company was reportedly neglecting its franchisees. In 1997, the business entered bankruptcy.
In its more than 30 years in business, Howard & Phil's Western Wear had ridden its share of rocky trails. But in the end, poor relationships with suppliers led to the company's failure.
Are there new competitive threats on the horizon to which your company hasn't responded?
A dose of competition can be healthy, by keeping you on your toes. But for some of these businesses, new competition proved deadly. Such was the case for Chicago's Children's Bookstore. The store faced steep competition when five superstores opened within a one-mile radius. The independent bookseller closed its books in 1996.
Sally Wheeler-Valine blames Internet competition for the demise of her business, Estate Administrators and Liquidators. She believes the popularity of online auctions drove her sales sharply down. Some others in the industry say her high prices factored in, too.
Is your marketplace changing? If so, are you able to adapt?
Another group faced shifts in the market that the companies couldn't contend with. Because of marketplace changes, Dydee Diaper, a diaper delivery service in business for more than 60 years, faced a dwindling customer base. The company tried to adapt by adding a delivery, pickup, and recycling service for disposables, but these attempts to diversify weren't enough.