HELP FOR THE SMALL BUSINESS WHO CAN’T GET A BAILOUT
I meet with small business people daily. I am very concerned about the recurring trends I see many of these individuals dealing with. Unfortunately this is the group that has taken the brunt of the recession, without getting the big bailout. Here are some items that I keep seeing that are causing the failure of a lot of small businesses.
1. FINANCIAL RECORDS. From the number of consultations I do, I am always astounded at how few business owners understand if they are making a profit or not. About one in five of the people who consult with me actually have financial statements with them to review. The majority of businesses are operating out of a checkbook with a CPA preparing their taxes annually. When the checkbook is empty they figure they have lost money. It is imperative in this economy to understand if you are making money on a weekly basis or at a minimum on a monthly basis. It is so easy to use products like QuickBooks that can produce both an income statement and a balance sheet very easily. I’m always astounded at the amount of money an owner will continue to borrow or use their personal savings to keep a business afloat that probably should have closed months ago. Even if you don’t want to do the accounting yourself, there are many small bookkeeping firms that can handle this for a minimum monthly fee. Ask your CPA who does your taxes what they think. They know if you are making it or not. Spend an hour with them and get their opinion.
2. FINANCING OF THE BUSINESS. Another disturbing trend that I have seen is the number of small businesses that use credit cards as a means to furnish the capital to start up their business. Or they are using their credit cards to keep the business afloat. Those days are pretty much gone. The credit card companies have been very aggressive in increasing interest rates on these debts to over 30%. A lot of people were operating with credit lines to do their shows and sales trips. The same credit card companies have cut their credit limits to a third of what they used to be. If you’re in a startup situation you have to be realistic that you either have to obtain the capital from investors or try to apply for a small business administration loan to get your business going. If you utilize credit cards, the majority of the time you’re going to find that you cannot pay what they want in both interest and payments. If credit cards are your only option then think twice before even opening the doors. They will potentially put you in personal bankruptcy. A good rule of thumb is to make sure you have enough startup capital to pay the operating expenses of the business for one year if it never made a dime that year. You need to understand that if you need additional capital a year down the road that no bank will touch you, especially if you are not making a profit.
3. DON’T BELIEVE THE FRANCHISOR. If you decide to purchase a franchise of an existing national business, you must be very diligent and use common sense regarding the franchisor’s promises. Most of us think that by purchasing a franchise it will give you the expertise that you don’t have to make the business succeed. The reality is the franchisor is looking for a large upfront franchise fee, trying to sell you their line of equipment, another location to pay them monthly franchise fees, and hope that you will succeed. You cannot believe the number of franchise business plans that I look at that never had a chance of succeeding. The most common factor is the person buying the franchise never had enough capital available to sustain the business even one year. You have to use your common sense in looking at what they are proposing. If the location they are choosing for you is one that you probably would not go to for the product if you lived in that area, why would anybody else. If somebody is recommending that you sign a 10 year commercial lease, would you do the same in your personal life for housing if you’re not sure if you would be employed in the same area 10 years from now? Never believe that you should put more than 5% of your capital into promotion as most Franchisors would like for you to do in order to get the business off to a fast start. If you burn up your capital in advertising that doesn’t work and it can be hit or miss, you have nothing to fall back upon.
4. PERSONAL GUARANTEES OF COMMERCIAL LEASES. Every week I run into some of the most unbelievable personal guarantees of commercial leases that you can imagine. Most small-business people find the location they like and negotiate a commercial lease with the landlord based upon the rent that they can afford. Invariably, the commercial landlord will tell you that they cannot do the deal unless you personally guarantee the lease. A lot of people figure no big deal. I should be able to work my way through this. These personal guarantees will always come back to haunt you when the business fails. The landlord will sue you personally in most cases for the balance of the rent due under the terms of the contract to its bitter end. You should never personally guarantee a commercial lease for more than two years. If you can, tell the landlord you refuse to personally guarantee it. It is imperative that you negotiate the terms of the personal guarantees to your benefit not the landlords. If the landlord refuses to lease without the personal guarantee that you feel is adequate and go somewhere else. There is commercial space everywhere right now. Do not ever sign one of these contracts without legal counsel reviewing it. In most cases they are massive 30 page documents, and I’m always astounded by the individuals who do not understand that they personally guaranteed the entire lease or agreed to terms they couldn’t possibly perform under the contract.
5. TIME TO STOP. We Americans are optimists. We believe that even if we had six bad months things will turn around. In this economy that is no longer the case. Every week, I get to the point in the discussion with a small business person, where I tell them you have to stop. It hurts and a lot of them don’t believe it, but it is senseless to continue. All of us including me work long hours to make our business succeed. I am sitting here writing this at 8 pm on a week night. You must look at your market and determine is this really going to turn around if I keep going. I recently filed a bankruptcy for a music CD distributor. Think how much that market changed in the course of two years to completely downloaded music. I have spoken with people who have poured every dime of their personal savings into the business when it hasn’t made a dime in months. Don’t make that mistake. How many years left do you have to restart and make a living? It may be time to bankrupt the business and start over. Chapter 7 Bankruptcy is a good option if you have a lot of creditors, you have a tough lease, you have personal guarantees everywhere, and the business has a lot of credit card debt. Chapter 11 is tough, because to succeed the business must be making a profit on its current monthly operating income minus its current operating expenses. The time to file chapter 11 is not when you are completely out of cash and capital.
6. GOOD LUCK TO ALL. To all of you who are probably still working at this time of night and trying to make it work, I wish you well. I hope these comments will help you succeed in the coming years. If it is time to stop come and see me and we will determine what the best course of action is. Sometimes you can reduce the fixed expenses of the business through negotiation. Sometimes the answer is to restart in a smaller location. Sometimes you have to file bankruptcy in order to sleep at night. Finally, sometimes you just have to stop and shut the doors.