During the fag end of 2020, Swiggy gave up on one of its important pillars of business. It stopped the service of deliveries of groceries, fruits and vegetables and other products in about 100 cities in India. It was a typical cost to benefit ratio call which Swiggy took and shut the service. Period. As start-ups traverse the journey of establishing itself and then growing, there are many hard decisions to be made. The hardest is to let go of a division or worse, exit the business itself. It is not an easy decision and it is a highly emotional process. But entrepreneurs should not be swayed with emotions and must pull out when the odds are severely stacked against them.
According to NASSCOM, a good 90 per cent of the start-ups are facing revenue declines, 70 per cent have reserves to last less than three months and 30-40 per cent are in the process of shutting down temporarily or permanently. The bane, as with every bubble, lies in the fact that the business models were baffling (lack of profits and high cash burn), many investors had the herd mentality to investing, and start-ups played the valuations game, looking for quick exits, said the report.
The failure rate of new businesses in the traditional and conventional businesses is much lesser when compared with start-ups. Of course, these rates are higher in the early-stage startups. Figuratively, the failure rate of Indian start-ups is around 90% in the first year of inception according to various studies.
Technically, the start-ups have distinct characteristics like an innovative approach and an agile business model. Though it sounds of a sure shot way to success, it is a bumpy ride to go further and the data is proof. The data and a look at the narrative of entrepreneur ventures in any industry gives a fair bit of idea that failures sometimes are inevitable. Certainly, no entrepreneur wants to be in this situation and exit the business but ignoring the warning signs is another faulty step taken by many business owners.
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Figuratively, the failure rate of Indian start-ups is around 90% in the first year of inception according to various studies.
Causes Which Lead to Exit the Business
There can be numerous reasons for the downfall of a business, some of the reasons are common, some rare, but regardless, they might be detrimental to the business. Entrepreneurs with prior knowledge of the causes of business distress can sail through better than those who are ignorant.
A viable business plan is the core of a successful venture. Long term planning, as well as short term planning, is crucial for businesses and lack of a plan can be specifically damaging for small businesses. Additionally, a lack of experience and leadership skills can result in a directionless organization which leads to a failure of every aspect of a business.
Sometimes, businesses are not able to grow beyond a single-digit growth rate, which could be because they have not understood their customer’s underlying needs. This leads to little revenue and few customers. The customer is at the helm of it all, whether you are in B2B or B2C, keeping an eye on customer needs, and changes in the pattern of consumption are essential. Detailed market research concerning product/service is a requisite when one is planning to launch a business. Apart from knowing one’s customer’s well, knowing competitors is also mandatory. It is vital to know who the major competitors are, and what competitive advantage your business has over them.
There are some organizations, especially startups, which reach the stage of scaling too soon, which again can be a cause of concern. Huge investment too soon in marketing, human capital, and infrastructure can put pressure on the health of the organization.
For an entrepreneur, the business is an incredible idea and original but in reality, it could be a run-of-the-mill. A faulty business model or a lack of an innovative business model is a common cause of failure. A business model in today’s world should not be only viable, but agile as well.
Mismanagement of finance has been cited as a usual reason why businesses shut down so early in their life cycle. The entrepreneur needs to know the capital requirement at the inception and the capital required before attaining the breakeven point. A business owner should be well acquainted with the basics of finance to be successful. In addition to financial knowledge, it is a necessity that an entrepreneur should be adept with legal issues like rules and regulations, any licensing requirements, Intellectual Property Rightsand the various policy changes.
Businesses are not run single-handedly, but by the excellent and dedicated team, an entrepreneur builds over a period of time. When entrepreneurs fail to build a skilled team around them, they risk damaging their business. Problems faced by the employees like lack of payment, conducive work environment, no training, and proper delegation of work are reasons of worry and should be dealt with earnestly by the business owners. Poor recruitment policies can result in incompetent and unsuitable employees in the organization which further increases the chances of failure.
Once in a while, the macroeconomic environment is unfavorable for the businesses to survive. Isolated occurrences like recession and a pandemic like COVID-19 can invariably disrupt the business ecosystem.
Gauging the signs of distress
The trouble in the organization due to any of the reason manifests into symptoms. However, the business owner’s involvement with the businesses causes them to ignore these danger signs. If they make a conscious decision to not let biases obstruct rational thinking, these signs can come in handy in the identification of distress promptly.
Distress signs can range from finance-related indicators to employee-related issues. Certainly, these signs interact with each other and are coupled with macroeconomic factors resulting in the companies to shut their doors. Undoubtedly, keeping a track of these 10 symptoms can help the entrepreneurs decide firmly and wisely.
Shrinking Margins
Businesses exist for various reasons. Undeniably, one of the top priority of businesses, both big and small, is profit. Though it should not always be the only reason of existence, it is a critical objective for survival as well as growth. When a business experiences a shrink in the profit margins, it points to that everything is not all right with the health of the business and indicates problems within the organization.
Plunging Sales
It is no brainer that plunging sales over a period of time, either a decrease from the previous quarter or the projected sales number of the current quarter. It is not a positive sign and an indication of trouble. Of course, a consideration of the industry environment is crucial in anticipating if the problem is internal for the organization or an external factor impacting almost the whole industry. Regardless of the cause of decline, it requires a proactive approach from the owner to analyze what can be done immediately to revive the numbers.
Cash Flow Struggles
Another giveaway sign is declining or even negative cash-flow. A steady cash flow is like a blood flow for the organization. Irrespective of an organization’s potential to generate revenue, if the organization has inadequate working capital to keep them going, even the feasible companies fail. Reduced cash flow, can lead to increase in outstanding account payable, not able to follow debt maturities schedule, and likely large liabilities as well. High receivables or big overheads could be the reasons of liquidity crunch and should be investigated thoroughly.
However, having money at one’s disposal is not always a solution, when a business owner is constantly asking for loans from family, friends, requesting for repeated bank amendments or higher loan limits to keep the business going. There is a possibility that there is something deeply wrong with the business fundamentally instead of just lack of funds.
Negative Net Asset Ratio
Liabilities are obligations which a company has to fulfil in the stipulated time, either a short term or a long term and usually net assets are appraised to estimate the total assets available with the business owner to meet total liabilities. A negative net asset value is a strong indication that the business is facing a critical situation financially.
Declining Capital Investments
Investments in new technology, equipment is extremely beneficial for organizations. When a business owner is not able to invest in the new advancements, it increases the production cost due to decrease in efficiency. When the organization is forced to reduce its capital investment programs it can be a sign of distress.
Creditors in Doubt
The market senses the future of a business even before the owner can. Once the creditors have put a condition of cash on delivery for a business, it could mean that the lender has some serious doubts regarding the organization’s ability to pay at a later point of time. This is a signal that the business is losing its reputation and indicates low ability of the business to raise funds.
Apart from the private lenders when related parties like shareholders, banks and other sources are reluctant to injecting funds, it could demonstrate that these parties are not confident about the prospects of the business.
Business is Not Buzzing
Good financial performance is a must, but market performance of a business is not secondary. Customers should be aware of a business and willing to recommend it in their social circle. For small businesses word of mouth marketing is significant. In today’s world admiration at the social media platform is a must for an organization. Customers should be talking about the business along with giving reviews and feedbacks. If a business is not buzzing it can be problematic.
Increase in Customer Complaints
A drastic increase in customer complaints is another indication of distress. It could be the result of declining quality. Due to pressures of cost cutting and, in an attempt, to increase the profit margins the organizations resort to cutting corners. Most of the times, the businesses compromise on the quality which not only deteriorates revenue in the long run but can be damaging for the credibility of the business in the market.
Low Employee Retention
A sudden high employee turnover rate is never a good sign. Employees leaving a business either for a reason of non-payment of salaries or just because they do not believe in the venture anymore are early warning signs of trouble in an organization. Recruitment processes are long and costly along with the cost of training a new employee, all add to the burden. And when the organization is not able to compensate the employees it gives rise to a vicious circle where key staff resigns,or are not getting paid and in turn the organization has to put in resources for new recruitments.
No Longer Passionate
Of course, financial indicators are an evidence backed signs which can tell the company is not doing well, and if the condition worsens it can lead to complete shutdown. However, these are not the only way a business owner can recognize the trouble in the business. An entrepreneur always starts a business with strong passion and if the venture is no longer run by the same passion, it is a good time to step back and think of the future of the venture, as without a motivated leader the business cannot become successful.
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A faulty business model or a lack of an innovative business model is a common cause of failure. A business model in today's world should not be only viable, but agile as well.
Why is it so difficult to see these symptoms and to exit the business if required?
Many factors are involved, from a fear of losing one’s credibility as a successful entrepreneur to psychological biases. The entrepreneur is emotionally invested in the organization and had built business merely from an idea, which then causes the entrepreneur to refrain from readjusting goals or to contemplate an exit plan. The entrepreneur starts looking for information to ascertain their argument to hold on to the venture which in turn makes them invest additional sources to a pool of unrecoverable cost.
How to Exit the Business?
If a business faces multiple trigger points both financial or market-based metrics, it is essential to consider it as crisis and work on it urgently. Start with having a deep look at the business plan adopted. Changes both in the external and internal business environment can make previously feasible plans, obsolete. A turnaround is possible by concentrating on the main pain point like cash. A self-analysis of the investments, and their performance done to reveal the cause of declining cash flow can be undertaken. Improving operational processes and making a business lean and agile can also help in cash flow issues.
A turnaround is a great option for a business owner. The incubator ecosystem, advice and support from the experts help the organizations to sail through difficult times and in progressive direction. Entrepreneurs’ should seek advice from the professionals and not risk their businesses.
But at times, the only solution in sight for a business owner is to let go resources. When and how to exit the business is a very emotional process for an entrepreneur, it is also difficult to make such decisions. However, an apt exit strategy should be chosen depending on various factors. There are many exit strategies available for a business owner; Mergers and Acquisitions (M&A), selling the business, or liquidation.
M&A is a good option as the company gets valued appropriately. Is the company saleable? If the answer is yes, then selling a business to someone trustworthy, family or trusted partners or key employees is a viable exit strategy. However, there are times when the business owner does not see any reason for continuing the business and can decide to liquidate by selling all the assets.
Facing the prospect of exiting a business is not an easy decision to take but it can be an informed decision if it is to be taken. Staying too long with a losing business will not only be emotionally draining for the business owner but can also result in reduction in the valuation of the venture in the market.
