The last couple of years have brought hard times to many business owners. They are barely surviving. What started as a dream business has become a nightmare, leaving them wondering how in the world they have ended up in this place in their lives. Large amounts of their savings have been eaten up or, worse still, they have large debts.
Could this have been prevented? I believe, in some cases, absolutely. At least their losses could have been minimized. I get called almost every week by owners desperate for someone to help them to get out of their businesses or to at least recover some or most of their investments. But with sales down on an average of 30% or more and committed high expenses, most business are either not saleable or must be sold at a substantially discounted price. Many owners set up their businesses or bought existing businesses without thinking or planning for the future when the possibility of wanting or needing to sell might arise. Yet there ARE businesses surviving and thriving and who have recession-proofed themselves! What could they have done to equip themselves to survive the downturn during difficult economic times? What have the successful businesses done differently to prosper during this recession?
One of the big ways business owners have gotten themselves into trouble is through signing a lease for a business premise where the rates are so high they can barely afford them in prosperous times and that have now become a devastating expense during the downturn. Also, many leases are not transferable and the owner has signed personal guarantees for the full term of the lease for 3 to 5 years. Preferably, there should be no guarantee or a guarantee negotiated for only 6 months to a year of the monthly rents payable to the Landlord. Once you sign a lease, the Landlord will not renegotiate this agreement so make sure you are fully aware of what you are signing in the beginning.
A lease should not be signed if it has a clause stating that, if the tenant notifies the Landlord of their intent to assign the lease, the Landlord has the right to cancel or increase the base rent. The Assignment Clause should read simply that the tenant requires the Landlord’s consent to assign the lease but that the landlord cannot be ‘unreasonable’. Never accept that this is the way it is and that you cannot change the terms of a lease agreement and just sign it. You may regret this later when you want to sell and cannot assign the lease. The result may be that any equity or goodwill in your business no longer belongs to you but to the Landlord who is in control of whether your business will be saleable or not. If you, and others, would refuse to sign these one-sided leases in favour of the Landlord, the Landlord would eventually be forced to negotiate a lease that is reasonable to the business owner or end up with an empty space. Why would anyone spend their hard-earned money and time to risk everything only to lose it all due to a bad lease? Yet I see this happening all the time.
Other common downfalls are to start with insufficient capital and not to get proper advice from a professional who has references and years of successful experience. Often people are listening to family, friends and people who say they know what they should do. This can result in helping dig them deeper into financial despair. Many owners end up working forty hours or more a week for no salary and then have to dig into their pockets to pay the Landlord and other expenses to stay in business. There are no net profits; only losses.
This is not what they thought their dream business would become. Do your due diligence. Research the project for the best, and also the worst, scenario. Have a budget in place and when times are good, keep a nest egg to carry you through the difficult times. Most of all, if you keep your expenses reasonable and your margins tight, you will ride the down times in the market with greater ease.
There are other factors to a successful business venture but the most important one is to take the time to make wise business decisions or don’t do it at all.
Bill Gates says, “The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.”