19 January 2006.
Weinzimmer, Laurence G.Fast Growth: How to Attain It, How to Sustain It.Dearborn, 2001.
Hillstrom, Northern Lights updated by Magee, ECDI
BUSINESS FAILURE AND DISSOLUTION
CLOSURES AND FAILURES: THE NUMBERS
In 2002, 22.98 million businesses operated in the United States, but the overwhelming majority of these were enterprises without employees. The U.S. Census Bureau maintains data on the closure of businesses with employ- ees (a universe of 5.66 million firms) but without specify- ing the cause of the closure. Dun & Bradstreet Corporation tracks business failures, but its database clearly includes some one-person corporations.
The Census Bureau data, available from the U.S.
Small Business Administration on its Web page titled
‘‘Firm Size Data,’’ shows that in 2002, 586,890 firms with employees closed their doors; 569,750 businesses were launched. The Census refers to these as ‘‘deaths’’
and ‘‘birth.’’ In most years births outnumber deaths by a small margin; 2002 was an unusual year. In 2001, a much more typical year, 553,291 firms closed their doors and 585,140 were started, a net gain of 31,849.
The terminology employed by statistical agencies does not make it easy to distinguish between business closures or dissolutions for whatever cause and business failures more narrowly defined as involuntary closures due to financial or legal failure. Some indication is pro- vided by bankruptcy data. In 2002 38,540 business bankruptcies were equivalent to 6.6 percent of closures;
in 2001, 40,099 bankruptcies were equivalent to 7.2 percent of ‘‘deaths.’’ Brian Headd, a researcher for the Census Bureau’s Center for Economic Studies looked closely at closure rates of small businesses. He found that 66 percent of small businesses that close are ‘‘unsuccess- ful’’; the rest close for other reasons. Bankruptcy, of course, is an extreme form of being unsuccessful.
Another source of statistical data, maintained by Dun & Bradstreet Corporation and reported by the U.S. Census Bureau (see ‘‘Business Enterprise’’ under references), identifies business failures explicitly.
‘‘Failures’’ are due to insolvency, bankruptcy, or legal action. But these data, while explicit, are difficult to compare with federal data: the number of business con- cerns D&B uses as its base is much larger, almost cer- tainly because the company includes some firms without employees; such firms are excluded from Census Bureau data. In D&B’s report for 1994, for instance, 707,000 new incorporations are shown against 71,529 failures, a ratio of nearly 10 startups to 1 failure. The Census ratio for the same year was 570,587 startups for 503,563
‘‘deaths,’’ a ratio of 1.1 to 1.
Business Failure and Dissolution
The logical conclusion from these data, insufficient though they are, is that businessfailures are a subset of total businessclosures—and closures are much more com- mon. Most businesses are dissolved voluntarily while still successful because owners close shop for whatever reason or sell their businesses to others who merge them into existing entities.
REASONS FOR BUSINESS FAILURE
Businesses almost always fail for reasons that are complex and intertwined. The Small Business Administration, citing two well-known authors (Michael Ames and Gustav Berle) provides a ten point list for consideration.
SBA’s list includes 1) lack of experience, 2) insufficient capital, 3) poor location, 4) poor inventory management, 5) over-investment in fixed assets, 6) poor credit arrange- ments, 7) personal use of business funds, 8) unexpected growth, 9) competition, and 10) low sales.
The first item in SBA’s list is not only the most important cause of failure. In a way it includes all of the others. Robert Fairlie and Alicia Robb found, for instance, in a study published by the Census Bureau, that individuals who had acquired experience in working in a family business were much more likely to succeed in another enterprise—but their own. They had acquired what the authors called ‘‘human capital,’’ i.e., experience.
The literature provides many lists like SBA’s, and longer ones at that. They all touch on the same matters but in more detail. In a more systemic way, one might assign the causes of failure to poor planning, poor con- trols, incompetent execution, and slow adaptability.
Planning, which relies on experience, of course, will correctly assess the market environment, including demand, competition, location, and availability of capital and credit. Operational planning will determine the effi- ciency of the enterprise and will ensure that financial controls are in place and are used to provide early warn- ings of trouble. Controls are vital to match purchasing to inventory and to trigger timely discounts when invento- ries become too old or too large. The business must not be started if capital is unavailable or credit arrangements are still too loose. Prospective entrepreneurs must culti- vate a certain humility and realism about the competi- tion. No matter how promising one’s own product or service, the competition is not likely just to melt away. It may respond.
‘‘Unexpected growth’’ may appear to be an unusual cause of business failure. It is relatively common because the owners are dizzied and confused by sudden success and fail to maintain discipline in dealing with a rush of orders. The growth may be temporary—but they over- extend themselves in anticipation of its continuing. They may expand too soon. They cannot get the financing to
meet the demand. The market, disappointed, may sud- denly turn away and leave them with very high commit- ments to vendors.
BANKRUPTCY
Bankruptcy is a legal proceeding, guided by federal law, designed to address situations wherein a debtor—either an individual or a business—has accumulated debts so great that the individual or business is unable to pay them off. It is designed to distribute those assets held by the debtor as equitably as possible among creditors.
Bankruptcy proceedings may be initiated either by the debtor—a voluntary process—or by creditors—an invol- untary process.
Chapter 7 Bankruptcy. Individuals are allowed to file for bankruptcy under either Chapter 7 or Chapter 13 law.
Under Chapter 7 bankruptcy law, all of the debtor’s assets—
including any unincorporated businesses that he or she owns—are totally liquidated, and the assets are divided by a bankruptcy court among the individual’s creditors.
Chapter 13 Bankruptcy.This is a less severe bankruptcy option for individuals. Under the laws of Chapter 13 bank- ruptcy, debtors turn over their finances to the court, which distributes funds and payment plans at its discretion.
Chapter 11 Bankruptcy.Chapter 11 bankruptcy law is designed to provide businesses with the opportunity to restructure their finances and debt obligations so that they can continue to operate. Companies usually turn to Chapter 11 protection after they are no longer able to pay their creditors, but in some instances, businesses have been known to act proactively in anticipation of future liabilities.
RECOVERING FROM BUSINESS FAILURE
Business failure is usually a demoralizing event in a person’s life. It impacts both professional and personal self-esteem. Indeed, many experts believe that the entre- preneur who experiences a business failure goes through many of the same stages as individuals who suffer from the loss of a friend or loved one—shock, denial, anger, depression, and acceptance. But observers are quick to point out that people who experience business failure can still go on to lead rewarding professional lives, either as part of another company or—down the line—in another entrepreneurial venture.
Many analysts believe that chances of subsequent success in the business world often hinge on the entre- preneur’s activities in the first year or two after the failure has occurred. The best response, after the initial shock has passed, is a realistic look at the reasons for the failure.
This assessment, carried out by the individual with some help from uninvolved friends or mentors, may pinpoint the fatal turn which, if corrected, could lead in the future Business Failure and Dissolution
to a more successful run. For some, of course, the con- clusion might be that life as an entrepreneur is not what they are seeking. Paul Hawken, a very successful small businessman and author of Growing A Business [Simon and Schuster, 1987], makes the important point that business isabout problems; they cannot be avoided. The art of management is a knack for turning bad problems into good ones so that they stimulate creative responses—and new problems which challenge rather than overwhelm us.
S E E A L S OBankruptcy; Liquidation
B I B L I O G R A P H Y
‘‘Are You Ready?’’ U.S. Small Business Administration. Available from http://www.sba.gov/starting_business/startup/
areyouready.html. Accessed on 19 January 2006.
Business EnterpriseU.S. Bureau of the Census. Available from www.census.gov/prod/2/gen/96statab/business.pdf. Accessed 19 January 2005.
Fairlie, Robert W. and Alicia Robb. ‘‘Families, Human Capital, and Small Business: Evidence from the Characteristics of Business Owners Survey.’’ Center for Economic Studies. U.S.
Census Bureau. September 2003.
‘‘Firm Size Data.’’ U.S. Small Business Administration. Available from http://www.sba.gov/advo/research/data.html. Accessed 19 January 2006.
Headd, Brian. ‘‘Business Success: Factors leading to surviving and closing successfully.’’ Center for Economic Studies. U.S.
Census Bureau. November 2000.
Hillstrom, Northern Lights updated by Magee, ECDI
BUSINESS HOURS
The term ‘‘business hours’’ refers to the ‘‘open’’ and
‘‘closed’’ schedule that a business determines for its oper- ations. Small and large businesses adhere to a wide range of business hours depending on such factors as customer expectations, technology, and seasonal fluctuations in business. The rise in online shopping has expanded the concept to ‘‘24/7,’’ as we now say. To some extent in response to Internet pressure and expanding hours worked by the public, a relatively recent development has been the growth in businesses that have expanded their hours. As George Russell observed in the Fairfield County Business Journal,‘‘The business community is not in a 24/7 work mode—yet—but we’re no longer in a 9 to 5, Monday through Friday world. Business owners and their employees work past dinner-time, on weekends and often into the early hours of the morning. And more—
much more—pre-9 a.m. and post-5 p.m. working hours are in our immediate futures.’’ As this observation illus-
trates, the issue of business hours has two aspects: the time during which a business is open—and the amount of time employees must work.
Principal Determinants of Business Hours Business owners point to several factors important in determining what hours their business will be open. The nature of the business is the principal driving force. A nightclub will be open when bakeries are shut. The last young people leaving as the nightclub closes may be present, however, as the breakfast-serving bagel-shop turns on its lights.
Companies serving other businesses will match their hours to the customer’s. The continuing and still grow- ing participation by women in the workforce has greatly contributed to the expansion of retail hours as women have shifted shopping from daytime hours to the night.
Among many and continuously dynamic factors that impact working hours are the following:
• Non-traditional lifestyles—Increasing numbers of customers, and especially retail customers, keep non- traditional work hours themselves as mentioned above.
Some work overtime, while others are employed on a part-time basis or work two or even three jobs to support their families. These potential customers will likely be lost to stores that do not keep extended hours.
Moreover, some consumers simply prefer to shop late at night to avoid long checkout lines and hassles associated with busy aisleways and parking lots.
• Seasonal considerations—Some businesses are highly seasonal in nature. Retail establishments based in regions that are highly dependent on tourist dollars, for example, often scale back their hours (or even close entirely) during the off-season.
• Technology—The emergence of e-mail, fax
machines, cellular phones, and other trappings of the modern business world has accelerated the pace of the entire commercial environment in the U.S. and around the world, in part because they have made it so easy for people and businesses to communicate with one another, no matter the time of day.
• Competitive pressures—Analysts point out that simple economics have played a large part in the surge in expanded business hours for many
companies. ‘‘The ceaseless search for efficiencies and the high cost of adding capacity are compelling many small companies to squeeze more out of existing facilities by adding second and third shifts,’’
said Dale Buss in aNation’s Businessarticle entitled
‘‘A Wake-Up Call for Companies.’’
Members of the business community agree that for many companies, hours of operation are likely to Business Hours
continue to expand, as demands for convenience on the part of both individual and corporate customers do not appear likely to abate any time soon. But small business owners should make sure that they lay the appropriate groundwork for an expansion of operating hours before committing to it. Thorny issues will almost inevitably crop up, whether they take the form of logistical worries about restocking shelves in the presence of customers or difficulties in finding employees to work that fledgling second shift. But the business owner who takes the time to study these issues in advance will be much better equipped to handle them in an effective fashion than the owner who tackles each issue as it rears its head.
FLEX TIME
A corollary to expanding business hours has been the rise in ‘‘flex time,’’ a policy that permits employees to set their own hours of work within certain limits. Flex time tends to increase in times of economic expansion and to contract in times of high unemployment. ‘‘Across all industries,’’ reported Celeste Ward recently in ADWEEK,‘‘the use of flex time has dropped in the past several years, as workers are more skittish about asking for it and fewer companies are offering it. According to a July [2005] report from the Department of Labor, the number of full-time workers age 16 and older who are on flexible schedules dropped from 29 million in May 2001 to 27.4 million in 2004. And the proportion of compa- nies that offer flex time fell from 64 percent in 2002 to 56 percent this year, according to the Society for Human Resource Management.’’ George Russell’s complaint about ‘‘more—much more’’ work is therefore on target.
In the current environment, economic and competitive conditions are increasing the hours—and decreasing the worker’s flexibility.
B I B L I O G R A P H Y
Buss, Dale D. ‘‘A Wake-Up Call for Companies.’’Nation’s Business.March 1998.
Russell, George. ‘‘24/7 Workweek Hovers on Horizon.’’Fairfield County Business Journal.27 December 2004.
Stewart, Thomas A. ‘‘It’s 10 p.m. Do You Know Where Your Business Is?’’Fortune.3 April 2000.
‘‘24-Hour Businesses Have Unique Practices.’’HR Focus.
October 1999.
Ward, Celeste. ‘‘Make Your Own Hours: How some staffers bend the work week with flex time.’’ADWEEK.
19 September 2005.
Weeks, Linton. ‘‘In U.S., Nighttime is the Right Time: 24-Hour Businesses are Making Odd Hours Ideal for Doing Errands.’’
Washington Post.20 July 1997.
Hillstrom, Northern Lights updated by Magee, ECDI
BUSINESS INCUBATORS
As the phrase itself implies, business incubators are pro- grams intended to help small businesses get off the ground. They almost always provide both services and rental space to fledglings. The services typically include administrative help, consulting, and referral. Incubator programs are managed by public and private agencies.
According to the National Business Incubation Association (NBIA), around 5,000 incubators were oper- ating around the world in 2006; 1,000 of these were located in North America (http://www.nbia.org/).
In its Web-site article titled ‘‘The History of Business Incubation,’’ NBIA names the Batavia Industrial Center (Batavia, NY) as the first incubator, founded in 1959. ‘‘But the concept of providing business assistance services to early-stage companies in shared facilities did not catch on with many communities until at least the late 1970s,’’ NBIA reports. ‘‘In 1980, approx- imately 12 business incubators were operating in the United States—all of them in the industrial Northeast, which had been hard-hit by plant closures in the previous decade.’’ Other important influences were promotional efforts by the U.S. Small Business Administration (mid- 1980s), a program enacted by the Pennsylvania legisla- ture in 1982, and the efforts of Control Data Corporation (Minneapolis) under the leadership of its founder, William Norris.
NBIA provides a profile of the incubator movement in 2006 on its Web site. Ninety percent of incubators are not- for-profit, the rest are for-profit entities hoping to benefit from start-up growth. Nearly half (47 percent) have a mix of clients; 37 percent focus on technology businesses, 7 percent serve manufacturers, 6 percent serve service organ- izations, and 3 percent serve niche markets and concentrate on community revitalization projects. Forty-four percent of incubators draw clients from urban, 31 percent from rural, and 16 percent from suburban locations.
The sponsorship of incubators in 2006 was 25 per- cent academic institutions, 16 percent government agen- cies, 15 percent economic development agencies, 10 percent for-profit entities, 10 percent other, and 5 percent hybrids. The remainder had no formal host or sponsor.
ADVANTAGES OF INCUBATORS
Given the myriad advantages associated with member- ship in an incubator program, small business consultants often counsel their clients to at least investigate the possibility of securing a spot in one. Strengths of incu- bators include the following:
Shared Basic Operating Costs Tenants in a business incubator share a wide range of overhead costs, including utilities, office equipment, computer services, conference Business Incubators
rooms, laboratories, and receptionist services. In addition, basic rent costs are usually below normal for the region in which the fledgling business is operating, which allows entrepreneurs to realize additional savings. It is worth noting, however, that incubators do not allow tenants to remain in the program forever; most lease agreements at incubator facilities run for three years, with some programs offering one or two one-year renewal options.
Consulting and Administrative Assistance Incubator managers and staff members can often provide insightful advice and/or information on a broad spectrum of busi- ness issues, from marketing to business expansion financ- ing. Small business owners should remember that the people that are responsible for overseeing the incubator program are usually quite knowledgeable about various aspects of the business world. They are a resource that should be fully utilized.
Access to CapitalMany business incubators help entrepre- neurs acquire capital by means of revolving loan and micro- loan funds, according to NBIA. They link businesses to investors by referral. They assist entrepreneurs in preparing presentations to venture capitalists, and assist companies in applying for loans. Start-ups are helped in raising capital merely by having been accepted by an incubator program.
These programs act as a qualifying filter. Those who are accepted gain legitimacy in the business community.
Universality of Incubator Concept One of the key advantages of incubators is that the concept works in all communities of all shapes, sizes, demographic segments, and industries. In many cases, the incubator naturally takes on some of the characteristics of the community in which it is located. For example, rural-based incuba- tors may launch companies based on the agriculture present in the area. But whether based in a small town in the Midwest or a large urban area on the West Coast, proponents of incubator programs contend that the small business people in the community would know more about how to start and operate such businesses than major corporations that focus on mass production.
Comradeship of Fellow EntrepreneursMany small busi- ness owners that have launched successful ventures from incubators cite the presence of fellow entrepreneurs as a key element in their success. They note that by gathering entrepreneurs together under one roof, incubators create a dynamic wherein business owners can 1) provide encouragement to one another in their endeavors; 2) share information on business-related subjects; and 3) establish networks of communication that can serve them well for years to come.
FACTORS TO WEIGH IN CHOOSING AN INCUBATOR
Many incubators have been pivotal in nourishing small businesses to the point where they can make it on their own. But observers note that the programs are not fool- proof. Some small businesses fail despite their member- ship in such programs; incubators themselves sometimes fold, crippled by any number of factors. Entrepreneurs, then, need to recognize that some incubators are better suited to meet their needs than others. Considerations to weigh when choosing an incubator include the following:
• Is It a True Incubator?—Some office building owners falsely advertise themselves as incubators in order to lure tenants. Entrepreneurs need to study the details of each offer to determine whether such claims are legitimate.
• Length of Operation—Incubators take some time to establish their reputation in an area unless they are sponsored by a very high-profile corporation or a well-funded government agency.
• Incubator Leadership—Many analysts contend that entrepreneurs can learn a great deal about the fundamental quality of an incubator program simply by studying the program’s leadership. Is the incubator managed by people with backgrounds in business, or by general college or agency
administrators? Can the managers provide long-term business plans that show how they intend to guide the incubator to financial independence?
• Location—Does the incubator’s setting adequately address your fledgling company’s needs in terms of target market, transportation, competition, and future growth plans?
• Financing—Is the incubator’s financial base a reliable one, or is it on shaky ground?
Entrepreneurs interested in exploring the incubator concept can request information from several sources, including the Small Business Administration, area eco- nomic development agencies, area educational institu- tions, or the National Business Incubation Association.
Would-be small business owners should have a com- plete business plan in hand before applying for entrance into an incubator program. Most incubators maintain a stringent screening process to ensure that their resources are put to the best possible use.
RECENT INCUBATOR INNOVATIONS
Internet Incubators ‘‘Internet incubators—a for-profit variant of the old-time government- or academic-sup- ported not-for-profit entities—are sprouting up like Business Incubators