Each year, approximately 625,000 small businesses startup, and about 640,000 small businesses fail.
They either die a slow painful death taking the owners' dreams and fortunes with them, or they take the quicker and slightly less-painful route of dissolving in bankruptcy. Either way, for as much as small businesses are touted as the savior and backbone of the American economy, they are dying at a greater rate than they are being born. The apparent negative growth rate of American small business is not caused by a lack of ingenuity or desire. The result is a lack of balance. Business owners must walk a fine line to achieve a critical balance in their business. That balance is between the day-to-day revenue producing activities of the business, and some of the other financial, legal and strategic aspects activities of the business that are less glamorous and often overlooked.
Businesses that achieve long-term sustained success are those that have taken control of these seven areas, as wells as the day-to-day management and revenue producing activities.
If the business model for your business does not work, your business will not succeed. If the business model for your business does work, and you master the topics covered in this article you will position your business to be one of the few very successful business owners whose business is a valuable and appreciating asset. According to a recent research study commissioned by the SBA Office of Advocacy, and conducted by the Klemm Analysis Group, legal disputes can have a devastating impact on small businesses.
The cost of litigation for most small business issues can range from $5,000 for smaller disputes to over $150,000 for larger disputes.
As an attorney who represents small businesses, the findings were not surprising to me. The study found that: litigation is costly to business owners - costing both time and money; litigation modifies the way that small businesses do business; and litigation causes emotional hardship within small firms. Litigation can kill the momentum of a business. It diverts funds that could be used for investment and growth and directs them to activities that may offer little or no value to the future of the business. The Klemm study found that the above outcomes held whether the small business was the plaintiff or defendant in a lawsuit. While not all instances of litigation will cost $100 thousand dollars, the impact of business disputes can still devastate the bottom line. SCORE compiled a list of ten reasons why businesses fail, and they can be reduced to one of three general problems: unfocused or distracted management; inadequate financing; or failing to utilize professionals. There are thousands of books and voices on the market dedicated to castigating the legal profession, and explaining why lawyers and lawsuits are killing American business. I am not one of those voices.
Litigation is a business reality.
Very little is accomplished by complaining about litigation so we will leave that for the politicians, activists, and political pundits. Our approach will be to focus on strategies and behaviors that help business owners to succeed in their business, avoid the common conflicts that lead to litigation, and position themselves to succeed if they encountered litigation. Most small businesses survive on slim profit margins. Additionally, 95% of all businesses never cross the $1 million threshold for annual revenue. While there is no "average profit margin" for small businesses, for most businesses, a 10% profit margin would be more than acceptable in an average year. For a business with $1 million in revenue and a profit margin of 10%, the net profit would be $100 thousand. Based on the earlier discussion about the range in cost of litigation, it becomes clear that the cost of one very serious legal dispute can wipe out all of a company's profit margin, and the loss of a major dispute could easily put a company out of business.
Seven Deadly Sins
From my experience, the seven mistakes that most often sink growing businesses are:
- Signing poorly negotiated commercial real estate leases,
- Entering one-sided subcontracting agreements,
- Corporations, Partnerships and LLCs without detailed agreements,
- Poorly documented loans and investments,
- Inadequate business insurance,
- Getting slammed by the IRS and State Tax Agencies,
- Failing to respond decisively to legal threats.