It’s no secret that starting a business presents daunting challenges and many new ventures have a high failure rate. According to the U.S. Department of Labor (DOL), only about half of all businesses founded in a given year are still in existence five years later. In addition, the DOL statistics show that around the 10-year mark the number of survivors drops to about one-third of the original figure.
Having survived the perilous start-up stage, why do so many companies run aground in the next phase? The principal reason, according to a host of business experts, relates to costly mistakes that businesses often make during their growth stages.
Following are a few of the troublesome tendencies that can sink a fast-growing young business:
Hiring Too Fast, and Without Due Diligence
When a young company finds its business growing rapidly, often the tendency is to ramp up staff as quickly as possible, without much regard for proper hiring practices. Almost inevitably, this will create impediments to efficient growth in the near future.
Smart owners or hiring managers will interview serious job candidates several times and include more than one member of senior management. They check references thoroughly and verify key background facts, such as experience and education.
Creating a Management Team that Thinks Only as You Do
It seems only natural that successful entrepreneurs are strong-willed individuals who, for the most part, want to have consensus behind their decisions. The danger, however, is the elimination of all checks and balances related to key management decisions.
A senior aide who can thoughtfully challenge his or her boss’s ideas – in an environment that encourages counter-thinking – can be an invaluable asset, especially to a growing young enterprise.
Failing to Build Cash Reserves
Growth requires large expenditures, and without careful planning, businesses in a growth phase may find themselves with insufficient cash to weather unforeseen adverse circumstances, such as a market downturn, operational difficulties or failure to meet the growth target.
A well-run company can survive all of these occurrences, as long as it has the resources to stay in business. Before embarking on an ambitious growth plan, it is vital for a company to carefully plan for and evaluate its cash reserves.
Overly Enthusiastic for Acquisitions
With so many Baby Boomers reaching retirement age, a large number of private companies are for sale, creating growth opportunities for younger firms. But growth-minded business owners have to be careful to avoid common traps that can snare an entrepreneur making his or her first acquisition.
These traps include preoccupation with chasing the deal, to the extent that aspects of the existing business are ignored; performing insufficient due diligence on the company being acquired, perhaps in part because the entrepreneur intensely wants to close the deal; assuming too much debt or making an upfront cash payment that is too large; and failing to plan sufficiently for the integration of the acquired company’s operations and employees.
Relying on Independent Contractors
When growing their companies, entrepreneurs sometimes elect to staff some functions with workers that the company classifies as independent contractors rather than employees, thus saving on payroll taxes and employee benefits. But the rules defining which workers can legally be classified as independent contractors are complex, and federal and state agencies are cracking down on businesses that misclassify employees. The financial penalties for improperly classifying a worker can be devastating and threaten a company’s existence.
Leasing Too Much Space for Expansion
Commercial space is expensive, especially if the space requires a customized build-out for which the tenant is responsible. Therefore, when leasing additional space to accommodate growth, it’s extremely important to avoid overestimating how much space will be needed within the term of the lease. Equally important is an understanding of the complexities of a modern-day commercial lease, including escalation clauses that can add significantly to facility expenses after the first year. The amount a firm budgets for rent can fall far short of the actual cost.
These are only a few of the situations that can ensnare an emerging company that has triumphed over the start-up perils and finds itself poised to take-off. Entrepreneurs who reach this stage should take pride in their accomplishments and eagerly anticipate accelerating growth, while guarding against over-confidence that can blind them to potential pitfalls on their path.
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