Keeping your sanity in between a rock and a hard place

There is a myriad of cautionary tales out there. Call it the Grimm’s Fairy Tales of business. Remember the Silicon Valley disaster? Where net millionaires saw their stocks plummet like diving bells and became crack addicts turning tricks on Market Street in San Francisco? There’s the rust in the gilded empire of Donald Trump. Who can forget the disastrous fall of Saul Steinberg of Reliance and his eviction from one of New York’s most fabled apartments on Park Avenue?

The reversal of fortune has never been more real, democratizing itself from the mighty to the blooming entrepreneur.

A failing business can be both nerve-racking and heartbreaking for entrepreneurs. Entrepreneurs tend to see their businesses as extensions of themselves and part of their way of life. The recognition that you have failed in what is supposed to be a pillar in your role in society is difficult for some as denial clouds not just judgment but prudence as well. Most companies go bankrupt because management failed to recognize the issue and tackle it head-on. It is human nature to deny in the midst of a crisis. Loss has its steps: Denial, negotiation, bargaining and acceptance. Denial in this case is a very expensive proposition and a dangerous stepping-stone. It is a gateway emotion to fiscal disaster.

The successful entrepreneur, however, recognizes failure early on and knows how to take quick corrective action. One has to be surgical in moments such as these. I came across some very good advice from Jack Welch’s book, The GE Way. You can only do three things with a failing business: fix, sell or close (in that order).

Try to fix the business. After fixing it you can keep or sell it. If you fail to fix it, sell it. Selling the business will allow you to recover some or hopefully all of your capital. Failing to sell it leads you to the last door. Close it. This is the last nail in the coffin.

One of the primary purposes of a business is to generate profit. It does not make sense to continuously finance a losing business (unless the objective is not a commercial one, but perhaps social or political). Closing a business is the very worst-case scenario, but it does prevent you from having to finance further losses, which will dig you a deeper grave.

I’ve had the experience of keeping a venture alive way past its expiry date and losing my shirt in the process. I’ve also been in a situation where I’ve kept a business on life-support for more than three years of continuous losses only to hit a breakthrough in the fourth year, which then generated a significant gain on my seemingly failed investment. I’ve also bought unprofitable companies and turned them around. But my conquests have their fair share of failure. I’ve bought a company, turned it around but sold it at a loss due to external factors. With these successes and failures under my belt, I would like to share the following five principles for entrepreneurs being sucked by a black hole:

3 Key principles in turning around a business

1. Do an external and internal assessment.

Are you in a sunrise or sunset industry? How are you performing against your competitors and peers in the industry? Is your company capable of winning customers and business from the competition? Can you do this profitably? Does your company have ample resources to implement this strategy?

The external and internal assessment will do two things for you: first, it will determine if you are in an industry worth staying in. If you aren’t, get out. If you are, it will give you sufficient rationale to spend more time and resources trying to implement a turnaround. The internal assessment will determine the “gap” in resources and how much you need to raise from stakeholders (investors, shareholders, suppliers, customers, employees) to make “it” happen. The internal assessment will tell you if you have what it takes to turn around the business or if you can raise the required resources to implement your plan.

2. Plan a strategy that will revolutionize or reinvent your business model or product/service offering.

The best and only way to turn around a business is to increase the number of customers you are serving. Increased volumes will produce economies of scale and hopefully generate sufficient margins to turn a profit.

Focus on the value proposition to the customer, and how you can come across with a superior value proposition and deliver that product or service profitably.

3. Make sure you have the right management team that believes in the vision and has the capability to implement it.

Most companies on the brink of disaster have problems retaining top management and other good people.  If you can articulate the turnaround plan clearly and provide key managers a stake in the success of the venture, you are able to get everyone into an entrepreneurial mindset, which is the key to success of any turnaround. A strategy is also only as good as its execution. And execution relies on people.

Surviving a crash is quite simple. Think of it as a plane ride. Fasten your seatbelt and when you feel a nosedive, just brace yourself.