13 Types Of Business Failure With 9 Real-Life Examples
Every business starts with a eureka moment.
It’s the sudden realization that your idea could, indeed, become a business.
Having a good idea, however, doesn’t happen overnight. It takes a lot of time, a lot of bouncing back and forth in your mind before finally, it starts making sense.
Indeed, there is no such thing as going to bed one night and waking up the next morning with a killer idea. It’s a long process during which you question your belief yourself; you discuss your inspiration with friends at the risk of them mocking you – after all, criticism helps your idea to grow.
Therefore, it’s not uncommon for enthusiastic first-time entrepreneurs to assume that once they’ve finally sorted out the business idea or services they could offer, they can just let it roll and hope for the best.
I remember as a kid, I witnessed my parents struggle with many businesses.
Although they were always quite enthusiastic to try new things, I still wondered why we were always changing shops and goods almost every three months.
Well, as I grew older I began to see why we were always changing from one shop to the other – our business kept on failing. We would accumulate so much profit in the first two months and in the third month, we would fold up due to some really bad management.
I began to wonder why we couldn’t just stick to one business and expand in due time, just like the businesses I see on the business newspapers that rake in millions in gross profit.
We obviously missed some steps. Let me shock you – your brilliant business idea is unlikely to be successful if you miss any of these essential building steps. The truth is, a significant percentage of new businesses are bound to fail after the first three months or one year of operation. Here are the reasons some businesses fail.
#1. Lack of Planning
Your idea is only the beginning of your business journey. However, if you truly want to navigate safely to the market, you need to have a business plan.
Indeed, your plan includes the estimated costs of launching your company and the forecast revenues. By using these two figures, you can define when and where to spend money to establish your presence. More importantly, you can know how to recoup your investment.
Without a plan, you’re unlikely to be able to monitor your profits or control losses.
Why? Because losses happen during the first few years as you’re building a brand new presence in the market.
#2. Poor Management
Most times, businesses fail as a result of bad management; it is usually the most common culprit for failed businesses. However, bad management isn’t the only cause of business closure.
In my JSS2 or 8th grade in high school, I was a very keen student of agriculture and would have gone for it as a major in university if I hadn’t gone for engineering. Well, I learnt in my agricultural studies class that so much care is given to crops when they are in their early stages.
For instance, rice plants are nurtured and cared for twenty-four hours as seedlings until they reach a mature stage of their growth. This is pretty much the same process in business. You need to pay special attention to your business at its early stages. A popular misconception is that when the business begins to grow, you should begin to monitor things with a UV microscope.
On the other hand, when a business has matured, it would take a mighty hit to bring it down unlike when you are still struggling to make enough profit and pay rent. Smaller children need more care and attention – smaller businesses also need that same care and attention.
#3. Lack of financial backing
Lastly, without funding, you’re going to struggle to bring your business idea to life.
A commercial loan can be tricky to obtain when you’re a new entrepreneur, but you can consider crowdfunding platforms, local investors and even bootstrapping.
The risk is less if you go for the latter. You can also save for a while using a secure money-saving platform like Piggyvest and use your accumulated funds to start or support your business whenever there’s a temporary challenge.
From knowing how to establish your business to understanding the limitations, there are questions you need to answer before your idea can be a successful company.
Don’t be tempted to rush through the steps; your future success depends on your patience and strategic approach.
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#4 Lack of location research
Back to my story. While my parents changed businesses, we also moved locations.
Believe me, relocation is not my thing – I hate moving. It gives me this unnecessary awkward nervousness of what the future holds. Now, you can imagine what it feels like to change businesses. I am sure I am not the only one that shares this predisposition.
Nothing beats settling down in one industry and growing your business to become a leading brand. However, unless you know why each business fails in such a short time, you will be in the dark and will continue to jump from one business to another like a bird whose forest is on fire.
Where should you establish your business idea?
For new entrepreneurs keen to have an office instead of working from home, the cheapest option is typically better. In fact, it’s not uncommon for startups to establish themselves in rural areas or on the outskirts of large cities.
Unfortunately, the location can have an impact on the facilities available to your everyday processes. Water supplies, for instance, could be limited when you’re away from the town.
Small manufacturers, agricultural businesses, or even industrial firms that have not planned for a large water tank to harvest rainwater as a backup might find themselves unable to work for long periods of time.
Additionally, rural broadband access also plays a significant role in everyday business. Rural locations can dramatically affect your activities if you haven’t weighed your options well.
#5. Businesses not suited to customers
Who are the customers of your business idea? If you can’t answer the question, you may not know how to target the right target.
Your first step as a new business on the market is to study your customer personas.
Use keyword tools, social media information, Facebook Insights, and data-driven surveys and feedback. Then you can gradually build a realistic customer view that encompasses many audience types.
#6. Poor Customer Services
When it comes to customer service, big businesses tend to have an upper hand in a lot of things compared to small start-ups. They usually have a functioning marketing/customer relations department that is tasked with following up on new trends and policies.
However, there are little things these big businesses fail to do and small businesses like yours can use them to their advantage. Most big companies, after a while, are not able to create that familiarity with their customers the way smaller businesses can.
When you cannot point out at least one unique thing or a selling point, there is no way you can attract the customers enduring poor customer service from big names. Most times, what start-ups do is create an environment where your customers can feel like they are all getting special attention.
Psychology has proven that everyone loves to be noticed and treated specially. Actually, I feel that knowing your customers on a first-name basis is very important for startups, it creates a serious sense of familiarity and care.
#7. Poor Business Plan
It is true that some businessmen, investors and entrepreneurs may not see the full importance of a business plan. This is due to the common misconception that a business plan is only needed when seeking investments from sponsors and can be abandoned once gotten.
I beg to disagree that business plans not only serve as the foundation of your business but also serves as a reference book to future developments, management and possible expansion.
I can bet that Apple Inc. still has its business plan in possession. In fact, most major or established businesses have their rigid initial business plan that only needs to be amended based on industry policy changes.
With that in mind, one must take serious care to build a good business plan. According to Wikipedia, a business plan is a written document that contains business goals, the method of attaining those goals and the time frame within which the goals need to be achieved.
In other words, a business plan is a guiding light on your business journey. Before you start building a house, you need an architect to draw a plan. Similarly, before you start any business you must structure your business plan in a way that it can be edited, invested into and achieved.
#8. Employing Too Many Staff
This is a mistake some small business owners make especially when they’re just starting out. The excitement of little leaps might get into the heads of some startups which could tempt them to employ ten persons for a job that five people can do comfortably.
It’s fine to do this if you can afford it but if you can’t, it’s better to grow slowly until you can do bigger things. Else, the high running costs may start weighing down on the business and lead to failure.
#9. Poor leadership
This is another low-key problem that many businesses experience. Many business owners hate to admit that they lack the right skills to grow and expand a business properly.
This is why we have businesses that are struggling especially when it comes to making key business decisions. Just like the music industry, a lot of preparation is done before the actual music recording such as studio time, album sales, digital sales, show bookings, security and appearances.
Similarly, there are certain traits you need to possess to sustain your clients and customers. Business is not for everyone and that is a fact. I have seen boys that were given a whooping 5 million naira to start a business and because they have never been in a leadership position or know what it takes to be a leader, the business came crashing.
#10. Poor Financial Management
Yes, this is a problem that plagues many small startups and inexperienced managers. Usually at the early stage of a business, balancing profit and running costs can be quite frustrating. Most times businesses find it hard to separate capital from profit.
In business, turnover is very important, however, if you aren’t getting any profits, it is almost impossible to continue in the business. Depending on the level of financial problem, you might need to get a solution as fast as possible to keep your head up.
It is easy to sell products at a good cost price but the whole thing boils down to whether you can still afford your operating expenses after your inventory is exhausted.
#11. Bad accounting
If you can remember the company Eron, then you probably understand where I am going with this particular one. Well, for those of you who don’t know this story, Eron was a company whose name is now synonymous with falsifying profits.
Eron executives will post misleading profits of millions of dollars and meanwhile, they were in debt and barely floating. On the contrary, a source has reported that they had even been looking for iva help in the UK because executives from Moorcroft debt recovery companies were in pursuit.
If Eron succeeded in erecting a facility, they will post the projected income rather than the actual income of that facility. The result was a 63 billion dollars debt tied in assets which is one of the largest corporate bankruptcy.
There are men with supposedly large enterprises that sit in their penthouse offices. If care is not taken, bankruptcy will creep in on them because they don’t take their time to find out whether any published money is real or not.
To make sure something like this doesn’t happen in your company, ensure you use a reputable audit firm to help do a proper and detailed account of your business. You can also get some accounting skills to have the basic knowledge.
#12. Incompetence and over expansion
This may be synonymous with bad leadership. However, incompetence might be on the side of everybody in the business which can also lead to a lack of productivity.
There are times when businesses experience the kind of incompetence only seen in African government institutions and it may become a problem for them.
Just like complacency, an expansion at the wrong time can be dangerous to the business. Expanding when you shouldn’t, puts a strain on your business.
#13. External factors
In a few cases, when a business crumbles, it is not due to incompetence or lack of funding. Sometimes, external factors might be the culprit.
The business market is a very unpredictable environment and small changes like a change in the government policy or what you might presume as small changes (competition) might affect your business adversely.
Real examples of failed businesses
1. Gowell Supermarket
Gowell was a supermarket about two blocks from my old house in Lagos State, Nigeria. The supermarket was established by a couple who perhaps decided that running a supermarket was a profitable venture, and were keen to exploit the opportunity. The supermarket was large; one of the biggest in that area at that time.
However, this couple was fully employed pharmacists who barely had time for their children let alone run a business. My sister was a regular babysitter for their kids when she concluded her junior WAEC examination.
Due to their busy time schedule, this couple handed the daily operations and management of Gowell to a church member and presumed friend. The business seemed to be doing well in the first six months. However, all hell broke loose by the last quarter of the year. My parents were close to this couple who were already laying serious complaints.
According to them, they were getting very little returns from their manager and goods were always missing from shelves. When queried, the manager usually blamed it on staff members and shoplifters.
My parents were shocked to hear that they were finding it difficult to pay their shop rent of just two million naira. Given the kind of crowd we see every day in that supermarket, one would think this couple was already on their way to success. My father, being an experienced person, was quick to point out that they made a terrible mistake by handing the care of such a large business to a non-investor.
If you want to do something or you want to start a project, make sure you establish top-notch management especially at its early stage.
Compaq used to be one of the major suppliers of PC in the past bus they experienced business failure because they failed to predict the market shift and were unable to keep up.
Competition soon became tense and the company was bought for about 24.5 billion dollars by Hewlett-Packard.
3. A&P Construction
A&P was a construction firm that collapsed before it even started. The firm was established by two inexperienced fresh graduates of civil engineering and architecture. I was opportune to meet one of them during a seminar.
These men were very skilled, nice and very polite. They started the company with what I would call a very faulty business plan.
First of all, they decided it would be the best idea to go for the big jobs rather than building their foundation from the underground. Trust the bigger construction companies, they had the reputation and could easily get jobs. It was not long before A&P couldn’t maintain running costs and the small business collapsed.
In 2004, blockbuster employed over 80,000 people worldwide with over 9,000 rental shops. Even though the company was at its peak, I think it was poor foresight and a terrible strategy that led to a decision like that.
In short, blockbuster filed for bankruptcy in 2010 due to a debt of over eight hundred and fifty million dollars. It did not help that a small struggling company called Netflix posed a very serious competition. It was just accepted that blockbuster paved the way for other movie streaming sites like Netflix.
5. Tommy Clothings
Tommy Clothings was a really popular clothing store in Lagos at a time. They made customised wear and even styled some celebrities. I remember my sister bought shoes from them around 2012. Well, Tommy Clothings was started by a young man called Tomiwa Akintola. He was a very talented tailor and could do things I had never seen any other tailor do before.
Tommy decided to expand his business and manage a clothing store where he sold his own designs, and other brands as well. The only problem was that Tomiwa, although a good tailor, was a terrible businessman. He found it very difficult to separate business from friendship.
His friends will troop in and take things on credit. His stock soon started to decrease until there was nothing more to sell. He kept following up on debtors and couldn’t have enough funds to continue his business.
Woolworth, a candy company that folded up, rendered more than 27,000 people jobless. Most experts believe that it was poor financial management that brought down one of the biggest companies down.
It started out with a few stores closing down in the last half of 2009 and finally, in 2015, the company failed.
7. Yu-mom Kitchen
Yu-mom kitchen used to be a very popular eatery in my area. They were, however, still very young in business when the manager decided another branch was a good idea. The new branch was a serious strain and soon they used profits from the main branch to keep the other running.
This whole thing continued for some time until they couldn’t keep up with the expenses. They had to shut them down. If the second one was built from scratch and made to earn its own profit, that might not have been the case.
The truth is that managing more than one place might seem exciting, but it is not usually easy unless you have more than enough funds to run both conveniently. Alternatively, you should give as much strength as possible to your current office instead.
RetireKing used to be a cooperative society that ran across different secondary schools in Nigeria. At first, they were doing so well that other institutions wanted to be a part of it. RetireKing would actually give you a product and take the money in bits from your account with the agreed interest.
However, a combination of corruption, bad leadership and incompetence brought down RetireKing before they finally experienced business failure in 1992.
9. Mr Biggs
Many Nigerians know about Mr Biggs, how popular they were and how quickly they fell in the face of competition. Mr Biggs used to be the go-to place for take-outs, family outings or even a business meeting.
However, they failed to make the necessary adjustments when new competition arrived. Other fast-food restaurants like Chicken republic and Domino’s Pizza began to outshine their predecessor and soon Mr Biggs shut down.
One tip I strongly think can prevent business failure and heartaches as much as possible is commitment. You must be committed to the early stage of your business to actually grow it. When you’re committed, you would have scaled through 70% of these problems.
Only commitment allows you to quickly adjust properly to industry changes. Knowing when to expand your business, when to sit tight and when to manage what you’ve got is key to your business success. Remember a bird at hand is worth more than two in the bush.
I hope this helps!