How to spot the signs of business failure and prevent it

Not all businesses can be rescued, but how do you know when a business is beyond saving and how do you prevent it? Globally recognised business turnaround expert Michael Dorn, founder and chief executive of international turnaround firm the RTgroup, provides his insights.

Here are four key indicators that Dorn believes business leaders should consider as part of the business planning for 2023 and beyond to ensure they have a viable business model, the support of their stakeholders, suppliers, staff, financiers, industry, and regulators.

1. Future-fit relevance 

Ask yourself, is the product or service offering relevant to the current and future market needs? Unless it carves a very strong niche for itself, that is in line with current and future digital trends, a business will most likely not survive.

“You can think of the example of the Yellow Pages. In the old days, this is where you found an electrician or plumber in your area, but then the internet came along. The Yellow Pages were founded in 1886 and its last UK print edition came out in 2019. Today it exists only on the internet as a service directory, although it can’t really compete with Google or Google Maps.”

2. The curse of stagnation 

Companies typically have three phases: growth, stagnation, and decline. If a stagnant business stops investing in new products, adapting to market conditions, or maintaining company energy, morale, and financial discipline, it will go into decline, which may become irreversible.

Business leaders who understand the basic principles of growth, stagnation, and decline – depicted in the well-known “S Curve of Change”– can learn to “time their growth phases to go from strength to strength”, says Dorn.

3. Early warning signs of mismanagement

“Businesses go under because of mismanagement. Sometimes crises are brought on by unexpected external forces, but if sound fundamentals are in place, including solid financial, people and product management, it will almost always be possible to adapt and survive,” notes Dorn.

A current example of a company that nearly went under but may have a shot at survival is South African cinema chain, Ster-Kinekor. The company has just come out of business rescue after it was able to clean up its profit and loss statement and balance sheet (e.g., renew its leases in the malls where it operates) – a key condition for support from its financiers.

“They’ve done the groundwork, and their business rescue practitioner did a great job, but now the real operational restructuring work starts. If they can drive the company to sustainable profitability in the next three to five years, it may have a chance to survive. The company may be out of business rescue but it’s not out of restructuring yet. Its future success all comes down to solid management now.”

4. People over profit

Companies weaken when their numbers start dropping and a culture of complacency and negativity sets in. “Strong businesses have sound financials, a culture of goal-setting and winning, and leadership that is fact-based, strong, accountable and treats people well.”

Another pertinent example of a company in trouble is sugar giant Tongaat Hulett, which was placed in voluntary business rescue by its board a few weeks ago after it could not pay its suppliers. The company sources its sugarcane from 12 000 small-scale growers across KwaZulu-Natal and Zululand and is a key player in the local sugar industry which creates a million local jobs.

This means its demise could create catastrophic socio-economic hardship in a province that has already been hit by a succession of crises over the past few years.

“While some stakeholders might no longer believe in the business, many other stakeholders are supportive of its survival, which means it might still have a chance – especially if the government and lending institutions come to the party,” says Dorn.

He advises businesses who face challenges to focus on creating value for stakeholders as well as their continued reason for being. If your key stakeholders believe your company needs to exist, it will be much easier to fight for its survival.

• Michael Dorn is the founder and chief executive of the RTgroup. The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of Ventureburn.

READ NEXT: Bounce back: 4 key lessons SMEs should heed in 2023