Silent Killers of Great Businesses and How to Avoid Them

Silent Killers of Great Businesses and How to Avoid Them

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What a dramatic heading. Silent killers! Yet, I see them at work every day with many of the entrepreneurs that I work with. These killers are seldom obvious and yet destroy the lives of solid entrepreneurs, eroding the value of some of the country’s best businesses and brands.

These killers are so insidious that they are most likely operating in you and me today. In fact, I know they are!

Recently I received a phone call from an entrepreneur that I’d done some really interesting work with a few years back. His business was mature when I met him.

It had been in operation for over 28 years and he had bought it from the original founder 17 years back. He got it for a song. It was a general wholesaler importing general hardware equipment and consumables as well as homeware.

When we met seven years back, George had done a lot to clean the business up. At the time of purchase, debtor’s days were averaging at 102, stock turn ratios were a mess and customer satisfaction was poor.

They bought from the business simply because of the ridiculously extended terms that were tolerated! We designed a turnaround plan and George immediately went to work. Stock that was older than six months was cleared for cash and that alone covered his purchase price plus some within the first year.

 

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It took six months to get right but his debtors book came back to an acceptable 45 days and he shrunk his customer base to a healthier 1 200-odd from the 1 600-odd that had patronised the business before.

George had also refreshed his staff complement. The average age of staff was now 37 as he brought in fresh blood and reinvigorated the business’s energy. None of this happened without sleepless nights.

There were many moments when George believed that the present week of trading would be his last. The reason he got the business for a song was that he also took on the legacy bank debt that the founder had managed to accumulate to an impressive R3,8 million!

Related: Thriving in a Downturn

Build a competitive model

With the turnaround complete, we were now to take the business to its next level. As a general wholesaler, George was vulnerable.

The independent retailers organised buying groups, the chains organised procurement divisions and the Chinese direct trading capabilities with South Africa were making it easy for retailers to import direct.

What George wanted was the ability to build the business into an asset of value. This is a business that can be sold for a premium price or alternatively can relatively easily raise growth funding if required.

We needed to build a moat around George’s business. Something that would make it difficult for his customers and competitors to compete with him. His castle needed a defensive line around it that would safeguard its value.

After some consideration, the strategy of the business changed. George would migrate the business model from a general wholesaler to a branded distributor.

This was going to take some doing and the starting point was to work with what he had – good staff, good operating systems and reliable back office bookkeeping and accounting capability, extensive customers in the hardware and home-ware retail market.

The change in the business model took some time. Moving from a general wholesaler to a branded agent distributor creates a different emphasis on the business.

For example, it required a completely different marketing system to be built. Branded agent distributors have to influence the man on the street as well as their retail distribution channels. The man on the street needs to ask for the product and the channels need to promote the product.

Before, the man on the street was largely irrelevant to George since his retail chain took care of moving his no-name products off their shelves. The premium associated with branded products needed this new drive and marketing effort.

Within five years George had 11 big name brands that he represented. His marketing efforts were well organised and paying off. Business began to boom again. During this time, George negotiated exclusive supply into a retailer for a branded product that he represented in sub-Saharan Africa.

The retailer had 283 stores around South Africa. George’s business boomed. Cash was being generated in the business at a rate unseen before but getting the deal done, securing the supply from his principles abroad and bedding down the logistics and distribution to meet the service level agreements with this retailer had taken their toll on George.  Exhausted, George began for the first time to take the odd holiday.

Keep working on your business

In my recent meeting with George, I was saddened to see a dramatically different man. He looked faded and exhausted.

His former enthusiasm had been replaced by a cynicism and resentfulness towards arbitrary foes – the exchange rate, the schooling system, toll roads!  He was meeting with me in order to get some assistance to prepare the business for sale. It was clear that he was sick of it, sick of his customers, staff, suppliers and everything else.

We looked through his last three years of financial statements. The business had hit a turnover level of R79 million in its peak and today was trading at 24% below that high.

This is not necessarily a problem if the ratios remain the same since changes in turnover can be driven by many things. I looked on and saw that his gross profit had fallen by 6% and overheads increased by 16%. This was not good. What was especially disturbing was that George did not seem to care.

After an extensive consultation, it was clear to me that George had fallen prey to the four silent killers of entrepreneurs and the businesses that they build.

Women-screaming_Silent-killers

Complacency

When securing a great long-term contract that spits cash into the business every month many entrepreneurs feel that they can take a breather. The everyday worrying slog of the business lifts.

The paranoia of remaining afloat fades. The tolerance for conflict and the fight to get the business to where you want it softens. It was exactly these conditions that led to the sellers offloading what was originally a good business to George for a song.

It was within a year of his big deal that George fell prey to the same condition.

Comfort

We all suffer from entrepreneurial exhaustion. It’s vital that as an entrepreneur you find ways and means to constantly build your entrepreneurial psychic energy.

Often this is found through people, getting help from specific people who inspire you, thinking big and taking small steps to get to the big idea.

The cost of comfort is a fading interest that will result in you not dealing with the increasing number of little things that erode the businesses performance such as late payments, dragging compliance deadlines, late arrival from staff, softening pricing from suppliers and the like.

Cocooning

The exhaustion of entrepreneurship affects everyone. If you are introverted by nature, this killer will impact you even more.

By isolating yourself from your environment to find some reprieve from the hectic weeks that govern your business, life will only bite you in the back.

Related: Business Plans: A Remedy for Failure

If business is about people, you cannot afford to not be meeting people and activating a sensible networking calendar as a business development tool to prevent isolation from your industry, politics and the people influencing the direction of things to come that will impact you and your business.

Loneliness is bad enough without you having to amplify it!

Blame

There are many reasons for our inability to succeed in business. From uncertain government economic policy, red tape, compliancy pressures, weak staff capability and skills as a result of a shocking educational system, potholes and Nkandla amongst others.

There is a perverse satisfaction in being able to blame something else for our inability to move ahead and make it happen. The reality is that everyone is in the same boat. Languishing in blame only depletes the most precious commodity that we have.

Time. It can never be taken back. The remedy might well be to take a teaspoon of cement with honey and toughen up. A business is built through action, not ideas and building a business anywhere in the world is tough!

First warning

Silent killers are lurking in everyone’s business — which are yours?

Journey back to health

Small changes in strategy can result in massive improvements.

Pavlo Phitidis
Pavlo Phitidis is the CEO of Aurik Business Incubator, an organisation that works with entrepreneurs to build their businesses into valuable assets. Pavlo is a regular commentator on entrepreneurship on 702 Talk Radio and 567 Cape Talk Radio. He can be contacted at www.aurik.co.za