Business Start-Up Killers or How to close your business in five steps!

Having been in business now for nearly eight years, I recently had pause to consider why typical businesses don’t succeed in the local market in Taiwan or anywhere. This list includes some of my observations:

1. Poor Financing

Most business owners here in Taiwan budget enough money to open the business, but they base income projections and the related decisions on the most rosy of circumstances in the first three months. The result is often that the business will close within 3 months because the businesses have run out of cash, and haven’t built up enough customers on a returning basis to pay for the basic costs. If you’re planning to open any business, remember to consider several scenarios and prepare for different results.

When we opened our business, we had very low estimates of income in the first six months; and we were financially comfortable with the idea of paying costs until the business could support itself. Part of that was a realization that salaries for the bosses (the only staff at the time) would be token only.

Solution: Always budget for a period at startup in which income is less (much less) than your expectations. Don’t forget to include unexpected startup costs. Be bullish on these because best-case scenarios rarely occur.

2. Missing the Mark

It’s amazing how many business owners only look at the superficial aspects of running a business. Yesterday my wife and I ate in a coffeeshop that had newly opened. The coffeeshop had a great location, and lots of potential. But when we walked into the store, everything LOOKED fine. It’s only when we ordered the food that we noticed the LOOK of the store was quite different from the reality. The staff were untrained, didn’t know how to greet customers, the drinks we ordered were pricy (for that kind of service) and really didn’t measure upto drinks at half the price in better restaurants (no flair), and the management seemed too busy doing the work to notice what was missing: an atmosphere, good service, and passion for the foodservice business. Oh, well.

The restaurant was called O Sole Mio and had a very pretty facade with a decent counter area, and much of the right equipment, too. Its location was on a major route around the north coast of Taiwan just outside Jingshan. In reality, most people would only stop once as we did.

Solution: Focus hard on the quality of the food or service that you produce. Make sure that they are up to scratch. And be your own harshest critic.

3. Location, Location, Location

That’s right. We’ve seen great businesses with potentially good profit margins killed by their locations. Why? Because the location chosen for the business ate up most of the businesses income. The business owner had chosen a high traffic location to maximize the market exposure. Result: he ended up paying over the odds for rent. When it turned out the product wasn’t that great, initial business interest fell away, and word of mouth didn’t occur.

A bakery opened across the road from our community and fell victim to this situation. Worse: the baked goods were quite unexceptional, and there was little reason for customers to cross the road to shop there, when TWO very good bakeries were less than 100 yards away. It shut in less than three months.

Solution: Choose a cheaper location, and create such a great product that people will go out of their way to find you. Once you have the quality, margins, and cash, then rent a mainstream property.

4. Hiring Staff

This has to be the biggest bugbear of any new business. Why? Finding good staff is an ongoing nightmare for our school from the first year that we opened. We have recruited actively most of the past eight years, but many of the applicants have been less than desirable. Even those we vetted carefully and who came to interview and do demos with us were in most cases unsuitable. We hired the best of those interviewees, but in reality only one or two of those we hired had the passion to be an excellent teacher.

Of course, hiring and training are both essential. When you hire new staff, it’s important they be trained properly. This is an aspect we seriously underestimated as we expected our hires to have the same passion and skill as we shared. This expectations have been tempered by our experience.

Solution: you have to be prepared to hire selectively, manage directly, and fire decisively. Poor staffing and staff who are unmotivated and interested only in their salary both will seriously undermine your business.

5. Freebies, Giveaways and Discounts

Over the years, we have noticed that some promotions work and some promotions look like they work. You have to learn to tell the difference.

  1. Freebies – Giving away products and services for free rarely generates a good client-base. Why? Because you will always attract people who like ‘free’, and who will shrink at the first sign of a bill or invoice. If you are going to do freebies, make sure it is tied to something that is purchased. And clearly state that these are introductory offers only.
  2. Giveaways – Giving away products may work for toothpaste and shampoo. It will likely not work for your business. Why? Because you will have to give away a lot of samples just to get some leads. Be careful with what you give away.
  3. Discounts – Discounts also can be used to attract attention, but you need to be careful in how you manage them. Otherwise you will find that you have to offer permanent discounts to keep customers who ‘thought’ that the discounted price was the regular price. Worse, as we found out, some customers will tell others that that is the pricing.

Solution: Clearly limit the duration, type and extent of your promotions. Make sure that your discounts, freebies and giveaways are closely tied to those you are trying to attract. And manage your cost basis effectively enough that you can still have a decent mark-up after your promotion. Otherwise, you will find it difficult to service those accounts properly.

One of the biggest reasons that you need to avoid these ‘killer promotions’ in the long term is simply that you will end up in a bidding war either with your own pricing or with a competitor’s. You should have confidence in your pricing structure. Aggressive promotions will create initial surges of interest, but may undermine the future of your business, the quality of your products, and your reputation.

These five issues are all issues that I’ve dealt with in different situations. They did not all pertain to my current business, but I’ve seen how the effects of these bad decisions can effectively ruin a nascent business, even one that has passed the first two years. Do let me know if you have any additional suggestions for this list.