Contact Us    Locations    11/18/2008

Why Some Businesses Fail

Lessons from the trenches:

Few people know small business better than Vicky Layco. A senior escrow officer of The Mechanics Bank Escrow Department's small business section, she oversees the ownership transfer of hundreds of small businesses annually. A former small business owner herself, she knows exactly what it takes to make a small business succeed...or fail.

Layco's clients are mostly first-time entrepreneurs, often new immigrants to the US or first generation citizens. They're latching on to the American dream, purchasing dry cleaners, gas stations, restaurants. Money is tight, but they have no shortage of willingness to work hard. Many will succeed, some against all odds. And yet, some are doomed to failure, starting with the purchase transaction itself.

“Ninety percent of my customers are doing owner-to-owner transactions with seller financing,” she said. “They're often not represented by an agent, even though they should be. We have to do a lot of hand-holding to help them through the process.” Additionally, she's developed a long list of service providers - brokers, consultants, etc. - she can recommend to clients when necessary.

Language is a barrier for some. Fluency with the regulatory process is another deficiency.

“For example, I've had people buy stores or restaurants that sell alcohol, and not realize they need to fill out the Alcohol Control Board (ACB) forms,” Layco said. “Without the proper forms completed ACB will not grant them an appointment for submission of their application. I'll get them the forms and help them fill them out, but that's not typical of most escrow agents.”

Over the years, Layco has seen classic examples of every possible mistake small business owners could make. What are the biggest ones? Layco can list them off the top:

• “Location, location, location. Even if you're starting a new business, find out how other businesses have done in that lcoation,” she advises. “If there has been lots of turnover in that space, it may be a reason to look elsewhere. Some places are inconvenient or even invisible to potential customers.”
• “Not checking with the landlord to see if the lease can be assigned to you is a big mistake,” she says. “Once the sale is complete, you don't have as much leverage. The landlord may see an opportunity to raise the rent, and you may need the lower rent to make a go of it. The good news is that a landord can't unreasonably withhold assignment. Get a good attorney and fight.”
• “Changing the nature of a successful business right after you buy it is very risky,” Layco says. “Keep what worked. When you buy a small business, often all you're getting is a customer base. Don't go from a Mexican restaurant to a Korean barbecue overnight.”
• “Don't assume you can turn around a failing business,” Layco says. “I've handled the sale of some businesses over and over again. Every six months someone new comes along and thinks he can make a go of it. There's a reason it's not working. You may be better off starting out fresh.”
• “Bookkeeping is a weak point for almost every small business,” Layco observes. “It may not seem important, but without a way to prove income, you'll have great difficulty getting loans - including personal loans such as mortgages - and you'll also have trouble selling the business in the future. Invest in a bookkeeping service or software.”
• “Don't be an absentee owner,” Layco warns. “Any business that deals with cash is an invitation to employee theft. If you have to rely on someone else, family members are a better prospect than strangers, but you still should have a strong presence.”
• “Don't expect profits immediately,” she says. “In fact, count on at least two years of no profit, and have enough cash to hang in there. Also, don't hire right away, to minimize your overhead expense. Long hours are a fact of life in small businesses.”

If all this sounds pessimistic, Layco is anything but. In fact, she is constantly surprised and inspired by the business owners who make a go of it, often against striking obstacles. One example she cites is a Korean couple who purchased a Mexican restaurant patronized largely by Hispanic customers. They staffed it themselves. With very little English language capability and no Spanish, she wondered how they would communicate with customers.

One day she dropped by their restaurant. The place was jumping, and the menu had changed very little - with one exception. Next to each entrée was a number. All the customers had to do was point. “I had to laugh - and then applaud their creativity,” she said.

In fact, Layco reserves special praise for foreign-born entrepreneurs. “Immigrants often come to this country with tremendous focus,” she says. “Frequently, they've endured enough hardship in their native country to see America as a dream opportunity - especially to make things better for their families. Sometimes, you just know they're going to make it because they want it so much.”

Vicky can be contacted at The Mechanics Bank Escrow Department at 510-251-3808, or by e-mailing her at: Vicky_layco@mechbank.com.

See also: Best Businesses to Buy

©2008 Mechanics Bank. All rights reserved