It’s common knowledge that starting a business can be exhilarating, fun, and profitable. It can also present daunting challenges, and many new ventures fail. In fact, according to the U.S. Department of Labor (DOL), only about half of all businesses founded in a given year are still in existence five years later. In addition, the DOL statistics show that around the 10-year mark the number of surviving businesses drops to about one-third of the original number.
Why do so many companies that survive the risky start-up phase fold in the next stage? According to business experts, the principal reason relates to costly mistakes that business owners often make during growth stages.
Following are five of the most common missteps that can sink a growing young business:
Hiring Too Fast
When a young company finds its business growing fast, often the tendency is to hire additional staff as quickly as possible, without much regard for thorough hiring practices. Almost inevitably, this will create significant roadblocks to healthy growth in the future.
Smart owners or hiring managers will interview serious job candidates several times and include more than one member of senior management in the process. They also check references and verify key background facts, such as experience and education.
Creating a ‘Yes’ Management Team
It seems natural that successful entrepreneurs are strong-willed individuals who likely want to have the support of others behind their decisions. The danger, however, is the lack of checks and balances related to key management decisions.
A senior aide who can thoughtfully and respectfully challenge his or her boss’s ideas can be an invaluable asset, especially to a young enterprise.
When growing their companies, some entrepreneurs staff some functions with workers that the company classifies as independent contractors rather than employees, thus saving on payroll taxes and employee benefits. But the rules defining which workers can legally be classified as independent contractors are complex, and federal and state agencies are cracking down on businesses that misclassify employees. The financial penalties for improperly classifying a worker can be devastating and threaten a company’s existence.
Lack of Cash Reserves
Growth requires large expenses, and without careful planning, businesses in a growth phase may find themselves with insufficient cash when confronted with unforeseen circumstances such as a market downturn or operational difficulties.
A well-run company can survive these occurrences, as long as it has the resources to stay in business. Before executing an ambitious growth plan, it is vital for a company to carefully plan for and analyze its cash reserves.
Overly Enthusiastic for Acquisitions
With so many Baby Boomers reaching retirement age, a large number of private companies are for sale, creating expansion opportunities for younger firms. But business owners must be careful to avoid these common pitfalls:
- Preoccupation with chasing the deal, to the extent that needs of the existing business are ignored.
- Assuming too much debt or making an upfront payment that is too large.
- Failing to plan effectively for the integration of the acquired company’s operations and employees.
These are just a few of the situations that can hinder an emerging company that has triumphed over the start-up phase and finds itself in a position to take-off. Entrepreneurs who reach this stage should take pride in their accomplishments thus far and eagerly anticipate accelerating growth, while guarding against over-confidence that can blind them to potential traps on their path.
Eric Bonugli is a district manager and Kay Oder is a Certified Business Performance Advisor for Insperity located in the company’s Austin office. Insperity, a trusted advisor to America’s best businesses for more than 28 years, provides an array of human resources and business solutions designed to help improve business performance.