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Three Critical Questions for Small Business Owners

Aug 17, 2007
Can you really fix a small business if it gets in trouble? Of course you can. And here's a common-sense approach that works: 1) control the cash, 2) size to the core business, and 3) execute with persistence.

That comes as a surprise to many, because it sounds so simple. The truth is, it's not difficult to fix a small business, and just about any motivated manager can do it when armed with the right know-how and some backup.

Of course, not every troubled business is a candidate for a turnaround. If your industry is consolidating and competitors are slashing prices to combat cheap labor or new technology, it's probably too late for a turnaround.

However, if your industry is stable and you can generate enough cash to stay in business for a few months while you put a plan together, you have a good chance of fixing your company.

Here are three questions to consider before you get started:

WHO'S IN CHARGE? Regardless of what others may tell you, you don't have to hire a $50,000 per month turnaround consultant or file for bankruptcy to save your company. If this were true, no ship's captain would ever find his way to safety after encountering bad weather at sea. The notion that you aren't capable of getting yourself out of trouble because you were at the helm when the storm came up is ridiculous.

You are a good candidate to lead your own turnaround if you have the following characteristics: 1) you like being the leader and you intend to remain in charge, 2) you have made some mistakes, but have not committed fraud, 3) you have personal assets at risk in the business, and 4) you can get beyond denial and take action.

Success happens when you get motivated to take charge, fix your company, and protect your assets. Most small business owners who have pledged their homes as collateral for a business loan understand this.

WHAT HAPPENED? There are many reasons why small businesses get in trouble. The easy answer is bad management, but there is much more to it than that. Most small business owners are not bad managers, they are under managers. They got distracted at the wrong times and did not do enough of the right things to avoid trouble. They let margins slide without taking action. Or, they launched a growth program without enough capital to see it through. Others played too much golf while competitors stole their best customers. Brutal honesty and good financial analysis will show you what went wrong.

CAN YOU PROTECT YOURSELF? There are many legal and ethical reasons why small business owners should turn their companies around, instead of locking the door and heading for the hills. It's the right thing to do, and it will also reduce your chances of losing lawsuits to angry creditors.

If your liabilities exceed the fair market value of your assets, or you cannot pay your debts as they come due, you are in the Zone of Insolvency. Your personal liability increases significantly when this occurs. When you are in the Zone of Insolvency, the law requires you to act in the best interest of both investors and creditors.

However, the law does not require you to be perfect with every decision you make. The Business Judgment Rule will usually protect you from ordinary mistakes, so long as you have conducted yourself: 1) in the best interest of creditors, 2) in the best interest of investors, 3) with sufficient information to make an informed decision, and 4) without any intent to defraud or deceive.

When your business is insolvent, turning it around is the best way to protect yourself. Saving your company is clearly in the best interest of creditors and investors, because creditors are repaid and investors don't loose their investment. Acquiring sufficient information to conduct the turnaround and then acting ethically will usually complete the four point test of the Business Judgment Rule.

So, protect yourself by at least trying to turn things around. And remember, you should not be authorizing bonuses to yourself or other executives, or repaying loans to yourself or other insiders, while you are delinquent to outside creditors.

If you don't have a relationship with a good small business attorney, develop one. Ask your business friends for referrals. Find a lawyer who represents business owners like you, and pay him for his judgment, experience, and assistance.

If you need turnaround know-how and resources, search the web using keywords such as small business turnaround, small business problems, or turnaround management.
About the Author
Van Lanier is creator of the Turnaround Roadmap system for small business owners. Get a free turnaround guide and learn more at http://www.lanierturnaround.com
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