Business Closure
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Transcript of Business Closure
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BUSINESS
AND F
CLOSURE
ILURE
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Storey, Chapter 4
Birley and Muzyka, Part 10
Hisrich and Peters, Chapte
Burns and Dewhurst, pp. 6
Deakins, Chapter 3 (esp pp
Murphy, pp 22-25
Wickham, Sect 8.5, pp 100-
Other articles are referred
Closure and Failure -
r 17 (4th ed)
-71
59-61)
103
o in the lecture notes
Reading
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Closure and
Some Que What exit routes ar
Why do businesse
What is failure?
What causes failur
Which businesses
fail?
ailure:
tionsavailable?
close?
?
re most likely to
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Closure and
Some Que
Can we predict f
What are the eff
ailure:
tions
ilure?
cts of failure?
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The LongerTer
continu
acquisi
franchi
stabilis
sale ofinves
trade ssale to
sale of
liquidat
Continued
ownership
and
management
Transfer of
ownership /
management
Harvesting
:
the Options
ed organic growth
ion
ing
tion
equity to externaltor
le to external investorcompetitor
assets
ion and closure
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The Owner-Manager: O
Growt
Stabili
DelegaManag
succ
Conti
Continuing
Reduction
or Exit
Personal
Involvement
in
Management
tions and Exit Routes
Sale of BusinessDisposal of Assets
Liquidation
ation
tionement
ssion
Sale of Shares:
A.I. M.
VC / Angel
uing Reduction or Exit
Personal Investment
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Pattern
Voluntary
Sale
Liquidation
Unplae.g. to
Planned sale
Voluntaryliquidation
(e.g. retirementor to found newventure)
Note: the dividing line between voluntary
of Closure
Compulsory
Liquidationforced by
creditors
(Insolvency)
Forced takeoverby creditor
ned salecompetitor
and compulsory is an issue of perception
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16
12
8
4
0 12 24 36 48 60
VAT deregistrations
in year (%)
Business Deregistrations v. LifeBusiness Deregistrations v. Life
The older
its chanc
SURVIV
72 84 96 108 Lifespan in months
span (U.K. Data)span (U.K. Data)
a firm, in general the better
s of survival:
AL RATES
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0 6 12 18
% Still Alive
The Effect of Recession
100
80
60
40
20
1989 - 92
75
88
(Source: Barcla
24 30 36
Months
on Business Survival
1974 - 87
55
41
66
s)
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What cause
Other reasons fordiscontinuance
15 %
5 %
32.5
Source: Watson & Everett: "Defining Small Busines
closure?
Closed "to preventfurther losses"
"Did not make a go of it"
%
s Failure"; International Small Business Journal April 93
Bankruptcy / Involuntary liquidation
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What is F
Financial distress
Voluntary closure due to inadeq
Cessation of trading
VAT deregistration
Company deregistration
Personal bankruptcy
Insolvency
Liquidation
The term failure is used loosely
following conditions or circumsta
ilure?
uate returns
nd may describe any of theces:
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Market decline (or over-optimism)
Increase in competition
Loss of competitiveness
Overtrading - or a single 'big project'
High gearing
Under-capitalisation
Inadequate cash management
Inadequate controls
Excessive drawings
Common Caus
Market
Financial
Business location
Over-ambitious startup
Over-optimistic cost estimates
Imbalance or inadequacy in areas of
management
Loss of interest or drive by owner-manager
Loss of leadership and direction
Inadequate / inappropriate recruitment
s of Failure
Operational
Human
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Factors in Busi
1. Lack of knowledge of marketing
2. Competing task demands from family /
3. Problems of outlets
4. L
ack of market awareness of product / s
5. The costs of business premises
6. Inappropriate business premises
7. Insufficient mark-up
8. Unacceptable risk
9. Change in home circumstances
10. Inappropriate size of premises
In a recent study, Deakins found the follo
Source: Deakins, D., Entrepreneurship and S
ess Failure
omestic sources
ervice
ing factors to be important (in rank order):
all Firms, McGraw-Hill (1996)
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Differing Vie
Causes of business failure asidentified by analysts:
%
Incompetence/ inexperience 44
Lack of managerial experience 17
Unbalanced experience 16
Inexperienced in line 15
Neglect 1Fraud or disaster 1
Unknown 6
Business owners and external analysts
s of Failure
Causes of failure as defined bybusiness owners:
%
Inadequate sales 49.9
Competitive weakness 25.3
Heavy operating expenses 13.0
Debtor difficulties 8.3
Stock control difficulties 7.7Excessive fixed costs 3.2
Poor location 2.7
may interpret failure very differently:
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Factors influen
Age of firm - the longer the firm is es
Size of firm - the larger the firm, the
Growth - firms that grow are more li
Macro-economic conditions - failure
Sector - failure rate is higher in so
People - there is some evidence that
educational level, age and prior exp
Firm type - there is a lower failure rat
Location - failure rates are somewh
Source: Storey, D.J., "Understanding the Small Busin
ing failure
tablished, the less likely it is to fail
less likely it is to fail
ely to survive
rates increase during a recession
e industrial sectors
failure rate is inversely related to
rience of the owner-manager
e among franchises
t lower in rural areas
ss Sector", Routledge, 1994
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Failure rates
Failure rate per 10,000 businesses
(Based on Dun & Bradstreet data)
Services (1987)
Veterinary practices 10
Funeral directors 11Doctors 24
Hotels 65
Travel agents 135
Miscellaneous retailer 290
(e.g. hobbies, gifts etc.)
Source: Greenfield, W. "Developing New Ventures" Ha
by sector
Manufacture (1992)
Chemicals 60
Food and drink 70Textiles 610
Metals / engineering 650
rper & Row 1989
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Failure Prediction
In broad terms, failure might be as diffic
most involuntary closures are caused by
that financial data and ratios, where avail
the risk of failure with some accuracy. T
profitability and performance ratios but a
changes in owner remuneration.
Non-financial indicators
Financial data notoriously suffers from u
Numerous other indicators may be useful
redundancies
delay in submission of published acc audit qualifications
changes in legal form
changes in management structure
reduction in stock levels
issue of round-figure cheques
lt to predict as growth, but the fact that
cash insufficiency or insolvency means
able and reliable, can be used to predict
ese indicators might include gearing,
lso other financial data such as
availability, inaccuracy or lateness.
in anticipating distress or failure, including:
ounts
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Failure allows for the release of resource
Failure can be a learning experience - 'a
entrepreneurial personality' ( Shapero)
Hence potentially greater development ca
entrepreneurs who have failed previousl
The costs (and ben
The costs
The (potential) benefits
" Failure is the opportunity to begin again more
Loss of entrepreneur's and creditors' capi
Injurious psychological effects:
- damage to self-esteem
- return to employee status or unemploy
Economic effects of reduced national andsocial security payments and impact on l
for productive and efficient use
essential development of the
pability of enterprises founded by
fits ) of failure
intelligently" Henry Ford
al with resulting 'domino effect'
ment and social marginalisation
local tax revenue, increasedcal economic development
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The tolerance
The process of failure can be a very valuab
in Britain, our culture is less tolerant of fai
individuals have not been able to recover fr
whereas
in the USA failure is viewed as a learning e
failure, can learn from their experience and
as a result
(Deakins)
It is sometimes said that a
support of entrepreneurship, both in societ
failure-tol
of failure
le learning experience but:
ure and too often highly talented
m failure
xperience and people can benefit from
go on to form successful companies
is necessary for the
y at large and within the organisation
rant culture
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Success a
Cave F, Eccles S and Rundl
An exploration of attitudes
learning experience or an
In Proceedings of 21st BabFoundation Entrepreneur
June 2001
Cope J, Cave F and Eccles
Attitudes of venture capitalentrepreneurs with previ
Venture Capital, vol. 6, no2/
172
d Failure
e M (2001)
to entrepreneurial failure: a
indelible stigma?
on College/Kauffmanship Research Conference,
(2004)
investors towardsus business failure.
3 April-September, pp 147-
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Some speak of the fu
My love speaks softlShe knows theres n
And that failures no
Bob Dylan (1996?), Love Minus Zero/On Bob Dylan Unplugged
Success a
ure
success like failure
uccess at all.
No Limit,
nd Failure