Heed Signs of Distress in Small Business

Small business owners should plan for failure as much as success, experts say.

"People don't do it because they are paranoid. They think if they plan for failure it will be a self-fulfilling prophecy," says Robert Warren, director of the Asper Centre for Entrepreneurship at the University of Manitoba. "But you should plan for everything that could go wrong."

With more than 70 percent of small businesses ceasing to exist within the first five years of operations, entrepreneurs can do a number of things at the outset to minimize financial loss down the road.

"Your best bet is not to expand too fast," Mr. Warren says. "A lot of businesses grow too quickly and take on too much debt or extend a lot of credit and then they can't match up their cash flows."

Gary De Pape knows first hand what can happen if you try to grow your business too quickly. In 1997, the then radio reporter abandoned a broadcasting career to build a microbrewery in Winnipeg after he spotted locally brewed beer on the shelves of a liquor mart in British Columbia.

"I thought if they can do these microbreweries in British Columbia, I should do one in Winnipeg," he says.

Mr. De Pape developed a business plan and hit the pavement searching for local investors. Within five months, he had raised $2.5-million from a dozen or so local investors and Agassiz Brewing Co. was born.

In its first year of operation, the company secured 400 accounts in Manitoba and Saskatchewan and sold more than 30,000 cases of beer. "I got so excited I raised the money, I allowed a business partner to change my approach. I allowed us to bring in a 50 hectalitre brew house, which was way too big for the market."

On top of that, Mr. De Pape got poor advice from an advertising firm and launched too many brands too quickly. He says it became difficult to control costs and the business needed a series of cash injections. It wasn't long before a handful of shareholders began to micromanage the microbrewery.

After working 80 hour weeks for three years, Mr. De Pape became so stressed he asked the other shareholders to buy him out. When they refused, he walked away -

bankrupt and emotionally scarred.

"It all came back to the fact we built a bigger brewery than we should have," says Mr. De Pape, who is now a successful car salesman. "Looking back, I should have just focused on the city of Winnipeg. You have to get strong in your backyard first before the business will thrive. But I was excited, I am a go-getter."

In addition to not expanding too quickly, Mr. Warren says it is important for small business ventures to be properly capitalized.

"When you do your business plan, make sure you have realistic projections, sufficient financial resources on your own and can withstand a few months of slow payments from customers or slow sales," Mr. Warren says.

Successful entrepreneurs look for ways to minimize risks, such as getting a government-backed loan, working with suppliers to get easier payment terms and finding a partner.

"Good entrepreneurs control risks and they don't go out on a limb to do something that will come back to haunt them, overextend their credit or take on too much inventory," Mr. Warren says.

Eric Morse, executive director of the Pierre L. Morrissette Institute of Entrepreneurship at the University of Western Ontario, also urges investing in stages. "If you can outsource something in the beginning, do it," he says. He suggests that entrepreneurs just starting out should keep costs on a variable basis as much as possible.

Both experts say equity financiers typically look for entrepreneurs with at least one failure.

"They want to see someone who has learned from mistakes," Mr. Warren says. "Successful entrepreneurs face setbacks, take the lesson, dust themselves off and go on to the next thing."