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Business Closure

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  • 8/9/2019 Business Closure

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    BUSINESS

    AND F

    CLOSURE

    ILURE

  • 8/9/2019 Business Closure

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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


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