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Survival of the fittest - Smart Company Insights

07 March 2011

It's the moment that every entrepreneur dreads - that time when your business is on the line and you're not sure if you'll make it through to next week. Whether it's cash-flow problems, piles of debt or an attack from a competitor, many businesses have a near-death story to tell.

Many of these incidents happen during the start-up phase, when SMEs are still finding their feet. But as these 10 examples from our Smart50 show, bigger, more successful companies aren't immune from the threat of a sudden and catastrophic collapse.

Of course, true entrepreneurs never throw in the towel, as these stories show, smart companies can always find a way through the storm.

Caught up in red tape

Many SMEs complain about red tape hurting their progress, but nearly faced a collapse after running into trouble with the Australian Communications and Media Authority.

\"The ACMA called upon us many years ago and asked us to show them the test result for a Canon camera. The concern was that as the importer of a Canon camera that we hadn't proven it wouldn't bring down a jumbo jet from the electronic omissions,\" founder Mark Harrison says.

The company was forced to stop all sales and find a solution to ACMA's queries, but Harrison claims it was given no information about what should have been done.

Eventually it found a solution by hiring a testing organisation to cover the company's liabilities. While Harrison says \"obscure laws\" led to the company's near-downfall, he points out the necessary practice of checking out current laws before doing business.

A bad partner

Starting a business with the right people is essential for success, but all too often SMEs overlook this crucial part of operations. Hiflow Industries' founder Brett Saunders says it nearly \"shut our doors\" in the early stages of the company due to a bad partnership position.

\"This was a result of the other business partner making some ongoing bad decisions. It was a very costly exercise to go through - cost a lot more money than anticipated.\"

The company was so concerned about the partnership it offered an \"inflated price\" to force the director to leave. Saunders says the company has thrived, but its experience offers a lesson for start-ups - you can't be too careful when it comes to business partners.

Hit by a walk out

Some problems you just can't prepare for. After travel specialist company Travelcorp suffered through harsh industry conditions following September 11 and the collapse of Ansett, chief executive Helen Logas had a manager walk away with most of the business.

\"That was probably one of the biggest things I've had to suffer. He came in and said, 'I'm leaving' and I told him to stop joking. He said he was serious and walked out with literally over a third of the business.\"

The staff member walked away with several clients and three staff members, and Logas says she faced significant emotional trauma as a result.

But Logas was determined to remain in control, and hired business development experts to come in and reshape the company to be even more successful. While she says the company couldn't avoid the incident, \"we perused an aggressive strategy... and eventually recovered in a big way.\"

When competition gets nasty

Lift Shop founder Les Katz entered the residential lift market in order to open up the product to a variety of different demographics, but he didn't count on the competition attempting to tear him down in the process.

\"This is where they would talk about us negatively, saying that Lift Shop did not have a service department, that we had financial difficulties, (when in fact their credit score was bad), Lift Shop sells illegal lifts. They defamed us quite badly, really.\"

Competitors also allegedly dropped prices into \"loss making territory\", with one director claiming he would make up losses after Lift Shop went under.

Katz says he spent too much time defending the company against spurious claims from competitors, but eventually triumphed. He says he focused on cutting both prices and delivery times in order to impress potential customers, and it seems to have worked with the company still operating five years on.

A wobbly customer

Having your business become successful is a dream for entrepreneurs, but it can also deliver a suite of new problems. For IT Leaders Group founder Scott Jones, achieving a new level of success led to complacency that nearly cost the entire business.

\"I did have an uncomfortable time earlier this year when a large client got the wobbles while they had a very large debtor account balance. They had been spending so much so quickly that our existing credit control systems hadn't flagged the risk and I wasn't paying enough attention either.\"

While Jones says the company was only \"temporarily incapacitated\", it took careful discussions with the company to fix the problem. \"It was a kick in the butt to remind me that as the clients get bigger the stakes get larger so the risk management needs to be tighter.\"

Customs and a near catastrophe

Importing is a lucrative industry, especially as the Australian dollar continues to climb. But wholesale trading company E3! nearly reached its end when it underestimated the problems that come with entering the industry.

The company ordered a large amount of goods for a \"valuable\" client, but encountered problems bringing the product to home shores.

\"There was a problem of product branding as well as an error made on the custom clearance form between the factory and Chinese customs, the goods were not released to clear customs. E3! tried to solve issues between customs and factory but in the end customs still wouldn't release the stock,\" founder Vanessa Garrard says.

The company faced a fine and claim to the customer to the tune of $60,000, which the company rightly describes as a \"big loss\". The lesson for importers is simple - know international requirements inside out and make sure suppliers are aware of all necessary requirements.

The money-raising runaround

Obtaining funding can be difficult for a start-up, so when an eager investor offers a good amount of cash, entrepreneurs can't be blamed for taking the money deal. But Matthew Meszaros from 2it Consulting says their company's attempt to obtain funding for a growth plan went horribly wrong.

\"We centred in on one investor and had really strong interest, so then we had the financials prepared and an information memorandum. It really got far down the track but occupied a lot of our time and focus getting there.\"

\"Unfortunately that investor pulled out on us after giving us his commitment and quite a bit of run-around. When we looked up from the whole thing we had a financial iceberg looming in front of us, it was very hard to get out of.\"

Meszaros says the company was forced to obtain cash quickly, and worked \"extremely hard\" in order to get back to their good standing. It's a lesson for entrepreneurs not to put your company's future on the line with a single customer.

Shut down - by mistake

Perrie Croshaw and Paul Baldwin wanted to start an accommodation booking agency (South Coast Holidays), but were told by the Office of Fair Trade they would need to contact a solicitor in order to find out what legal requirements they would need to fulfil.

The pair was subsequently told no license was required to trade. But nearly 10 months later as the business was just taking off, they were hit with a warning to shut down.

\"The OFT sent officers to our home (where the business was based) and told us to stop trading immediately. We were faced with having our business shut down for an unknown period of time after which it would be next to impossible to start it up again.\"

\"Rather than be intimidated by these officers, we immediately lodged a complaint with various sections of the OFT, wrote to the minister, our local MP and generally kicked up a big fuss. They finally awarded us a 'restricted' real estate agents licence which permitted us to work in the area of short-term holiday rental.\"

Croshaw and Baldwin said the OFT was in the middle of a regulation reform and hadn't informed businesses of their new requirements. The incident serves to prove that no matter how many times you do the right thing, SMEs should always be prepared for unforeseen consequences.

Pushing the envelope - too far

Many SMEs actually fail when their start-up becomes more successful, as the scale of the business becomes bigger than they can handle. Jacky Roberts and Franz Madlener from furniture company Villa & Hut Group said they had reached their limit, and the business was at risk.

\"We reached a 'tipping point' with our franchisees - a point where our ability to service and grow our existing network, and build new relationships - was no longer being serviced properly to the standard that everyone had grown used to and this nearly tipped us over the edge.\"

\"The final straw was a call one day from a prospective franchisee who said, 'It has taken me five calls to track you down - if this is what it's like for me to try and give you my money, I would hate to think what it's like to try and get some help'.\"

The pair's near-death experience highlights a critical need for entrepreneurs to always plan for their company's next step before they get caught out unprepared.