“Grow or die!” So goes the oft-quoted commandment in the world of business. Unfortunately, sometimes the result of following that dictum turns out to be grow and die, especially for young companies that have only recently graduated from their startup phase.
While about half of all businesses founded in a given year survive for at least 5 years, U.S. Department of Labor statistics show that the survival rate drops to only about one third at the 10-year mark. The question is: Why do so many new businesses successfully navigate the perilous start-up phase only to succumb in the years that immediately follow?
In some cases, the answer simply may be that they failed to grow. However, business experts agree that in many instances young entrepreneurs make common but costly mistakes as they begin the growth phase of their businesses. Sometimes those mistakes are serious enough to imperil the existence of the company. Following are ways to avoid some of the main traps that can ensnare a growing young business.
MAINTAIN DUE DILIGENCE WHEN ADDING STAFF
Entrepreneurs who find their businesses growing rapidly understandably are inclined to ramp up staff and fill key positions as quickly as possible, sometimes without full regard for proper hiring practices. This is when seeds may be planted that can grow into major problems in the near future. Interview candidates for important positions several times and include more than one member of senior management. Be sure to check references thoroughly and verify background facts, including college degrees.
BUILD AND PROTECT CASH RESERVES
Do not allow the initial growth phase to consume all of the company”™s capital reserves. Without reserves, the company is in no position to survive unforeseen adverse circumstances, such as a temporary economic downturn, or some operational difficulty. These are problems a well-run company can survive, as long as it has the resources to keep the doors open. Before embarking on an ambitious growth phase, it is important to carefully plan for and evaluate a young company”™s cash reserves.
TEMPER ENTHUSIASM FOR ACQUISITIONS
Yes, an acquisition can be a shortcut to growth and with so many baby boomers reaching retirement age, a great many private companies are for sale. But it is very important to guard against the common traps that befall a young entrepreneur making his or her first acquisition. Among them: Preoccupation with “chasing the deal,” even to the extent that aspects of the existing business are ignored; performing insufficient due diligence on the business being acquired, possibly while under pressure to close the deal; taking on too much debt; and not planning sufficiently for integrating the acquired firm”™s employees and operations.
USE CAUTION WHEN RELYING ON
INDEPENDENT CONTRACTORS
Pressed to finance growth, entrepreneurs sometimes elect to fill some functions with workers classified as independent contractors rather than employees, thereby saving on payroll taxes and employee benefits. Be aware, however, that the rules defining which workers can legally be classified as independent contractors are complex. Federal and state agencies are cracking down hard on businesses that misclassify employees. The financial penalties for improperly classifying a worker can be ruinous.
The issues addressed above cover some of the steps that can help an emerging company safely grow. Entrepreneurs who have triumphed over the startup phase and are poised to lead their organizations to greater success should take pride in their accomplishments, while also guarding against the overconfidence that can blind them to potential pitfalls on their path.
Laura Burkett is a district manager in the Purchase office of Insperity Inc., a national human resources and business performance consulting company with $2.6 billion in revenues in 2015. For more information, call 800-465-3800 or visit insperity.com.
