Small Businesses Destined for Failure

by Mr. Cheap

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Confucius says “Man without smiling face should not open store”

When I lived at Bathurst and St. Clair, in Toronto years ago, there was a steady stream of new businesses opening and closing.  It was great for me, as I loved to try new restaurants, but it got to the point where I could tell when a small restaurant or independent retail store was going to fail.  I wish there was some way to make money off of betting on a small company’s failure, but I was never able to think of a way to do so.

The common factor in the businesses destined to fail was that the owners were pretty sour.  One Turkish restaurant opened up and I ate there once or twice a week for months.  Every time I came in, one of the family members would take my order stone faced while other family members gave me malevolent looks.  The food was decent, and they did it to everyone so I didn’t take it personally, but I couldn’t understand how they expected to build a business treating customers that way.

Another family tried to open a Dollar-store style liquidation store.  Similarly, they’d act like they were doing people a favour selling cheap junk.  They used to always post misleading signs (like “1/2 price off everything”, and when you got to the cash it turns out whatever you were buying wasn’t part of “everything”).

In both cases I’m sure the families lost a ton of money on their business ventures, and probably console themselves with the old chestnut “most businesses fail in the first 5 years” (which apparently isn’t true).  I feel bad for anyone who fails at starting a business (I think it’s great when people try to start a business), but I really think they could have had a much higher chance at success if they’d been nice to their customers (it’s a wild and crazy concept, I agree).

This is fairly widespread, when I moved to Pape and Danforth I tried out a new Caribbean restaurant that was opening right as I moved in.  I ordered a meal, paid, and when he brought it out there wasn’t any coleslaw (which was listed on the menu).  I asked if I could have some coleslaw, and the guy (who I *think* was the owner) told me “Sorry, we’re all out.  I’ll get you next time!”.  There wasn’t a next time.  If you’re going to list something on your menu, charge full price then not give the person part of their meal, you aren’t going to get repeat business from Mr. Cheap.  I haven’t checked since I moved away, but I’m sure he’s shut down by now.

It’s painful to admit as a techie, but businesses need to be sales driven, especially at the beginning.  It’s crazy to do your initial marketing, have people from the neighbourhood coming into your store out of curiosity, then treating them badly and making sure they don’t come back.

Some people might object to forced friendliness to all their customers and say “I’m opening a business to be my *OWN* boss, not to suck up to everyone who walks through my door!”  If this is someone’s attitidue (viewing being friendly as “sucking up”) they definitely shouldn’t try to run a restaurant or retail business (and should probably have someone else deal with customers if they open another type of business).

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{ 10 comments… read them below or add one }

1 Mike

I didn’t know that stat about failing businesses wasn’t true.

Customer service is often very poor but I usually assume it’s just a low-paid disgruntled employee and don’t worry about it too much – even though I don’t like it.

As for doomed businesses – once I saw a closed-down store that had a “coffee and spring roll” sign out front which I thought was kind of funny. :)

2 Mr. Cheap

Yeah, I always believed it too (that site was the first time I saw anything arguing against it, they make a reasonably good case against it though).

I expect bad service from employees, but it always boggles my brain when you get it from the owner.

3 Chris

My wife & I always shake our heads at the owners (or sales-incented employees) of businesses that are not doing so well. Often they will hang around in, or just outside, the front door – just waiting for someone to come in their place of business. From the customer’s perpsective (at least mine) nothing screams ‘stay away’ like a person who looks ready to swoop in on you the moment you show some interest in what they are selling.

I live very close to the Danforth in Toronto, and the other ‘head shaker’ for us are the endless stream of poorly-capitalized businesses that seem unwilling to spend a single dime or put in any effort to make their businesses anything above marginal. You’ve all seen the offences: terrible ‘home-made’ signage, atrocious spelling errors, dirty sidewalks, dirty windows / shelving, weeds around building’s edge, etc. I know many of these business owners are struggling, but I have no sympathy – if an owner isn’t willing to put in the minimum of effort to even keep their business clean, why should I patronise them? If I have to work for my money, why shouldn’t they have to work for theirs?

4 nobleea

I think 50% of new business fail is high, but the 4% listed in that site is probably way too low.

50% of new restaurants certainly fail. Probably for a lot of the reasons you’ve mentioned here.

5 Alexandra

Hmm, I guess there are some that fail because of bad customer service, but also some that survive and even thrive despite it. There is a coffee shop at Bathurst and Queen where the worker took the change from my coffee and deposited into the tip jar without asking or even looking at me. I was outraged, and asked to speak to the owner. It was her!! I was even more outraged because owners of a store should not be getting any tips at all, yet here she is with a tip jar.

I never went back again, but due to it’s prime location, the place is still thriving.

6 Dividend Growth Investor

Hmm I think that the interpretation that few businesses fail is misleading. It takes a look of the number of failures and compares it to the total number of businesses, and is not really looking at how long these businesses were operational for.

I could say that 1.5 mln new businesses were added and .8 million closed shop. I would say that at least 50% of new businesses would close shop somewhere from 1 to 5 years from the opening..

7 Henry

I think it really depends what you mean by small business. A lot of contractors are sole proprietors. Does that mean they really own their own “sole proprietorship” business? In many cases, sole proprietorship can be highly successful to due to the support of an established business or corporation.

If you factor contractors who own a “sole proprietorship” business, the success rate of small business should be quite high.

8 Mr. Cheap

Henry: I suspect you’ve hit the nail on the head. They cast the net pretty wide what is considered a “business” (since the 4% figure was taken from government data, it’s probably pretty broad).

9 Thicken My Wallet

If you read the D & B report, it claims (from memory) that one of the leading causes of business failure (which I include as forced termination rather than complete broke bankruptcy only) is bad management.

You are 100% correct. A good chunk of my friends are entrepreneurs (like attract like) and the ones who do well love their business and project it. The ones who struggle leapt into a business not because they loved it but because it was “hot” (everyone seems to be designing apps for smart-phones but how many people love that space?) and they resent the business because they realize they have to spend tons of time on something they don’t love.

The modern issue with customer service is that everyone is so thin-skinned on both sides of the table. If you ever have a chance go to Singapore and see how they school North American customer service. At hotels, they have photos of all their guests and every morning, staff are briefed on who is staying at the hotel and to greet them (as Mr. or Miss not “hey you”). Shocks the crap out of you the first time they do it but its very respectful and humbling.

10 Mr. Cheap

Nelson: I think it’d be a very enticing idea too, but I have no idea what a market like that would look like. Who would be selling the contract? If it was the owner themselves, they’d a) be highly motivated to stay in business until the contract expired & b) be unwilling to tie cash up to pay out the contract when / if they did close up shop.

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