Prepare for the worst now — you won’t have time to do it the right way when things go south in a hurry
Many business owners may hate to acknowledge it, and dread the day it ultimately comes — but at some point in their entrepreneurial endeavors, something bad is likely to happen to their business.
If there’s something positive that can be taken away from this realization, however, it’s that more often than not crises can be planned for.
According to local public-relations guru Gerald Baron, whose strategic-communications firm, Baron & Company, has aided hundreds of businesses going through various dilemmas, about 75 percent of business crises are visible and known to management ahead of time. In other words, they can spot the smoke before there’s a major fire.
“That means in most cases businesses have the opportunity to identify a problem and deal with it,” he said.
First and foremost, because many problems can be planned for, disaster contingencies and crisis management should be included in companies’ annual strategic plans, added Tom Dorr, director of Western Washington University’s Small Business Development Center.
In planning ahead, businesses can be prepared for worst-case scenarios. However, said Dan Robbins, a counselor with the local chapter of the Service Corps of Retired Executives (SCORE), an entrepreneur education organization, “If you don’t have a plan to begin with, then chances are you’re going to be scrambling in a crisis.”
Here are some suggestions from local crisis-management veterans on how to plan for and respond to a few common crises.
Crisis: Your business is in the public eye for unfavorable reasons
Depending on the seriousness of what’s being said — and whether it’s true or not — that information has the potential to ruin your business, said Baron, also the author of “Now Is Too Late: Survival in an Era of Instant News,” a blueprint for crisis management.
“A lot of times, people may think a reputation problem can’t kill a business, but it can,” he said.
One way businesses can squelch rumors or falsehoods in their early stages, find out where they’re coming from, or get the correct information circulating, is by contacting a pre-selected group of people with close ties to the company, such as customers or stakeholders, said Baron.
“You’re dealing with trusted people and you can let them in on what your concerns are and ask them what they’re hearing,” he said.
Another way to kill a rumor — say for instance that your business is closing — is to get the correct message out to as many people as possible, possibly using the media to get the message out.
“There’s not a lot to lose by communicating loudly,” Baron said. “It might be a good idea to buy an ad. Just address it head on.”
No matter what the situation, Baron said, he suggests business owners personally keep the people who are most important to their company abreast of all situations as a way to maintain a positive relationship and make sure they get the full story.
“One thing I usually advise clients, when they’re dealing with a reputation issue of any kind, is to look to the people on whom their future rests,” he said. “They need to know who those people are and be able to communicate with them as directly and quickly and openly as possible. They need to pick up the phone and call the 50 or 60 people who are most important to the future of the organization and fill them in on the situation.”
While business owners may need to go to the media at times to clear misunderstandings, other times the media will come to them — and want answers immediately.
Again, Baron said, have a plan already in place that outlines what you intend to do and what your goals are, and have a designated company spokesperson ready to respond to the inquiries.
“Understand and deal with the media,” said Baron, who served as the spokesman for Olympic Pipeline after the deadly 1999 explosion. “You need to be fast because we live in an instant world.”
In addition, he suggests, don’t refuse to talk to the media because a ‘no comment’ or refusal to comment can be viewed by others as an admission of guilt.
Finally, if handled well, said Baron, positives can come out of a reputation crisis, especially if it’s dealt with well, early on.
“Crises often have the opportunity to enhance your credibility,” he said. “People can build trust in you if it’s handled correctly.”
Crisis: Your business just lost its best customer or account
First, said SCORE’s Robbins, it’s not wise to rely on one business for more than 50 percent of your profits.
“Never put all your eggs in one basket. As enticing as it is, it could put you under,” he said. “When you only have one client, you’re at the mercy of that client.”
For example, Robbins said, a giant retailer could place a huge order with a smaller company, get that company ramped up to employment and production levels it’s never seen before, and then suddenly announce they plan to drop the product completely.
“The first thing you’ll have to do is scale back or get rid of employees,” he said.
Dorr said businesses that depend on only a few clients or customers should be seeking additional opportunities.
“I’d push my sales staff to diversify and make sure we’re not resting on our laurels with one or two clients,” he said. Also, he said, continuously make sure those clients are happy.
“Studies have shown the No. 1 reason businesses change suppliers is because they felt their business wasn’t cared about,” Dorr said.
If a business does lose a major customer, Robbins said, they should have that possibility already addressed in their business plan.
The plan should have recently identified a list of potential new customers and ways to get their business. Also, it should identify what competitors are doing and ways to do those services better.
Before writing off a lost client, said Dorr, a business owner should go back and find out what went wrong.
“Take ownership, learn from the experience and make corrections,” he said.
Crisis: Your business just incurred a significant cost increase
In the event of an unexpected cost increase, said Dorr, a business owner should do an immediate financial analysis to determine their new break-even point and then figure out how much they’ll have to raise prices to maintain their current profit margin.
Said Robbins: “Every cost increase, one way or another, has to be passed on to the consumer. You have to pass that (increase) on to the consumer immediately. When the vendor raises their price, you have to raise your price.”
One way to offset increased costs is by implementing a surcharge, he said.
For example, if a flower-delivery business is grappling with increased fuel costs, it could increase its delivery charge. Flowers would remain the same price but the delivery charge could be raised from $5 to $7.
In addition to businesses raising prices, they can also look at ways to cut costs. Dorr said restaurants, for example, could reduce serving sizes of meals but continue to charge the same price for them.
An increased cost from a vendor can also be an opportunity to search for a new supplier. Even before a cost increase occurs, businesses should know who their vendors’ competitors are.
“Go out for bids to keep costs down,” Robbins said. “If one guy raises his price, the other guy might be hungrier for your business and you can go to him.”
Crisis: It looks like you’re going to have to file for bankruptcy
The need to file for bankruptcy, say many bankruptcy attorneys and accountants, shouldn’t come as a surprise to business owners.
“If you have an accountant, you should be doing an income statement and balance sheet once a quarter, and with regular financial-statement analysis you can tell if your cash flow is going down the tubes,” said Bellingham accountant Gene Bell.
For business owners without professional financial help, said accountant Dennis Archer, a warning sign that a business is failing is any time your current liabilities are greater than any cash you’ll have in the next 30-day period.
Also, added bankruptcy attorney Tom Lester, of Lester & Hyldahl, “If you ever have difficulty making taxes, that seems to be the greatest sign you have big problems. If you’re not making taxes, that means you’re robbing Peter (the IRS) to pay Paul (employees), and Peter’s going to be mad.”
Once a business owner realizes that filing for bankruptcy is imminent, to avoid accumulating additional taxes, they should attempt to close the business as soon as possible, no matter how hard a personal decision it may be.
“When things aren’t going right, if you’re in business and you’re sensitive to your business, you can’t stick your head in the sand and say the economy will turn around next week,” bankruptcy attorney Peter Arkinson said. “It’s hard for a person who starts a business to admit that the business is failing. In this country we teach success and if you work hard and do a good job you’ll be successful. The reality of life is that sometimes, no matter how hard you work, you may still not succeed, even through no fault of your own.”
When deciding when to close, Lester said, business owners should take into account any losing business cycles, to avoid losing even more money. Also, to recoup some money, owners should consider the possibility of selling any specialty equipment they own.
As a business is closing down, Lester said, owners should also contact their creditors and attempt to negotiate any arrangements that may allow them to save on their debts, and pay as many taxes and wages to employees as they can.
All tax returns must be completed by the time of the initial meeting with creditors, he said, or, under new bankruptcy laws (see the November BBJ), the bankruptcy will be dismissed.
Despite the feelings of defeatism that may come with filing for bankruptcy, those filing should not forget to look to the future.
Oftentimes, people who have filed for bankruptcy go back to work focusing on the aspect of their previous business they did best or, eventually, opening a similar business.
“People must decide what they’re going to do in the long term,” Lester said. “Most people think their life has ended but they need to take a step back and do an inventory of what they do well, identify their strengths and what they’re going to do after the dust settles.”