Description
Description explain about journal of small business and enterprise development.
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Published in:
Journal of Small Business and Enterprise Development, Spring, 2002.
Learning the hard way:
the lessons of owner-managers who have closed their business
David Stokes
Robert Blackburn
Small Business Research Centre
Kingston Business School, Kingston Hill, Kingston-upon-Thames, KT2 7LB
Tel. 020 8547 7218; fax 020 8547 7140
email [email protected] [email protected]
Abstract
There is a tendency to associate business ‘closure’ with business ‘failure’, confusing
owners that close a business with ‘unsuccessful’ entrepreneurs. This article reports on a
study into the experiences of business owners who have left their business. Three stages
of research, including interviews and a postal questionnaire, tracked businesses that
closed, what the owners did next and what they learned from the experience. The results
suggest that some common assumptions need challenging in order to remove the stigma
from closing down a business. The financial health of the 387 businesses that closed in
the survey varied with nearly half described as ‘ailing’ financially and 29 percent
described as ‘thriving’. 70 percent of owners who had closed a business were
encouraged by their experiences and still wished to run their own business. Over 60
percent had acted on this by either starting a similar or new business, or continuing with
another business of their own. Only 29 percent returned to employment or
unemployment and one in 10 retired.
Even if they had not gained financially, many owners still believed they had benefited
from their experiences of running a business. They reported that their skills had
improved especially in personal development areas. They felt they had learned
particularly about managing trust and relationships, marketing, finance, self- management
and motivation. When asked if there was one particular experience they would like to
avoid, owners particularly cited financial and tax problems, and issues of trust.
The overall conclusion is that the closure process can represent a positive, learning
experience. Even owners who have had unsuccessful ventures are motivated and more
able to make it work next time because of lessons learned. This provides further support
for the concept of the serial entrepreneur.
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Introduction
This article focuses on an area of growing interest in small business and entrepreneurship
research: the process of business closure and owner-manager exits. Although much has
been written on small business formation and growth, less is known about the
discontinuation of enterprises. In particular, there is insufficient research into the
behaviour and experiences of the entrepreneur in what is considered to be the final stage
of a business’s life cycle. Little is known about the experiences and attitudes of owners
in the closure process: whether they consider the closure as a mark of failure, what they
have gained from the experience and what they intend to do next. The aim of this article
is to contribute to our understanding of business closure from the perspective of the
owner.
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Business closure and failure
Many businesses close every year - between 350,000 and 400,000 in the UK in recent
years, or approximately 10 percent of the total stock of 3.7 million businesses (SBS,
2001). A crucial problem in the literature on business closure and owner-manager
experiences was identified over 15 year ago by Scott and Ritchie (1984: 49): "In our
examination of the way in which we view failure and the difficulties thrown up by our
inability to produce clear definitions, the general tone has followed the cultural norm that
failure is a negative event". Thus there are a number of important issues relating to the
literature on these discontinued businesses: a) definitions of the terms involved, b) a
tendency to associate closure with failure, and c) a focus on the business, rather than the
owner, as the unit of analysis.
a) Definitions. There are problems relating to the use of various terms involved in
research into business closures. In particular, definitions of business ‘closures’,
‘exits’ and ‘failures’ are confused and often overlapping. ‘Closure’ can be
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This research was sponsored by HSBC, and conducted by the Small Business Research Centre of
Kingston University. The authors are grateful for the support of the bank and the time given by the owner-
managers to conduct this research. The views expressed in this article are those of the authors.
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categorised as the inability of the business to survive and thus represents a
discontinuance of the business (Keasey and Watson, 1987; Hall, 1995). ‘Failure’ is
generally regarded as the discontinuance of the business due to a lack of adequate
financial resources (Everett and Watson, 1998). ‘Exit’ is used in several senses; it
can refer to the exit of the business from trading in a specific market or from
producing a particular product (Siegfried and Evans, 1994). It can also refer to the
end of an owner's participation in the business, as in the search for ‘exit routes’ by
entrepreneurs wishing to sell up or exit from a business.
b) ‘Closure’ or ‘failure’? There is an underlying tendency to associate business
‘closure’ with business ‘failure’, implicitly assuming that most owners that close
down their business have been unsuccessful in some way. The issues relating to
definitions cited above partly stem from this confusion. This is exacerbated by an
over use of life-cycle concepts, referring to the ‘deaths’ or ‘mortality’ of businesses,
which also have negative associations. There are clearly a whole range of reasons
why businesses close, from a successful sale at one extreme to involuntary liquidation
at the other, but some writers still refer to them all as ‘failures’ (e.g. Bruderl et al.,
1992). This is symptomatic of a tendency to stigmatise owners involved in business
closure as ‘failed entrepreneurs’ who, as a result, often find it harder to obtain credit
if they re-open another enterprise. For the purposes of this research, a business
closure was defined as a situation in which a business entity discontinues in its
existing form. This could be for positive or negative reasons.
c) Unit of analysis. Most closure research has focused on the business rather than the
owner. Previous studies have tended to concentrate on reasons for failure (e.g. Birley
and Niktari, 1995), models for predicting failure (e.g. Argenti, 1976; Keasey and
Watson, 1987) and turnaround strategies for ailing businesses (e.g. Blackwood and
Mowl, 2000). Few studies have considered the fate of the business owner, other than
in terms of ‘human capital’ as an explanatory factor in the demise of the business.
One reason for this is that much early research into closures originated in the field of
business economics (Everett and Watson, 1998), and was conducted using datasets of
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discontinued business entities such as VAT de-registrations and receivership or
liquidation records (e.g. Hall and Young, 1991; Nucci, 1999). More recently,
research into entrepreneurial behaviour has considered the role of the owner in
business closures, but often in search of distinctions related to gender or ethnicity
rather than a focus on their experiences and what they did next. For example,
Kalleburg and Leicht (1991) and Carter et al. (1997) investigated if small businesses
headed by women were more likely to close than those headed by men. However,
what happened to the enterprise and the owner-managers as separate processes
remains relatively unexplored. The unit of analysis in this paper is the business
owner. An owner’s exit describes the act of departure from business ownership by the
business owner. Thus a distinction is made between the business that closed and the
owner who exited from it.
Patterns of closure
Studies on business closures tend to report closure rates typically ranging from 3 to 9 per
cent of the total business stock per annum (Birley, 1986; Bates and Nucci, 1989; Barclays
Bank, 2001). However firms do not close at uniform rates; some patterns have emerged
from the statistics in the business economics literature (e.g. Hall, 1995; Nucci, 2000):
a) Closure rates are highest in the early years after start-up, and decline as businesses
age. Younger firms tend to close at a higher rate than older ones.
b) Smaller firms are more likely to close than larger ones. Micro-firms employing less
than 10 people close at a much higher rate than small firms employing up to 50
people, which in turn are more likely to close than medium sized companies.
c) Some sectors have higher closure rates than others. For example, manufacturing
firms are less likely to close than those in construction.
In other words, as a firm becomes larger and older its chances of survival improve.
Statistically this has been calculated in one survey as a 1 per cent change in firm size
leads to a seven per cent change in the probability of survival, and a one per cent change
in age leads to a 13 per cent change in the probability of survival (Evans, 1987).
Although these patterns of closure and survival are of interest particularly in guiding
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macro-economic policy, they do not inform us of the eventual fates and experiences of
owners facing the prospect of closing their businesses.
Reasons for closure
The literature on business discontinuance is dominated by studies of the reasons for
closure or failure (e.g. Berryman, 1983) and attempts to build models that can predict
failure (e.g. Altman, 1971). The origins of business failure have been categorised by i)
business functions and where they originate (internally or externally), ii) whether they are
strategic or operational in nature, and iii) whether they are within or outside of the firm’s
control (Boyle and Desai, 1991). Conversely, three groups of factors affecting the
survival, or non-closure of an enterprise have been similarly categorised as i) individual
characteristics of the founder ii) attributes and strategies of the business itself and iii)
conditions in the business environment.
Accounting and finance issues have often been cited as the core reason for business
failure (Altman, 1971; Boyle and Desai, 1991; Cromie, 1991). Altman (1971) developed
five equations/ratios as determinants of failure for small business in the USA: working
capital, retained earnings, profits and sales expressed as ratios to total assets, and market
value as a ratio to debt. These key internal ratios all contribute to a variable classified as
‘Z’, which indicates a company’s propensity to fail. The use of financial ratios was soon
questioned for its reliability and several authors sought to identify other ways in which
failure could be predicted.
Argenti (1976) argued that the use of financial information to define failure posed several
problems because financial ratios were mainly symptoms of business failure and were
unable to yield insightful results. He devised a business failure model that utilised
several non-financial indicators including: managerial structure, inadequacies of
accounting information systems and audit lags, the manipulation of financial statements
and gearing. The hypotheses developed by Argenti were tested in an empirical study of
73 failed and 73 surviving independently owned companies in the North of England by
Keasey and Watson (1987). They found that use of the Argenti hypotheses only
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improved small business failure predictions by a margin as compared with information
obtained from financial ratios. However they suggested that other, non-financial
variables, could prove to be better predictors for small business failure.
Many researchers have attempted to categorise these variables that are associated with
business closures. Berryman's (1983) review of the literature on small business failure
and bankruptcy suggested six categories for reasons for failure: accounting, marketing,
finance problems, other endogenous factors, exogenous factors and the behaviour of the
owner manager. Some studies allowed the owners themselves to identify reasons for
failure (e.g. Cromie, 1987). Others asked the opinions of experts; for example Birley and
Niktari (1995) identified 10 key failure themes based on the opinions of accountants and
bankers.
Thus, the literature on business closure has made great strides to identify the causes for
closure and classify these reasons. The more sophisticated research of this genre has
tended to present an endogenous-exogenous model (e.g. Watson and Everett, 1996),
which then ranks the order of importance of the various factors or classification of
factors. Based on these models, policy makers can then address the reasons for failure
and target specific weaknesses in small business owners’ strategy with the ultimate aim
of reducing closure rates. We would argue, however, that, whilst the progress this
literature has made in understanding the causes of failure is commendable, it has only
begun to develop an understanding of the portfolio of possible reasons for business
closure, and the human experiences involved. An over-focus on preventing business
closure may be diverting attention from more significant areas of enquiry including the
owner-manager learning experiences in the closure of the business which could be of
benefit to new business formation.
Entrepreneurial personality and learning
Whilst numerous studies of business closure have divided the causes of small business
closure into exogenous and endogenous factors, some have concentrated more
exclusively on the role of owner-managers (e.g. Beam and Carey. 1989). If the
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motivations of owner-managers are fundamental to understanding the entrepreneurship
process, they should also help determine the reasons for, and attitudes towards exit
(Littunen, 2000). Distinct schools of thought have emerged in relation to the influence of
the entrepreneur on their business. The ‘trait model’ (Chell, et al., 1991) emphasises
distinct characteristics of the entrepreneur, focusing on the factors that led them to start
the company and the features of their personality that makes them successful
entrepreneurs. The ‘contingency model’ (Gilad and Levine, 1986) proposes that the
environment and the current status of that environment demarcate the characteristics of
the entrepreneur, so that it is the interaction between the individual and the environment
that leads to the development of personal characteristics. In the process of business
closure, the environment is often subject to rapid change. Does this imply that closure
offers exceptional opportunities to develop the owner-managers’ personal characteristics?
Formal interventions aimed at developing owner-managers through entrepreneurship
education may improve the chances of survival of a business. However, evaluations of
such programmes cast uncertainties on their effectiveness (Garavan and O’Cinneide,
1994). Gibb (1997) considered the impact of traditional training and development on
small firms, recognising two types of learning – adaptive learning in order to cope with
change and generative learning involving creative thinking. He recognised small business
owners’ preferences for active learning within their own organisation rather than
imposed, traditional types of education. Theories of organisational learning are derived
predominately from large firms but a number of authors have recognised the potential of
these concepts for entrepreneurial development (e.g. Chaston et al., 1999).
Serial Entrepreneurs
More recently, the literature (and especially the grey literature) relating to business exits
has taken a more positive perspective through a focus on ‘serial entrepreneurs’. These
are individuals who have founded and operated multiple start-up companies. According
to Ryan (2000), serial entrepreneurs thrive off the psychological reward of making an
impact as opposed to the wealth to be gained from operating successful ventures. These
entrepreneurs are risk takers, having built sufficient wealth (relative to their comfort
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level); they will invest their money on new ventures that often tend to be vague visions of
an unsolved problem. Ryan (2000) further suggests that serial entrepreneurs view failure
as an experience, which will make them stronger and bolder to take on new risks.
Some entrepreneurs seem to thrive on the gruelling early stages of starting and building a
business, and prefer to hand it over for others to manage whilst they return to the start-up
process (Fraone, 1999). Clancey (2000) claims that serial entrepreneurial behaviour is
habit forming and that most serial entrepreneurs tend to be intrigued by the possibility of
exploring several opportunities simultaneously, more than the financial benefits of
operating successful ventures. However the literature on serial entrepreneurs tends to
portray them as a rather special breed, the exception rather than the norm in business
ownership.
The research reported on here is part of a larger study into the role of entrepreneurs in
growing and closing businesses. It seeks to:
a) Investigate what happens to business owners who close, or exit from a business.
What do they do next?
b) Develop a better understanding of the attitudes and future intentions of business
owners who close a business. Is the experience encouraging or discouraging towards
new ventures?
c) Gain insights into what the owners perceive they learned during the completed life
cycle of the business. Which experiences do they regard as lessons for the future?
Methodology
The research comprised a three-stage data collection process: interviews with advisors, a
postal survey of owner-managers, and telephone or face-to-face interviews with a subset
of owner-managers. In setting out the agenda for the quantitative study, 20 preliminary
interviews were conducted with bank managers, accountants, solicitors, and small
business advisors and consultants in government and charitable organisations. From these
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early findings, a theoretical framework for business closures emerged and a postal
questionnaire was developed.
One of the greatest barriers to researching closures is finding ex-owner-managers and
businesses that have closed. In this research, we developed our own sampling frame that
sought to be as representative as possible of the range of business closures and exit types,
rather than relying on one source, such as official receivers’ data that reflects only a
limited number of types of closure. This was derived from as wide a source as possible
and comprised HSBC customers including business account closures (66% of
respondents), Dun and Bradstreet lists of existing businesses (25%), and closures
identified during research on other projects by the SBRC, Kingston University (10%).
The postal questionnaire was piloted with business owners who had experience of closing
a small business and the final version was posted throughout May and J une, 1999 to
2,719 business owners. The overall response rate was 14% with a total of 387 usable
responses returned. The low rate overall was primarily caused by the poor response of the
Dun and Bradstreet lists (5%) although this was to be expected since it was a more
general list of businesses in existence rather than exits exclusively. The HSBC customers
within the sample had a higher response rate (36%). The characteristics of the enterprises
from the different sources were cross-checked and showed a high degree of conformity.
The final question asked the respondents if they were willing to be interviewed and 20
former owners were interviewed to provide greater insights into their past experiences
and future plans. The quantitative data arising from the questionnaire was analysed using
the Statistical Package for the Social Sciences (SPSS). The resulting qualitative data was
analysed using general analytical procedures (Miles and Huberman, 1994) whereby
common themes are identified and categorised from the face-to-face interviews.
Results
Financial condition of the business
Owners were asked to appraise the financial situation of the business when it was closed
on a five-point scale from ailing (1) to thriving (5). Almost half (48%) of respondents
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described their business as ailing, whilst 29% said it was thriving (Figure 1). A quarter
(24%) said it was neither ailing nor thriving, implying a no-growth, but relatively stable
financial situation. Thus, just over half (53%) of respondents closed a business that was
not seen to be in financial decline. Clearly, business closure is not merely about reacting
to financial difficulties.
INSERT Figure 1 Financial condition of the businesses at the time of closure
What happened to the business owner after closure?
The economic activities of owners once they had closed a business were quantified as
illustrated in Figure 2. A key finding of this research is that a majority (62%)` continued
as a business owner in some way. Only 29 percent of owners sought non-business
ownership employment after closing their business, and some owners retired (9%). Most
of those seeking to exit business ownership were successful and became employed; some
became unemployed or could not work through illness (7%); others were running their
business part-time and so continued with their existing paid job (3%).
However, the findings confirmed the notion of the ‘serial entrepreneur' in that the
majority of respondents continued as business owners (62%). The preference was to stay
with what they already knew. Some already had other business interests and continued
with these (20%); others continued the same business in a different form (9%) or started
up a similar business (18%). A minority tried something new by starting or buying a
different type of business (15%).
INSERT Figure 2 Business owner exits – what they did next (n=367)
Attitudes to the experience of closing a business
The experience of managing a business that eventually closed, was viewed mainly in a
positive light. The majority (70%) of respondents claimed that they were encouraged by
their experience to continue as a business owner (Figure 3). Only 15% said they were
discouraged. This might be expected particularly from those who had described their
businesses as thriving when they closed. However, even those who had been in financial
difficulties were not put off by their experience. An analysis of those who described
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their business as ‘ailing’ when closed, revealed that 60% still responded that they were
encouraged to have their own business in the future, with only 18% stating they were
discouraged.
INSERT Figure 3 Attitude of owner to business closure (n=379)
Learning from the experience of business closure
From the above analysis, it seems that the majority of respondents viewed their
ownership of a business that closed as a positive learning experience. In order to
establish in more detail what it was that they felt they had learned, they were asked to rate
their skills in various areas compared to when they started the business. From the
literature, a number of internal problems have been identified which contribute to
business closure (Cromie, 1991). These can be grouped into the key functional
categories of managing operations, marketing, finance, personal development, and
managing people (Stokes, 2002). These formed the basis of the skills which owners were
asked to rate. The results are shown in Table 1, which indicates that those skills relating
to self-management were seen to have improved the most.
INSERT Table 1 Rating of skills categories learned (n=386)
Almost three-quarters of respondents said they had improved their skills in personal
management areas (coping with setbacks, self-management, and adapting to change),
higher than any other category of skills. Thus it was not the traditional functions such as
marketing, finance and managing people that improved most overall, but personal
development skills relating to how the business owners managed themselves and coped
with their business environment.
Learning from the experience: lessons for the future
Respondents were asked two open questions in order to investigate particular issues that
had constituted a learning experience. One question focused on positive experiences that
would be useful in the future (Table 2); the second asked about experiences they would
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avoid next time round (Table 3). Some patterns emerged by grouping the responses into
themes.
INSERT Table 2 Experiences found to be useful (n=306)
In considering useful experiences, the theme of trust and relationships was cited by over a
quarter of respondents. Trust was an important issue in a variety of relationships:
partners, relatives, friends, banks, accountants, and government were all mentioned in
terms of the need to build good, trusting relationships. Some respondents expressed this
as a positive factor (e.g. “build a good relationship with your accountant”); others
expressed negative feelings (e.g. “never work with relatives and friends”; “beware of
loopholes in contracts”).
Marketing issues were mentioned by a quarter of owner-managers. The need to
understand the market before starting up was one lesson cited, and watching trends
thereafter was another. Finding customers was a common issue including the need to act
quickly to replace lost customers. It might be expected that financial management issues
would be cited frequently as useful learning experiences, considering that respondents
were all owners of businesses that had closed. However, a relatively small number of
respondents (16%) cited they had gained from their experience in financial matters such
as managing cash flow and understanding how businesses are financed. Financial issues
were seen more as experiences to avoid: financial and tax issues were the most common
theme in the open question on experiences to avoid in running a business as Table 3
below indicates.
Learning from the experience: what to avoid
Trust and relationship issues again featured frequently as experiences to avoid, often
mirroring comments on the previous question on positive learning experiences (Table 2).
Other research has indicated that owner-managers frequently perceive marketing as
representing promotions and selling only, with negative attitudes towards the cost of
these activities (Stokes et al., 1997). This was supported by advice from respondents in
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this research to avoid or reduce the costs of advertising and promotions. Although issues
arising from the management of people were raised by only 8 percent of respondents,
many of them did not employ any or many staff (47% of the sample employed from 0 to
4 people)
INSERT Table 3 Experiences to be avoided (n=296)
Conclusions and discussion
Our review of the literature on small business closure concluded that:
a) Most of the relevant studies have focused on the factors associated with the relative
‘success’ or ‘failure’ of small businesses. There has been a tendency to associate
business closure with business failure, or to assume that the majority of closures
represent unsuccessful business ventures.
b) A large number of studies have attempted to build or test models for the identification
of business failure and its prevention and cure. Again, this has been driven by an
agenda which seems to imply that business closure is negative, rather than part of
dynamic economy in the Schumpeterian sense.
c) There has been a conflation of the closure of the business with the business owner.
The preferred unit of analysis has been the business rather than the entrepreneur.
This has hampered serious studies of ex-owner managers, particularly from a learning
perspective.
d) Very little research has been conducted into the range of exit rationales and
experiences of small business owners. One of the reasons for this is that it is very
difficult to identify and contact owners whose businesses are likely to close or have
already closed. Thus there are few adequate data sources on which to study business
closure, these being dominated by financial or economic sources.
This paper has presented some new data seeking to fill some of the gaps in the literature
by focusing on the experiences, attitudes of owner-managers during the business closure
process. Nearly 70 percent of owners who had closed a business were encouraged by
14
their experiences and still wished to run their own business. Even those who described
their closed business as ‘ailing’ were encouraged by the experience - 60 percent still
wanted to run their own enterprises. The majority had acted on this inclination by either
starting a similar or new business, or continuing with another business of their own. As
some owners retired (9 per cent), only 29 percent returned to employment or
unemployment. This suggests a broad typology of owners who exit by closing a business
as shown in Figure 4.
INSERT Figure 4 Typology of Owner Exits from Business Ownership
Only a minority can be described as truly ‘departing’ when they exited, as most in fact
are soon ‘returning’ to business ownership. A third category are ‘retiring’, having found
their exit route from ownership. This has considerable implications for business
educationalists and policy makers. In summary, a person who has closed a business is a
very likely candidate to become involved in a new venture, and should therefore be a
prime target for those seeking to advise or support new businesses. Owners, therefore,
can be regarded as leaving a business through a ‘revolving door’, rather than a ‘one-way
exit’. Many return to start the entrepreneurship process again.
Even if they had not gained financially, owners had still benefited from their experiences
of running a business. They reported that their skills had improved particularly in
business planning, and building a customer base. However they improved most in
disciplines relating to personal development such as self-management and coping with
setbacks rather than the traditional functional areas such as marketing and finance. They
felt they had learned particularly about managing trust and relationships, personal
development, marketing and finance. When asked if there was one particular experience
they would like not to repeat, owners cited many problems to avoid including financial
issues such as cash flow and tax problems, but again the issue of trust was frequently
mentioned.
15
The message from the study for researchers and policy-makers is clear: distinguish
between businesses that close and the owners that close them. Although a business entity
may disappear, the owner who created it is likely to re-enter or continue in business
ownership. Whilst the notion of serial entrepreneurs is confirmed, they seem more
widespread than most commentators imply. Even owner-managers who have had
unsuccessful ventures have been shown in our research to be motivated to start another
enterprise. In their view, they also appear to be better equipped to make it work next
time because of lessons learned. Our thinking on the concept of the small business needs
to be broadened and the notion that permanence is positive, whilst short-lived enterprises
is a negative phenomenon, needs addressing. This may then form the basis for support
agencies to provide appropriately informed advice and products for these owner-
managers leaving their business. The research also implies that much of the advice on
start-up and business development is targeted at an inappropriate level because of the
underlying assumption that owner-managers are doing it for the first time. More support
is required for the entrepreneur who is no longer a novice but who nevertheless is starting
or developing a relatively new venture.
The concepts of organisational learning in entrepreneurial ventures have emphasised the
preferences of entrepreneurs to develop through action learning. The results presented
here indicate that the business closure phase can provide valuable experiences to inform
the entrepreneur in their next venture. It is suggested that more qualitative research in the
form of case studies, would be a way forward to build on these ideas. They may for
example build on the work of Rae (2000) who advocates the use of life stories and
narrative based research as a means of generating new insights into the entrepreneurship
process.
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Keasey, K. and Watson, R. (1987) ‘Non-Financial Symptoms and the Prediction of Small
Company Failure: A Test of Argenti’s Hypothesis’, Journal of Business Finance and
Accounting, 14, 335-354.
Littunen, H. (2000) ‘Entrepreneurship and the Characteristics of the Entrepreneurial
Personality’ International Journal of Entrepreneurial Behaviour & Research, 6 (6) 295-
309
Miles, M.B. and Huberman, A.M. (1994) Qualitative Data Analysis, Thousand Oaks:
Sage.
Nucci, A. (1999) ‘The Demography of Business Closings’ Small Business Economics, 12
(1) 25-39.
Rae, D (2000) Understanding Entrepreneurial Learning: a Question of How?
International Journal of Entrepreneurial Behaviour and Research, 6 (3), 145-159.
Ryan, V. (2000) ‘Anatomy of an Entrepreneur’ Telephony, April, 238 (15) 36-44.
Siegfried, J .J . and Evans, L.B., (1994) ‘Empirical Studies of Entry and Exit: A Survey of
the Evidence’ Review of Industrial Organisations, 9, 121-155.
18
Scott, M. and Ritchie, J . (1984) 'Re-thinking entrepreneurial failure', in Lewis, J .,
Stanworth, J . and Gibb, A (eds.) Success and Failure in Small Business, Gower,
Aldershot.
Small Business Service (2001) SME Statistics for the UK, 2000, SBS.
Stokes, D. (2002) Small Business Management, 4
th
edition, London, Continuum
International Publishing.
Stokes, D., Blackburn, R. and Fitchew, S. (1997) Marketing for Small Firms: Towards a
Conceptual Understanding, Report to Royal Mail Consulting, J uly, Small Business
Research Centre, Kingston upon Thames, Kingston University
Watson, J . and Everett, J . E. (1996) ‘Do Small Businesses Have High Failure Rates?’
Journal of Small Business Management 34 (4), 45-62.
19
Figure 1 Financial condition of the businesses at the time of closure
30%
18%
24%
16%
13%
0
40
80
P
e
r
c
e
n
t
a
g
e
1 2 3 4 5
Situation
Financial situation of the business
AILING THRIVING
20
Figure 2 Business owner exits – what they did next (n=367)
Only 29 percent of owners sought non-business ownership employment after closing
their business (Figure 3). Most of those seeking to exit business ownership were
successful and became employed; some became unemployed or could not work through
illness (7%); others were running their business part-time and so continued with their
existing paid job (3%); and some owners retired (9%).
Figure 3 What happened to the business owner?
Fate of the Business Owner
Sought Employment
Continued as Business
Owner
In Existing Business
Continued
other
existing
business
Continued
business in
different
form
Started/
Bought
different
business
Unemployed
/ill
62% 9%
18%
29%
9%
33%
20% 15%
7% 3% 20%
Retired
29%
Started a business
Employed
Continued
paid
job
Started
similar
business
21
Figure 3 Attitude of owner to business closure (n=379)
Has your experience of managing a business that closed, encouraged or discouraged you to have your own
business in the future?
8%
7%
16%
28%
41%
0
10
20
30
40
50
60
70
80
90
100
Percentage
1 2 3 4 5
Discouraged
Encouraged
22
Table 1 Rating of skills categories learned (n=386)
* Percentage of respondents who rated skills category as improved
* Percentage of respondents who rated skills category as improved
Skills Category Percent *
Personal Development 70
Operations 65
Marketing 62
Managing people 57
Finance 55
23
Table 2 Experiences found to be useful (n=306)
‘Is there one particular experience you feel you have benefited from whilst owning this
business that you consider would be useful if you were to become the owner-manager of
another business?’
Trust/ relationship issues 27%
E.g. Finding suitable partners/ directors. Finding trustworthy staff.
Good relationships with accountants. Never work with relatives/friends
Don’t trust banks or government
Marketing issues 23%
Watch trends/do research before starting business.
Good communications and networking. Promotions and advertising. Dealing with the
public. Quality of service and products. Finding new customers. If customers lost,
actively seek new ones.
Financial management 16%
Financial record keeping. Managing debtors and creditors. Managing cashflow and
overheads. Understanding how businesses are financed. Preserve capital for future
investments
Self-management and motivation 14%
Developed self-discipline/ self-motivation. Hard work/long hours.
Doing everything yourself. Time management and planning
Leadership. Making decisions – don’t postpone difficult decisions.
Self discipline. Confidence
Other management and business skills
People management skills
Taxation and company law
9%
24
Table 3 Experiences to be avoided (n=296)
Is there one particular experience you had whilst owning this business that you would like
to avoid if you were to become the owner-manager of another business?
N=286
Finance/tax issues
Problems with banks and borrowing money. Inland revenue
Insufficient capital. Insufficient investment in equipment. Cash flow problems. Failure to
control finances. Over reliance on overdraft. Too much credit to clients/bad credit
management
Trust/ relationship issues
Equal partnerships/wrong partners/having partners. Being a minority shareholder
Employing relatives/friends. Unsound/unwritten contracts. Trusting people too far
Self management
Lack of confidence/overconfidence. Dealing with all aspects. Working long hours. Being
ill/worrying
Marketing
Lack of selection of customers/taking on low margin work. Conflicts with customers.
Competition. Problems with distributors. Difficulties with trading abroad. Cost of
advertising and promotions.
Management of people
Staff problems. Not managing staff. Lack of delegation. Redundancies
Long term contracts. Insufficient staff
General Management
Lack of experience. Lack of contingency plans
Problems with suppliers
Other
Avoid: franchises; renting; bad advice; litigation, theft.
26%
22%
11%
9%
8%
6%
7%
25
Figure 4 Typology of Owner Exits from Business Ownership
‘Departing’ ‘Retiring’ ‘Returning’
30% 10% 60%
Returning to employment,
becoming unemployed, or
out of work through ill
health.
Retiring from active
involvement having sold or
closed their business
Continued as business owner by
opening or buying a new or
similar business to the one closed
or through the existing ownership
of another business
doc_756821410.pdf
Description explain about journal of small business and enterprise development.
1
Published in:
Journal of Small Business and Enterprise Development, Spring, 2002.
Learning the hard way:
the lessons of owner-managers who have closed their business
David Stokes
Robert Blackburn
Small Business Research Centre
Kingston Business School, Kingston Hill, Kingston-upon-Thames, KT2 7LB
Tel. 020 8547 7218; fax 020 8547 7140
email [email protected] [email protected]
Abstract
There is a tendency to associate business ‘closure’ with business ‘failure’, confusing
owners that close a business with ‘unsuccessful’ entrepreneurs. This article reports on a
study into the experiences of business owners who have left their business. Three stages
of research, including interviews and a postal questionnaire, tracked businesses that
closed, what the owners did next and what they learned from the experience. The results
suggest that some common assumptions need challenging in order to remove the stigma
from closing down a business. The financial health of the 387 businesses that closed in
the survey varied with nearly half described as ‘ailing’ financially and 29 percent
described as ‘thriving’. 70 percent of owners who had closed a business were
encouraged by their experiences and still wished to run their own business. Over 60
percent had acted on this by either starting a similar or new business, or continuing with
another business of their own. Only 29 percent returned to employment or
unemployment and one in 10 retired.
Even if they had not gained financially, many owners still believed they had benefited
from their experiences of running a business. They reported that their skills had
improved especially in personal development areas. They felt they had learned
particularly about managing trust and relationships, marketing, finance, self- management
and motivation. When asked if there was one particular experience they would like to
avoid, owners particularly cited financial and tax problems, and issues of trust.
The overall conclusion is that the closure process can represent a positive, learning
experience. Even owners who have had unsuccessful ventures are motivated and more
able to make it work next time because of lessons learned. This provides further support
for the concept of the serial entrepreneur.
2
Introduction
This article focuses on an area of growing interest in small business and entrepreneurship
research: the process of business closure and owner-manager exits. Although much has
been written on small business formation and growth, less is known about the
discontinuation of enterprises. In particular, there is insufficient research into the
behaviour and experiences of the entrepreneur in what is considered to be the final stage
of a business’s life cycle. Little is known about the experiences and attitudes of owners
in the closure process: whether they consider the closure as a mark of failure, what they
have gained from the experience and what they intend to do next. The aim of this article
is to contribute to our understanding of business closure from the perspective of the
owner.
1
Business closure and failure
Many businesses close every year - between 350,000 and 400,000 in the UK in recent
years, or approximately 10 percent of the total stock of 3.7 million businesses (SBS,
2001). A crucial problem in the literature on business closure and owner-manager
experiences was identified over 15 year ago by Scott and Ritchie (1984: 49): "In our
examination of the way in which we view failure and the difficulties thrown up by our
inability to produce clear definitions, the general tone has followed the cultural norm that
failure is a negative event". Thus there are a number of important issues relating to the
literature on these discontinued businesses: a) definitions of the terms involved, b) a
tendency to associate closure with failure, and c) a focus on the business, rather than the
owner, as the unit of analysis.
a) Definitions. There are problems relating to the use of various terms involved in
research into business closures. In particular, definitions of business ‘closures’,
‘exits’ and ‘failures’ are confused and often overlapping. ‘Closure’ can be
1
This research was sponsored by HSBC, and conducted by the Small Business Research Centre of
Kingston University. The authors are grateful for the support of the bank and the time given by the owner-
managers to conduct this research. The views expressed in this article are those of the authors.
3
categorised as the inability of the business to survive and thus represents a
discontinuance of the business (Keasey and Watson, 1987; Hall, 1995). ‘Failure’ is
generally regarded as the discontinuance of the business due to a lack of adequate
financial resources (Everett and Watson, 1998). ‘Exit’ is used in several senses; it
can refer to the exit of the business from trading in a specific market or from
producing a particular product (Siegfried and Evans, 1994). It can also refer to the
end of an owner's participation in the business, as in the search for ‘exit routes’ by
entrepreneurs wishing to sell up or exit from a business.
b) ‘Closure’ or ‘failure’? There is an underlying tendency to associate business
‘closure’ with business ‘failure’, implicitly assuming that most owners that close
down their business have been unsuccessful in some way. The issues relating to
definitions cited above partly stem from this confusion. This is exacerbated by an
over use of life-cycle concepts, referring to the ‘deaths’ or ‘mortality’ of businesses,
which also have negative associations. There are clearly a whole range of reasons
why businesses close, from a successful sale at one extreme to involuntary liquidation
at the other, but some writers still refer to them all as ‘failures’ (e.g. Bruderl et al.,
1992). This is symptomatic of a tendency to stigmatise owners involved in business
closure as ‘failed entrepreneurs’ who, as a result, often find it harder to obtain credit
if they re-open another enterprise. For the purposes of this research, a business
closure was defined as a situation in which a business entity discontinues in its
existing form. This could be for positive or negative reasons.
c) Unit of analysis. Most closure research has focused on the business rather than the
owner. Previous studies have tended to concentrate on reasons for failure (e.g. Birley
and Niktari, 1995), models for predicting failure (e.g. Argenti, 1976; Keasey and
Watson, 1987) and turnaround strategies for ailing businesses (e.g. Blackwood and
Mowl, 2000). Few studies have considered the fate of the business owner, other than
in terms of ‘human capital’ as an explanatory factor in the demise of the business.
One reason for this is that much early research into closures originated in the field of
business economics (Everett and Watson, 1998), and was conducted using datasets of
4
discontinued business entities such as VAT de-registrations and receivership or
liquidation records (e.g. Hall and Young, 1991; Nucci, 1999). More recently,
research into entrepreneurial behaviour has considered the role of the owner in
business closures, but often in search of distinctions related to gender or ethnicity
rather than a focus on their experiences and what they did next. For example,
Kalleburg and Leicht (1991) and Carter et al. (1997) investigated if small businesses
headed by women were more likely to close than those headed by men. However,
what happened to the enterprise and the owner-managers as separate processes
remains relatively unexplored. The unit of analysis in this paper is the business
owner. An owner’s exit describes the act of departure from business ownership by the
business owner. Thus a distinction is made between the business that closed and the
owner who exited from it.
Patterns of closure
Studies on business closures tend to report closure rates typically ranging from 3 to 9 per
cent of the total business stock per annum (Birley, 1986; Bates and Nucci, 1989; Barclays
Bank, 2001). However firms do not close at uniform rates; some patterns have emerged
from the statistics in the business economics literature (e.g. Hall, 1995; Nucci, 2000):
a) Closure rates are highest in the early years after start-up, and decline as businesses
age. Younger firms tend to close at a higher rate than older ones.
b) Smaller firms are more likely to close than larger ones. Micro-firms employing less
than 10 people close at a much higher rate than small firms employing up to 50
people, which in turn are more likely to close than medium sized companies.
c) Some sectors have higher closure rates than others. For example, manufacturing
firms are less likely to close than those in construction.
In other words, as a firm becomes larger and older its chances of survival improve.
Statistically this has been calculated in one survey as a 1 per cent change in firm size
leads to a seven per cent change in the probability of survival, and a one per cent change
in age leads to a 13 per cent change in the probability of survival (Evans, 1987).
Although these patterns of closure and survival are of interest particularly in guiding
5
macro-economic policy, they do not inform us of the eventual fates and experiences of
owners facing the prospect of closing their businesses.
Reasons for closure
The literature on business discontinuance is dominated by studies of the reasons for
closure or failure (e.g. Berryman, 1983) and attempts to build models that can predict
failure (e.g. Altman, 1971). The origins of business failure have been categorised by i)
business functions and where they originate (internally or externally), ii) whether they are
strategic or operational in nature, and iii) whether they are within or outside of the firm’s
control (Boyle and Desai, 1991). Conversely, three groups of factors affecting the
survival, or non-closure of an enterprise have been similarly categorised as i) individual
characteristics of the founder ii) attributes and strategies of the business itself and iii)
conditions in the business environment.
Accounting and finance issues have often been cited as the core reason for business
failure (Altman, 1971; Boyle and Desai, 1991; Cromie, 1991). Altman (1971) developed
five equations/ratios as determinants of failure for small business in the USA: working
capital, retained earnings, profits and sales expressed as ratios to total assets, and market
value as a ratio to debt. These key internal ratios all contribute to a variable classified as
‘Z’, which indicates a company’s propensity to fail. The use of financial ratios was soon
questioned for its reliability and several authors sought to identify other ways in which
failure could be predicted.
Argenti (1976) argued that the use of financial information to define failure posed several
problems because financial ratios were mainly symptoms of business failure and were
unable to yield insightful results. He devised a business failure model that utilised
several non-financial indicators including: managerial structure, inadequacies of
accounting information systems and audit lags, the manipulation of financial statements
and gearing. The hypotheses developed by Argenti were tested in an empirical study of
73 failed and 73 surviving independently owned companies in the North of England by
Keasey and Watson (1987). They found that use of the Argenti hypotheses only
6
improved small business failure predictions by a margin as compared with information
obtained from financial ratios. However they suggested that other, non-financial
variables, could prove to be better predictors for small business failure.
Many researchers have attempted to categorise these variables that are associated with
business closures. Berryman's (1983) review of the literature on small business failure
and bankruptcy suggested six categories for reasons for failure: accounting, marketing,
finance problems, other endogenous factors, exogenous factors and the behaviour of the
owner manager. Some studies allowed the owners themselves to identify reasons for
failure (e.g. Cromie, 1987). Others asked the opinions of experts; for example Birley and
Niktari (1995) identified 10 key failure themes based on the opinions of accountants and
bankers.
Thus, the literature on business closure has made great strides to identify the causes for
closure and classify these reasons. The more sophisticated research of this genre has
tended to present an endogenous-exogenous model (e.g. Watson and Everett, 1996),
which then ranks the order of importance of the various factors or classification of
factors. Based on these models, policy makers can then address the reasons for failure
and target specific weaknesses in small business owners’ strategy with the ultimate aim
of reducing closure rates. We would argue, however, that, whilst the progress this
literature has made in understanding the causes of failure is commendable, it has only
begun to develop an understanding of the portfolio of possible reasons for business
closure, and the human experiences involved. An over-focus on preventing business
closure may be diverting attention from more significant areas of enquiry including the
owner-manager learning experiences in the closure of the business which could be of
benefit to new business formation.
Entrepreneurial personality and learning
Whilst numerous studies of business closure have divided the causes of small business
closure into exogenous and endogenous factors, some have concentrated more
exclusively on the role of owner-managers (e.g. Beam and Carey. 1989). If the
7
motivations of owner-managers are fundamental to understanding the entrepreneurship
process, they should also help determine the reasons for, and attitudes towards exit
(Littunen, 2000). Distinct schools of thought have emerged in relation to the influence of
the entrepreneur on their business. The ‘trait model’ (Chell, et al., 1991) emphasises
distinct characteristics of the entrepreneur, focusing on the factors that led them to start
the company and the features of their personality that makes them successful
entrepreneurs. The ‘contingency model’ (Gilad and Levine, 1986) proposes that the
environment and the current status of that environment demarcate the characteristics of
the entrepreneur, so that it is the interaction between the individual and the environment
that leads to the development of personal characteristics. In the process of business
closure, the environment is often subject to rapid change. Does this imply that closure
offers exceptional opportunities to develop the owner-managers’ personal characteristics?
Formal interventions aimed at developing owner-managers through entrepreneurship
education may improve the chances of survival of a business. However, evaluations of
such programmes cast uncertainties on their effectiveness (Garavan and O’Cinneide,
1994). Gibb (1997) considered the impact of traditional training and development on
small firms, recognising two types of learning – adaptive learning in order to cope with
change and generative learning involving creative thinking. He recognised small business
owners’ preferences for active learning within their own organisation rather than
imposed, traditional types of education. Theories of organisational learning are derived
predominately from large firms but a number of authors have recognised the potential of
these concepts for entrepreneurial development (e.g. Chaston et al., 1999).
Serial Entrepreneurs
More recently, the literature (and especially the grey literature) relating to business exits
has taken a more positive perspective through a focus on ‘serial entrepreneurs’. These
are individuals who have founded and operated multiple start-up companies. According
to Ryan (2000), serial entrepreneurs thrive off the psychological reward of making an
impact as opposed to the wealth to be gained from operating successful ventures. These
entrepreneurs are risk takers, having built sufficient wealth (relative to their comfort
8
level); they will invest their money on new ventures that often tend to be vague visions of
an unsolved problem. Ryan (2000) further suggests that serial entrepreneurs view failure
as an experience, which will make them stronger and bolder to take on new risks.
Some entrepreneurs seem to thrive on the gruelling early stages of starting and building a
business, and prefer to hand it over for others to manage whilst they return to the start-up
process (Fraone, 1999). Clancey (2000) claims that serial entrepreneurial behaviour is
habit forming and that most serial entrepreneurs tend to be intrigued by the possibility of
exploring several opportunities simultaneously, more than the financial benefits of
operating successful ventures. However the literature on serial entrepreneurs tends to
portray them as a rather special breed, the exception rather than the norm in business
ownership.
The research reported on here is part of a larger study into the role of entrepreneurs in
growing and closing businesses. It seeks to:
a) Investigate what happens to business owners who close, or exit from a business.
What do they do next?
b) Develop a better understanding of the attitudes and future intentions of business
owners who close a business. Is the experience encouraging or discouraging towards
new ventures?
c) Gain insights into what the owners perceive they learned during the completed life
cycle of the business. Which experiences do they regard as lessons for the future?
Methodology
The research comprised a three-stage data collection process: interviews with advisors, a
postal survey of owner-managers, and telephone or face-to-face interviews with a subset
of owner-managers. In setting out the agenda for the quantitative study, 20 preliminary
interviews were conducted with bank managers, accountants, solicitors, and small
business advisors and consultants in government and charitable organisations. From these
9
early findings, a theoretical framework for business closures emerged and a postal
questionnaire was developed.
One of the greatest barriers to researching closures is finding ex-owner-managers and
businesses that have closed. In this research, we developed our own sampling frame that
sought to be as representative as possible of the range of business closures and exit types,
rather than relying on one source, such as official receivers’ data that reflects only a
limited number of types of closure. This was derived from as wide a source as possible
and comprised HSBC customers including business account closures (66% of
respondents), Dun and Bradstreet lists of existing businesses (25%), and closures
identified during research on other projects by the SBRC, Kingston University (10%).
The postal questionnaire was piloted with business owners who had experience of closing
a small business and the final version was posted throughout May and J une, 1999 to
2,719 business owners. The overall response rate was 14% with a total of 387 usable
responses returned. The low rate overall was primarily caused by the poor response of the
Dun and Bradstreet lists (5%) although this was to be expected since it was a more
general list of businesses in existence rather than exits exclusively. The HSBC customers
within the sample had a higher response rate (36%). The characteristics of the enterprises
from the different sources were cross-checked and showed a high degree of conformity.
The final question asked the respondents if they were willing to be interviewed and 20
former owners were interviewed to provide greater insights into their past experiences
and future plans. The quantitative data arising from the questionnaire was analysed using
the Statistical Package for the Social Sciences (SPSS). The resulting qualitative data was
analysed using general analytical procedures (Miles and Huberman, 1994) whereby
common themes are identified and categorised from the face-to-face interviews.
Results
Financial condition of the business
Owners were asked to appraise the financial situation of the business when it was closed
on a five-point scale from ailing (1) to thriving (5). Almost half (48%) of respondents
10
described their business as ailing, whilst 29% said it was thriving (Figure 1). A quarter
(24%) said it was neither ailing nor thriving, implying a no-growth, but relatively stable
financial situation. Thus, just over half (53%) of respondents closed a business that was
not seen to be in financial decline. Clearly, business closure is not merely about reacting
to financial difficulties.
INSERT Figure 1 Financial condition of the businesses at the time of closure
What happened to the business owner after closure?
The economic activities of owners once they had closed a business were quantified as
illustrated in Figure 2. A key finding of this research is that a majority (62%)` continued
as a business owner in some way. Only 29 percent of owners sought non-business
ownership employment after closing their business, and some owners retired (9%). Most
of those seeking to exit business ownership were successful and became employed; some
became unemployed or could not work through illness (7%); others were running their
business part-time and so continued with their existing paid job (3%).
However, the findings confirmed the notion of the ‘serial entrepreneur' in that the
majority of respondents continued as business owners (62%). The preference was to stay
with what they already knew. Some already had other business interests and continued
with these (20%); others continued the same business in a different form (9%) or started
up a similar business (18%). A minority tried something new by starting or buying a
different type of business (15%).
INSERT Figure 2 Business owner exits – what they did next (n=367)
Attitudes to the experience of closing a business
The experience of managing a business that eventually closed, was viewed mainly in a
positive light. The majority (70%) of respondents claimed that they were encouraged by
their experience to continue as a business owner (Figure 3). Only 15% said they were
discouraged. This might be expected particularly from those who had described their
businesses as thriving when they closed. However, even those who had been in financial
difficulties were not put off by their experience. An analysis of those who described
11
their business as ‘ailing’ when closed, revealed that 60% still responded that they were
encouraged to have their own business in the future, with only 18% stating they were
discouraged.
INSERT Figure 3 Attitude of owner to business closure (n=379)
Learning from the experience of business closure
From the above analysis, it seems that the majority of respondents viewed their
ownership of a business that closed as a positive learning experience. In order to
establish in more detail what it was that they felt they had learned, they were asked to rate
their skills in various areas compared to when they started the business. From the
literature, a number of internal problems have been identified which contribute to
business closure (Cromie, 1991). These can be grouped into the key functional
categories of managing operations, marketing, finance, personal development, and
managing people (Stokes, 2002). These formed the basis of the skills which owners were
asked to rate. The results are shown in Table 1, which indicates that those skills relating
to self-management were seen to have improved the most.
INSERT Table 1 Rating of skills categories learned (n=386)
Almost three-quarters of respondents said they had improved their skills in personal
management areas (coping with setbacks, self-management, and adapting to change),
higher than any other category of skills. Thus it was not the traditional functions such as
marketing, finance and managing people that improved most overall, but personal
development skills relating to how the business owners managed themselves and coped
with their business environment.
Learning from the experience: lessons for the future
Respondents were asked two open questions in order to investigate particular issues that
had constituted a learning experience. One question focused on positive experiences that
would be useful in the future (Table 2); the second asked about experiences they would
12
avoid next time round (Table 3). Some patterns emerged by grouping the responses into
themes.
INSERT Table 2 Experiences found to be useful (n=306)
In considering useful experiences, the theme of trust and relationships was cited by over a
quarter of respondents. Trust was an important issue in a variety of relationships:
partners, relatives, friends, banks, accountants, and government were all mentioned in
terms of the need to build good, trusting relationships. Some respondents expressed this
as a positive factor (e.g. “build a good relationship with your accountant”); others
expressed negative feelings (e.g. “never work with relatives and friends”; “beware of
loopholes in contracts”).
Marketing issues were mentioned by a quarter of owner-managers. The need to
understand the market before starting up was one lesson cited, and watching trends
thereafter was another. Finding customers was a common issue including the need to act
quickly to replace lost customers. It might be expected that financial management issues
would be cited frequently as useful learning experiences, considering that respondents
were all owners of businesses that had closed. However, a relatively small number of
respondents (16%) cited they had gained from their experience in financial matters such
as managing cash flow and understanding how businesses are financed. Financial issues
were seen more as experiences to avoid: financial and tax issues were the most common
theme in the open question on experiences to avoid in running a business as Table 3
below indicates.
Learning from the experience: what to avoid
Trust and relationship issues again featured frequently as experiences to avoid, often
mirroring comments on the previous question on positive learning experiences (Table 2).
Other research has indicated that owner-managers frequently perceive marketing as
representing promotions and selling only, with negative attitudes towards the cost of
these activities (Stokes et al., 1997). This was supported by advice from respondents in
13
this research to avoid or reduce the costs of advertising and promotions. Although issues
arising from the management of people were raised by only 8 percent of respondents,
many of them did not employ any or many staff (47% of the sample employed from 0 to
4 people)
INSERT Table 3 Experiences to be avoided (n=296)
Conclusions and discussion
Our review of the literature on small business closure concluded that:
a) Most of the relevant studies have focused on the factors associated with the relative
‘success’ or ‘failure’ of small businesses. There has been a tendency to associate
business closure with business failure, or to assume that the majority of closures
represent unsuccessful business ventures.
b) A large number of studies have attempted to build or test models for the identification
of business failure and its prevention and cure. Again, this has been driven by an
agenda which seems to imply that business closure is negative, rather than part of
dynamic economy in the Schumpeterian sense.
c) There has been a conflation of the closure of the business with the business owner.
The preferred unit of analysis has been the business rather than the entrepreneur.
This has hampered serious studies of ex-owner managers, particularly from a learning
perspective.
d) Very little research has been conducted into the range of exit rationales and
experiences of small business owners. One of the reasons for this is that it is very
difficult to identify and contact owners whose businesses are likely to close or have
already closed. Thus there are few adequate data sources on which to study business
closure, these being dominated by financial or economic sources.
This paper has presented some new data seeking to fill some of the gaps in the literature
by focusing on the experiences, attitudes of owner-managers during the business closure
process. Nearly 70 percent of owners who had closed a business were encouraged by
14
their experiences and still wished to run their own business. Even those who described
their closed business as ‘ailing’ were encouraged by the experience - 60 percent still
wanted to run their own enterprises. The majority had acted on this inclination by either
starting a similar or new business, or continuing with another business of their own. As
some owners retired (9 per cent), only 29 percent returned to employment or
unemployment. This suggests a broad typology of owners who exit by closing a business
as shown in Figure 4.
INSERT Figure 4 Typology of Owner Exits from Business Ownership
Only a minority can be described as truly ‘departing’ when they exited, as most in fact
are soon ‘returning’ to business ownership. A third category are ‘retiring’, having found
their exit route from ownership. This has considerable implications for business
educationalists and policy makers. In summary, a person who has closed a business is a
very likely candidate to become involved in a new venture, and should therefore be a
prime target for those seeking to advise or support new businesses. Owners, therefore,
can be regarded as leaving a business through a ‘revolving door’, rather than a ‘one-way
exit’. Many return to start the entrepreneurship process again.
Even if they had not gained financially, owners had still benefited from their experiences
of running a business. They reported that their skills had improved particularly in
business planning, and building a customer base. However they improved most in
disciplines relating to personal development such as self-management and coping with
setbacks rather than the traditional functional areas such as marketing and finance. They
felt they had learned particularly about managing trust and relationships, personal
development, marketing and finance. When asked if there was one particular experience
they would like not to repeat, owners cited many problems to avoid including financial
issues such as cash flow and tax problems, but again the issue of trust was frequently
mentioned.
15
The message from the study for researchers and policy-makers is clear: distinguish
between businesses that close and the owners that close them. Although a business entity
may disappear, the owner who created it is likely to re-enter or continue in business
ownership. Whilst the notion of serial entrepreneurs is confirmed, they seem more
widespread than most commentators imply. Even owner-managers who have had
unsuccessful ventures have been shown in our research to be motivated to start another
enterprise. In their view, they also appear to be better equipped to make it work next
time because of lessons learned. Our thinking on the concept of the small business needs
to be broadened and the notion that permanence is positive, whilst short-lived enterprises
is a negative phenomenon, needs addressing. This may then form the basis for support
agencies to provide appropriately informed advice and products for these owner-
managers leaving their business. The research also implies that much of the advice on
start-up and business development is targeted at an inappropriate level because of the
underlying assumption that owner-managers are doing it for the first time. More support
is required for the entrepreneur who is no longer a novice but who nevertheless is starting
or developing a relatively new venture.
The concepts of organisational learning in entrepreneurial ventures have emphasised the
preferences of entrepreneurs to develop through action learning. The results presented
here indicate that the business closure phase can provide valuable experiences to inform
the entrepreneur in their next venture. It is suggested that more qualitative research in the
form of case studies, would be a way forward to build on these ideas. They may for
example build on the work of Rae (2000) who advocates the use of life stories and
narrative based research as a means of generating new insights into the entrepreneurship
process.
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19
Figure 1 Financial condition of the businesses at the time of closure
30%
18%
24%
16%
13%
0
40
80
P
e
r
c
e
n
t
a
g
e
1 2 3 4 5
Situation
Financial situation of the business
AILING THRIVING
20
Figure 2 Business owner exits – what they did next (n=367)
Only 29 percent of owners sought non-business ownership employment after closing
their business (Figure 3). Most of those seeking to exit business ownership were
successful and became employed; some became unemployed or could not work through
illness (7%); others were running their business part-time and so continued with their
existing paid job (3%); and some owners retired (9%).
Figure 3 What happened to the business owner?
Fate of the Business Owner
Sought Employment
Continued as Business
Owner
In Existing Business
Continued
other
existing
business
Continued
business in
different
form
Started/
Bought
different
business
Unemployed
/ill
62% 9%
18%
29%
9%
33%
20% 15%
7% 3% 20%
Retired
29%
Started a business
Employed
Continued
paid
job
Started
similar
business
21
Figure 3 Attitude of owner to business closure (n=379)
Has your experience of managing a business that closed, encouraged or discouraged you to have your own
business in the future?
8%
7%
16%
28%
41%
0
10
20
30
40
50
60
70
80
90
100
Percentage
1 2 3 4 5
Discouraged
Encouraged
22
Table 1 Rating of skills categories learned (n=386)
* Percentage of respondents who rated skills category as improved
* Percentage of respondents who rated skills category as improved
Skills Category Percent *
Personal Development 70
Operations 65
Marketing 62
Managing people 57
Finance 55
23
Table 2 Experiences found to be useful (n=306)
‘Is there one particular experience you feel you have benefited from whilst owning this
business that you consider would be useful if you were to become the owner-manager of
another business?’
Trust/ relationship issues 27%
E.g. Finding suitable partners/ directors. Finding trustworthy staff.
Good relationships with accountants. Never work with relatives/friends
Don’t trust banks or government
Marketing issues 23%
Watch trends/do research before starting business.
Good communications and networking. Promotions and advertising. Dealing with the
public. Quality of service and products. Finding new customers. If customers lost,
actively seek new ones.
Financial management 16%
Financial record keeping. Managing debtors and creditors. Managing cashflow and
overheads. Understanding how businesses are financed. Preserve capital for future
investments
Self-management and motivation 14%
Developed self-discipline/ self-motivation. Hard work/long hours.
Doing everything yourself. Time management and planning
Leadership. Making decisions – don’t postpone difficult decisions.
Self discipline. Confidence
Other management and business skills
People management skills
Taxation and company law
9%
24
Table 3 Experiences to be avoided (n=296)
Is there one particular experience you had whilst owning this business that you would like
to avoid if you were to become the owner-manager of another business?
N=286
Finance/tax issues
Problems with banks and borrowing money. Inland revenue
Insufficient capital. Insufficient investment in equipment. Cash flow problems. Failure to
control finances. Over reliance on overdraft. Too much credit to clients/bad credit
management
Trust/ relationship issues
Equal partnerships/wrong partners/having partners. Being a minority shareholder
Employing relatives/friends. Unsound/unwritten contracts. Trusting people too far
Self management
Lack of confidence/overconfidence. Dealing with all aspects. Working long hours. Being
ill/worrying
Marketing
Lack of selection of customers/taking on low margin work. Conflicts with customers.
Competition. Problems with distributors. Difficulties with trading abroad. Cost of
advertising and promotions.
Management of people
Staff problems. Not managing staff. Lack of delegation. Redundancies
Long term contracts. Insufficient staff
General Management
Lack of experience. Lack of contingency plans
Problems with suppliers
Other
Avoid: franchises; renting; bad advice; litigation, theft.
26%
22%
11%
9%
8%
6%
7%
25
Figure 4 Typology of Owner Exits from Business Ownership
‘Departing’ ‘Retiring’ ‘Returning’
30% 10% 60%
Returning to employment,
becoming unemployed, or
out of work through ill
health.
Retiring from active
involvement having sold or
closed their business
Continued as business owner by
opening or buying a new or
similar business to the one closed
or through the existing ownership
of another business
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