Ted, great article. I think you hit the nail on the head early on in the fact the details provided in the SBA reporting is somewhat limited. You can get industry specific data as well, but you are right you do not know if it is an on-going business venture of an acquisition.

I have been in commercial lending for 30 years. We are both a Commercial Loan Brokerage Shop but also have a Bank Consulting division where we do primarily credit consulting work for banks and credit unions, including some banks that specialize in SBA lending. Based on the work we do and our experience, I can tell you the specific items that tend to kill businesses:

1) Bad management. When someone buys a business or is operating a business and does not get their arms around the business fully, this can lead to problems. Whether it is bad financial reporting or mistakes in operation, not having strong active management is a huge issue.

2) Failure of ownership to pivot quickly. The business world is constantly changing. As a business owner you constantly need to be looking at what is going on in your market and what your competitive is doing. If you are not in a position to pivot, whether that means finding new vendors that offer a lower cost, changing the way you deliver services, or being prepared to quickly cut costs if there is a change in market demand, you can lose track of your customers and your P&L quickly.

3) Lack of working capital. This is especially true for business acquisitions and start-ups. You need to be sure you have adequate working capital and have prepared for the worse case scenario. It is rare things go perfectly.

4) Expanding too quickly. Business owners who expand too quickly will often stress cash flow and working capital and if there are any unforseen changes in the business, it can take them down quickly. You need to be sure any growth plan is strategic and you have the capital support to get it done.

5) Business owners using their business as their personal piggy bank. I cannot tell you how many times I will see a business owner have a good year or two and then quickly increase their personal living expenses buying vacation homes, larger homes, boats, high-end autos, etc. These personal requirements often strain business cash flow because it takes larger salaries or draws from the business to support these expenses. That is often lost cash that is not easy to replenish into a business. And it becomes hard to get lenders to step in and fund a struggling business with the owners personal expenses are way too high. Lenders do not want to fund the luxury lifestyle of the owner. You need to be cautious and gradual and confident that your business will sustain itself before growing your personal assets too much.

6) Changing or unexpected changes in market conditions. Usually big events, like the Great Recession or the pandemic, can create disruptions and cause businesses to fail that otherwise might not have. It is hard for any business owner to be prepared for these one time scenarios, but again, the more working capital you have and the quicker you can pivot, the better of you are. I have seen many business owners just keep waiting for things to turn around and not making cost cuts or changes quickly.

These certainly are not all of the reasons a business can fail, but I thought I would highlight the main things I have seen and the main reasons our lenders are seeing deals fail. I hope this helps to put things in perspective.

good read