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Why Small Businesses Fail: The Gritty Truth

In this episode, Tony Cline and Shawn Johnson explore the common reasons why small businesses fail, drawing insights from a local restaurant's closure. They discuss the importance of leadership, customer engagement, and avoiding burnout. They also stress the need to innovate continuously, understand customer needs, and seek mentorship. The episode is a detailed discussion aimed at helping entrepreneurs navigate the difficult journey of starting and sustaining a business.

00:00 Introduction: The Struggles of Entrepreneurs
00:49 Welcome to Pay or Quit
01:16 A Personal Story of a Local Business Closure
02:32 Analyzing the Reasons Behind Business Failures
04:33 The Importance of Leadership and Customer Interaction
11:41 Statistics on Business Failures
23:39 Lessons Learned and Moving Forward
27:53 Conclusion: The Bigger Vision

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Transcript

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They either thought they had the business up and running where they could kind of put it on autopilot and step away, or it was underperforming to the point where they had to, in order to maintain their lifestyle, pay their own personal bills, they had to go and create a second source of income. Which then fragmented their attention and took their attention away from doing I'm all in on this and I'm just going to be here until it's a success.

That would kind of be two reasons why I could see people leaning into their business and then having to pull out. And it's either because they think they got it figured out and they put it on cruise control and they don't continue to innovate and tweak. You know, I'm always talking about those incremental improvements over time, equal, incredible results.

If you got something 80 percent dialed in, you're not there. It's how do I get to 81, 82, 83, and being focused on those small details.  

Welcome entrepreneurs to pay your quick, 

where we reveal the gritty truth behind business success. 

People see the glory. But not the struggle it takes to get there. 

We're here to share the real stories of entrepreneurs navigating the tough intersection of business and relationships.

I'm Tony Klein. 

I'm Sean Johnson. And together we'll guide you through the real challenges faced as serial entrepreneurs.  

Join us for the untold stories behind the scenes. 

Buckle in. It might get messy. Hey Tony. So recently I saw something on Facebook that really sparked my mind. And I personally just absolutely hate seeing small businesses close.

I also don't love seeing big businesses close and we've had, you know, quite a few over the years, but you know, a local business. Little restaurant that I enjoyed it was a sandwich shop And you you would like this because they're about the only one around town since I live in a small place It has gluten free stuff And so it's a great place for me to bring kristin and have a nice meal and to have this sandwich that I just loved It was called the albuquerque turkey and it was spicy had green chili, you know, new mexicans got to have their green chili  But I was bummed to see them closed and another restaurant piggybacked off of their Facebook post announcing the closure and kind of went into, um, not the support the small business stuff you see quite often, but more of the difficulties it is in having a restaurant or a startup or a new business and pushing through that stuff.

And so I really wanted to Kind of dive in to that, you know, frame, if you will, of lessons from entrepreneurs who almost gave up, if you will, and to just kind of get through encouraging them to keep pushing on. So anyway, welcome, Tony. It's good to see you, buddy. 

Hey, Sean. All right. So I want to, I want to start the conversation off by, we're going to get into some, uh, you Statistics and some reasons why small businesses fail.

But before we do that, I want to know a little bit more about this small business that you used to frequent that you can no longer frequent because unfortunately they didn't make it, which is not uncommon by the way. It's not uncommon for new startups to not make it. So share with us a little bit about how long that.

That company, that restaurant had been in business and was it a part of a chain? Was it just a individual, Hey, this is a one location kind of thing. Cause I think that will kind of frame some of the rest of our conversations. 

Oh yeah, for sure. So, um, this particular one. Was there about two years small business local husband and wife that owned it?

I think they own another business as well, but uh branched out into the restaurant business before that It was also a similar type of sandwich shop and it had closed I think this is probably the third type of business in the same space and they've changed a little bit You know changed their their food and their format and their offerings, uh over the years, but um, You You have this particular one, local mom and pop, basically, I say mom and pop, that makes it sound like they're old, but, but the younger, I would say like early forties, a couple that owned it.

So a little bit of frame there. 

Yeah. So if you had to guess, and we're going to go through a lot of different reasons why businesses fail, but if you were to guess looking from the outside, looking in, what would you say was the reason why they were unable to keep going? And I'm sure there's Uh, multiple reasons that feed into it because it's not just usually one thing that will take down a business, but what would you say is the primary reason that you see, it may not actually be the reason, right?

We're going to talk about some of these reasons, but what do you see as the reason from your perspective? Yeah, 

that's a good question. And it's cool. Cause some of these statistics that we'll share today, we'll actually dive into or support at least my thought process as to why personally, I think. You know, it was lack of traffic, but that was a symptom of a bigger problem.

And the bigger problem to me was there was really hardly ever any leadership at the restaurant. And you have young, I would say, teenage kids, you know, teenagers running the day to day, they're the face of the company, 16 to, you know, 20 something years old that you just haven't really grasped the impact you can have on a customer, whether it's.

positively or negatively based off of the interaction that you have in those 30 seconds of bringing them up. And I think that was a big part. Like, I'd go in, nice kids, whatever, but there was no, like, welcoming. You know, like, hey, thanks for coming today. We just really appreciate you supporting us. That little bit goes a long ways into creating loyalty, in my opinion.

It was more of What can I get for you? And I always hate that answer when you're at any restaurant. Is that all for you today? Is that all? No, what else can I do for you? That's the appropriate response. In my opinion, you want to, you want to double your ticket sales. Say, what else can I do for you today? 

You know what I mean? And that little, that little shift. So I think the symptom low traffic, but the real, if I had to pinpoint it, obviously probably under capitalization, all, all other kinds of things too. But, um, pinpointed was just simply, there was, The chickens were running and no rooster around,  you 

know, no, 

uh, no leadership, if you will.

So it's interesting that you mentioned some of these things because I just last night finished reading a book called the brand flip. And it's all about building your brand, building that loyalty that you mentioned. And in there, it talks about your brand consists, not of what you say it is, but what they say it is.

So your clients, your prospects, your customers, and what they say your brand is. It's an accumulation of all individual touch points and marketing messages, and it's everything that comes together. So when you mentioned there's no welcoming, that was part of their brand that was intentional or unintentional, but it was a part of their brand and to not have leadership there welcoming you in not having insight to not say, you know, what else or whatever, but what else can I do for you?

Or is that all, you know, having Having those scripts put together, one of the reasons I asked you in the beginning, is this a small mom and pop individual small business, or was it a part of a chain, a franchise, something like that is because I think one of the reasons why you see a lot of those, and we're going to continue to use the phrase mom and pop, even though, you know, I don't know that necessarily hits every small business, but one of the reasons why they Fail, I think at a faster rate or a larger rate than a chain or a franchise is because of the lack of systems.

It's not been tried and true. There's nothing that's been tested. It's all, let's just give it a shot. And two years, I was actually expecting you to say that they had been in business less than two years, simply because it seems like if you have two years worth of runway, you should be able to figure out what's working and what's not.

Yeah. You know, that's a valid point. I want to 

just bring up because I think the Owners spent a lot of time in it for the first eight months to maybe 14, 15 months, but then they, you never saw him anymore. And I think that's how they got past that first year because it was their baby. But for some reason they turned it into an absentee business and it's just not at a scale to allow for that.

I mean, we, we're all okay with, you know, Carl's juniors, Taco Bells, and all of those to never see the, the actual franchisee, the owner, totally okay with that. And they can treat the customers the way they treat the customers. They don't need to greet them. And because they've got a product that in a loyalty at a mass scale, that brings people in.

I know what I'm going to get every single time. I go to Taco Bell, right? It's consistent. A local business just doesn't have that luxury. Like we got, we got to go above and beyond so I can compete with. The Taco Bells, the, you know, whatever it was. It wasn't a fast food restaurant, it was a sandwich shop, but you get my point.

Yeah.  📍  

Hey Sean here. Before we dive back into today's episode. I want to take a moment to ask you a little favor. If you've been enjoying what you're hearing on payer quit. We'd love it. If you could leave us a review. Seriously. It helps us more than, you know,  Whether it's a shout out to Tony's wisdom or a tip you learned from the episode. Your review gives us their feedback. 

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I think that one of the things, if I'm looking at what you mentioned about them being there the first eight months or so, and then sort of trailing off, I have two schools of thought there, and of course these are both just speculation, but the first one is they either thought they had the business up and running where they could kind of put it on autopilot and step away, or.

It was underperforming to the point where they had to, in order to maintain their lifestyle, pay their own personal bills, they had to go and create a second source of income, which then fragmented their attention and took their attention away from doing the whole burn the boats methodology of the I'm all in on this and I'm just going to be here until it's a success.

And so again, it's just speculation, but that would kind of be two reasons why I could see people leaning into their business. And then having to pull out and it's either because they think they got to figure it out and they put it on cruise control and they don't continue to innovate and tweak. You know, I'm always talking about those incremental improvements over time equal incredible results.

And so it's, if you got something 80 percent dialed in, you're not there. It's how do I get to 81, 82, 83, and being focused on those small details. Like when somebody rings you up at a, at an order. And taking your order, having that script of what to say and being consistent with it every time to lead to those additional upsells.

Yep. Totally. Uh, I think that's a very good observation. One or two, you know, A or B options there. So to get into a couple of these, uh, statistics, I think that will relate and not only just to this story, if you will, but to business in general and then to what, what to do about it. Like, okay, statistics are statistics.

I'm not telling anybody to not take the risk. As a matter of fact, I want the opposite. I love when people put themselves out there and go and try to attack something that they believe in and try to make it a business. So it would be the opposite to hear from me that you would, you know, I would ever say, don't take that risk.

That's not what you would hear. But is there some ways that we can learn from others before we, you know, burn the boats, if you will,  and, uh, and attack those challenges head on so we can overcome those challenges before it comes, uh, you know, or becomes a failure, if you will. So one, uh, statistic here that is general business, approximately 90 percent of all new businesses fail.

with 10 percent not surviving the first year. I think we've heard that one, but um, that's a, that's a good foundation to build off of 29 percent run out of cash before becoming profitable. Yeah. I think this one's interesting to me because I think so often we think it's going to be cheaper to start up than it truly is.

And you know, I'm in the real estate business. So every time I do a house flip, I do a budget and then I try to hit that budget. And I'm telling you every single time, it's about 20 percent less than what actually turns out to be. So what do I do? Here's my budget. I add 20 percent and then I'm far more accurate with my numbers and it helps me to be far more conservative.

But I think this is something that is often missed in business as 

So I want to tie those two things together. And with just a little anecdotal story, but my mother about 15 years ago decided to start a business. And I kept telling her 90 percent of all small businesses fail in the first year. And I kept telling her that.

And I was telling her that so that she would focus on doing the things that were important to do that first year. It's important to dream and plan and And have a vision for beyond that. But if you don't make it past that first year, which statistically nine out of 10 don't, then it doesn't matter what you do on year two and year three.

And so I kept telling her that. And at one point she's like, you know, you're, you're not motivating me to be excited and inspired about this business. And so we had to have that conversation that the reason I was telling her that was not to pop her balloon or deflate her or, Get her to give up on her dream.

It was so that she would be laser focused on being the one and not being one of the nine that, that didn't make it. And 15 years later, here she is, and she's still running the business and it's still going strong. And I think, so to tie that together with that cash startup, that running out of cash, 29 percent of the startups run out of cash before becoming profitable.

If you just stay super focused on what do I need to do to get through this first 12 months. To turn that profit, you know, back to the sandwich shop, it could be that they limit their menu to three items so that they're not having to buy as much inventory that might spoil down the road, they may have a vision of having 15 items on their menu at some point, but it's all about maintaining your cashflow so that you can get through that first year and then expand.

Yeah. And I think it's natural for us to make it far more complex than it needs to be. If we can. Make it simple, not for only us as business owners, but also for our customers to do business with us and remove those complexities. Oftentimes, the money part falls in line because we're not distracted by the other things.

We're actually focused on what's important to, to, uh, you know, make a successful business. Um, so that was, that was a good one. The other one I thought was super interesting, and this ties back nicely to this restaurant,  3 percent fail because they don't have the right people in place like it is all business is a people business I don't know how else you could get around that but business is people and because people transact people have the money  And if you can't put the right people in place, um, yeah, man talk about a demise So yeah, like I mentioned at this restaurant, you know letting the younger kids that you know Truly, I mean nothing wrong with that but be that as a support team not No leadership around on how to treat the customers.

How do I expect you to greet them when they walk in? How do I expect you to say goodbye and thanks for coming when they walk out? Those are little things that go a long ways. And I'm just talking about a restaurant, but that could be tied into phone calls to emails, signatures to a million things in business.

I want to expand beyond just the, the people that are performing the work like at this restaurant, the younger people that are ringing up and  maybe sweeping up the restaurant and doing all the things that need to be taken care of. But when it says have the right team in place, I think we also need to focus on the team outside of our business, being connected to the right people, right?

If you're, if you're going to open a physical location, you know, you mentioned this is the third sandwich shop. I've got restaurants here that it's like. Okay, I wonder what it's going to be this six months, and then six months later, it's something else. And if you see a restaurant in that location consistently going out of business, have you hired somebody?

Have you worked with the city? Have you looked at their traffic studies? Have you seen the demographics that are driving by? Or are you just going by a commercial strip mall and seeing an empty spot and saying that's a good spot for me to put in my business to fulfill my dream? Are you utilizing the people up front on your team to help accelerate or increase your opportunity for success?

So I think there's a lot of people outside of our business that we need to consider being on our team, having the right attorney dealing with the right people to help you find the right commercial. Real estate to set up your business, the right marketing team, you know, bringing in people that you may not need forever, but they're going to help you launch in the right way.

Yeah. And I would summarize it into one question. I'd ask myself, what makes me think that this will succeed now? It hasn't succeeded in the past in the same location and, you know, restaurant or whatever. What makes me actually think, why would this succeed now?  Anyhow, we'll move on from that. So 14, 14 percent fail because they ignore customer needs.

Oh my gosh, this one rings true to me because as you know, Tony, I, uh, started a business on, uh, two years ago and I really didn't dive into the product market fit as nearly as good. And now we talk about new products that we're launching, Tony, you and I, and I'm like the other side. Now I got it. No, I did like.

Mountains of research to figure out if these are going to actually be impactful for people, if it'll actually bring value to somebody else's life. And I wanted to know that before I launched the next one. I mean, you know, that first, that one I'm talking about a couple of years ago was about 35, 000 that, you know, if I would have done a little bit of front loading, if you will, figure out what my customers actually want, probably could have avoided 20, 000 of that.

I would say,  

I think that you fell into a trap that a lot of us fall into as entrepreneurs. We get excited about an idea. We have a vision of a great product and we come up with a solution and then go looking for a problem as opposed to seeing a problem and seeing how we can uniquely solve that problem for our prospects, our clients or our customers.

That's true. I would say.  All right. The next one, 9 percent cite a lack of passion. As the reason they failed. I don't even get that one. Like that one doesn't even make sense to me. Like why'd you start it in the first place? And I'm not saying, like, let me just full disclosure here. Some of the most successful businesses are the ones that are completely boring.

The plumber. The electrician. The tradesperson. But you gotta want to do it. Like why would you trade? Why would you take all the risk of being a business owner? Give up a nine to five with a 401k. Insurance. Stability, I could clock, I mentally could clock out at the end of the day, not think about this again and give that all up for a business that you didn't truly believe in or have passion around.

This one's easy for me. I actually, I'm actually the opposite of you. I have the, I can see this killing a lot of businesses. And the reason for that is every January 1st, the gyms are filled with people who have big aspirations and they think, I'm so excited. I'm going to see. Sign up to do this and same thing with entrepreneurs.

I'm going to start this business. My boss is a jerk. I work too long, too many hours. I don't get appreciated at my job. I commute too far. I could be my own boss and set my own rules and it's going to be great. And I'm going to is January 1st. I opened my business and just like at the gym. Where by March, you know, it's a ghost town.

Well, I was trying to be nice,  but if you think about that, it's exciting to start a business. It's exciting to start a new journey. And then you've got to be passionate about getting through the difficulties because the difficulties will come and that lack of passion about being excited about. Getting through those times where, you know, as in a former business, I had times where I would want to quit, but there was nobody to quit to.

I was the boss. Like I'm, I'm the owner of the business. I can't quit. So I guess I got to put my head down and just figure this out. And I think there are people when you get to that situation that we're not anticipating how difficult it was going to be and they don't have the passion to pull them through that obstacle.

Yeah, totally valid. I like that frame of mind that you bring it to. Yeah, that's good. All right. So last one here, uh, 5 percent of entrepreneurs experience burnout. I think this is similar thing, but it leads to failure pushing through when times get hard. You know, I don't know about you, Tony, but you got a business, your customers rely on you.

Now you're come down with, you know, the flu or something. You still got to get up and work like you don't get to call in. And I know that, you know, that happens once, call it three times, whatever in the year and you're. That's when burnout leads, you know, you're working long hours, you're getting sick, your health isn't important anymore, or your mental health isn't important anymore.

You want to just throw in the towel. Ooh, ouch.  

Yeah. I think for me, uh, burnout also represents. Doing all the right things, or the things you think are the right things, and not seeing results, direct results tied to that. And going back to the gym, the first 30 days are hard, because you're not used to doing those exercises.

You don't know what you're doing. You are weak in the sense that you've not yet built that muscle. muscle up to be able to lift the heavier weights. And you can either try to overdo in the beginning, not pace yourself, or you don't do enough in the beginning to start seeing those results and you, you're doing the right thing.

It's like planting grass and then expecting to wake up with a full yard in the morning. It's. It doesn't happen that way. And so for me, burnout happens when your expectations are inconsistent with your efforts. 

Yeah, that makes perfect sense. You got a story about experiencing burnout yourself? 

Oh, I mean, yeah, all the time, you know, and I think it's, it's just exactly that.

It's, it's a matter of, for me, it's a matter of pacing. It's a matter of there's work that I do that I enjoy, and there's work that I do that I don't enjoy. And when I find myself doing more of the work that I don't enjoy, somebody needs to do it, doesn't need to be me. But when I find myself doing more of the work that needs to be done, that I don't enjoy, it's just like in a video game.

It's like you can watch your energy just get zapped and, and go down. And so if you spend time doing the things that you have a true skill in, I think I've mentioned this before on the podcast, but you know, I should only do the things that only I can do. And I should figure out how to delegate or outsource everything else.

And it takes a while to get there, but when I'm experiencing burnout, it's, I'm usually working on the wrong things and I have unrealistic expectations or misaligned expectations for the effort that I'm putting in. 

Yep. I love it. All right. So here's the facts, uh, business. It's not for the faint of heart.

There's a lot of sleepless nights. You're making tough decisions. I think. People really don't understand the countless sacrifices that it takes to run a business, or start a business, or continue to grow a business. And I'm sure we've all questioned if it's all worth it, right? And if self doubt kicks in and it feels impossible to overcome, but what do we actually do about it, Tony?

Like what do we, like all of those things we just mentioned, like what do we actually do about that? 

I think the only thing to do is to keep going. I mean, obviously bring in the right team, have the right plan, execute the right plan. Like it's real simple on paper, right? It's just you just need to do these three things or four things and then it all comes together But I think really for me what what's helped me become successful in the things that that I really focus on is Realizing that success is built on the foundation of failure and you're never going to be good at something The first time you try it the first time you study it and so it's all about being comfortable learning through failure and Don't just fail, but learn from those failures, be around other people who are successful, be around other people who have failed and try to find out why they failed.

Try to learn the lesson. Don't just be around them to, to, you know, because you become like the people you hang around. So you don't want to constantly be around people who aren't doing anything and aren't putting in the effort to succeed. But, uh, one of the other statistics we didn't cover was the amount of.

People, the serial entrepreneurs who, who have failed previously have a 20 percent higher chance of succeeding in their subsequent ventures. And it's because of how much they learn in failure. You learn way more about yourself and about problem solving through failure than you do through success. 

Yeah.

And I actually like looking at it like, um, I just need one or two to actually be successful. The other ones that fail, all right, that's a learning opportunity. What can I do to actually improve myself and learn from this so I can have that successful business, if you will? You know, one thing I think of, and I think Darren, I think it's Darren Hardy, he uses the story Three Feet From Gold as a motivator for himself.

Like, How close am I actually to being at the gold, to achieving, and that story, I don't know if you remember that story, Tony, but there's a guy in like 1850,  he, you know, the gold rush is full force in California, he buys some land, he starts to get some equipment, and they actually strike gold. Some gold and there's a gold vein that they're working through, but then it dries up and they can't find the gold vein and they've invested all this money into equipment and they just can't find it anymore.

So he sells it to a junk guy, like a guy that just, you know, buys other people's junk and sells it. The junk guy actually, Gets a geologist and says, Hey, is there anything to this mine? What am I missing here? Geologist says, well, oftentimes when the, you know, the tectonic plate shift that the minerals below will shift about three to five feet.

And there's a strong possibility that vein is just three to five feet away. So he's out. Interesting. Okay, cool. I got some expert advice. Let's, let's pursue this. Literally digs three feet and big, massive gold mine. Right? I think that's, that just goes with this us. I mean, You know, as human beings, don't give up, keep pushing through.

You might only be three feet from solving the problem, or three feet from being successful in business. And push, pushing on is something I think we often don't see enough. We, we see the give up stage, probably. Too early. 

Yeah, if I had to just a parting comment on that for me would be people give up I think because they being an entrepreneur is lonely.

It's hard and without having some light that's out in front of you some roadmap some mentor or something that is leading you forward, it's just so easy to quit. And so obviously one of the reasons why we've gravitated towards each other is because of that entrepreneurial mindset. And we've found things that you do really well that I don't and vice versa.

Well, I do some things well, well,  but, but, uh, you know, there's, there's, there's reasons why we've found each other to help us through the things that we don't know. And so, um, I think it's really about building your network and surrounding yourselves with the right people who are doing or have done what you've already done, even if it's in a different industry, being around that higher level thinker.

And so if I had one closing thought around this on all of these business statistics, how to hedge your bet and put yourself in the best way possible is. to figure out how to find those people who are performing at a high level you want to perform at and then figure out what you can do to offer a value to them and eventually that value will come back to you.

And if it doesn't, you're still going to learn a ton about what they're doing. And how they do it. 

That's a good point. I'll bring it back to you. One thing that you taught me and that was to cast and recast the vision. What's the big purpose of all of this? And I think we have to do that with ourselves.

Like what is the why behind why even got into business? If I can keep that as my center stage.  The why behind it, the vision, you know, the bigger than me purpose, then you could push through a lot. I mean, you could move mountains when you're going through crap because you've got something bigger than yourself.

What is, I mean, how does Elon Musk run multiple companies and want to go to Mars? It's because all of those things are far bigger than himself. I mean, Tesla, I want to save the planet. I want to be eco friendly. I want to go to Mars. Why? Because he feels the, you know, the, the world is going to end at some point.

We need to be multi planetary. Well, that's far bigger than him. And he feels like this is a burden I want to take up because I want to progress the human race. Make the vision so big that you will drive and go through mountains. To get there 

well said 

oh, okay. It's in the can 

it's in the can  

You know you started that out and i'm the one that's saying it now I'm, you're you're kind of slacking off bud.

I'm just letting i'm giving you an opportunity to shine 

Thanks, tony  

All right. Thanks for listening We'll be back next time to cut through the noise of what it really takes to be a successful entrepreneur 

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