Bickerdyke, I., Lattimore R. and Madge, A. 2000, Business Failure and Change: An Australian Perspective, Productivity Commission Staff Research Paper, AusInfo, Canberra. Copyright Commonwealth of Australia reproduced by permission.

You may also notice that of the 7.5% of business exits, 2.0% are classed as being ‘solvent but have insufficient returns’. Although it’s not always possible to predict accurately the returns a business will provide, proper planning and realistic goal setting can reduce the likelihood of closure for this reason.

These figures do not, of course, take into account the numbers of people who planned to start a business but decided against it following a thorough due diligence process. Whilst it must be disappointing to discover your business plan is not viable it is far better to know before you ‘become a statistic’ and waste your time, effort and money.

I recently completed due diligence on assets that a client of mine was intending to purchase to start a business. We spent a great deal of time researching the market, analysing the tax implications, looking at how the owners were currently using the assets and finalising a series of extensive spreadsheets. The time had come to make a final decision on the purchase.

In compiling our data we were very conservative about the amount of effort that my client could put in, how much would need to be borrowed and what return he expected to take from the business in terms of salary and dividends.

After careful analysis it was obvious that it would not be possible for the business to operate profitably using only the assets in question and that the business would potentially require the additional investment of several hundred thousand dollars in order to reach the desired goal. My client decided not to go ahead, saving himself a lot of money, stress and potential heartache. The cost of completing this due diligence work and compiling all of the relevant data was less than 1% of the cost of the original assets.

It can be difficult for a business owner to face the possibility of failure. As entrepreneurs we are a very optimistic and proud bunch and sometimes when we get something into our head, we find it hard to see reason. It is far better to be realistic about the returns you require and to thoroughly plan a business well before serving your first customer. It’s also important to be prepared to walk away from the venture if there is an indication that things may not go according to plan regardless of any emotional attachment you might have to the business concept.

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