AVM Magazine - Five stages of bankruptcy

No matter how advanced, educated, or socialized a person may be, I believe that their genetic traits remain the primary factor underlying their behavior. At some point, reason gives way to instincts. The situation is no different in the business world, where we assume reason prevails and everyone acts in their own best interest. At some point, reason gives way to emotions.

In major business decisions, since they pass through many filters, they are made rationally. In small businesses, since the entrepreneur makes decisions alone, their success depends heavily on their personality traits, emotional state, and ability to rely on their instincts. Even if an entrepreneur’s education, experience, and capital are sufficient for the business, they cannot succeed if the business does not suit their temperament. This is likely why half of small entrepreneurs worldwide go out of business within the first five years.

I have met small business owners while they were starting, running, and handing over their businesses; I have seen both those who succeeded and those who failed. When I examined the business stories of entrepreneurs who failed, I observed that the steps leading to failure went through specific stages, and that most of those who failed experienced the same stages in the same order.

The fact that these stages repeat in the same order among entrepreneurs from different cultures raised the suspicion that the cause might be genetic. Isn’t that the case with the five stages of grief—denial, anger, bargaining, depression, and acceptance— as described by Elizabeth Kubler-Ross in psychology? They don’t vary from culture to culture; people behave this way. I, too, identified the five stages of failure that are common to all the entrepreneurs I observed.

1-DREAM The first common trait among failing entrepreneurs is that they are dreamers and pursue their dreams. Dreaming is a prerequisite for entrepreneurship, but this is also the first step taken by those who fail. There are those who don’t dream; they do ordinary work, but they rarely fail. Some of those who dream achieve great things, but most who start from a dream end up failing. Being a dreamer is a common trait among entrepreneurs, but if the dream takes precedence over reality, failure begins.

2-WASTEFULNESS The second common step taken by those who fail is starting the business with excessive wastefulness. Prudent entrepreneurs invest only what they earn from the business or just enough to cover expenses, and they expand the business as they earn more. Those prone to failure say, “If we’re going to do it, let’s do it right,” and make the most extensive investment. Essentially, their faith in the business and self-confidence drive them to do this. In the end, the massive facility stands like the Egyptian pyramids, waiting for someone to take it over, making onlookers say, “The person who built this had no sense at all.” Sense is there, but that dangerous genetic tendency causes them to make this mistake.

3-PERSISTENCE The third common step among those who fail is persistence. Even if the expected results aren’t achieved within a reasonable timeframe, the entrepreneur persistently pushes forward, spending their time and money, hoping and waiting for things to improve. During this period, they tell those around them, “Everything will be wonderful,” offering hope. They practically try to prove to everyone that they are right. Cautious entrepreneurs also sometimes get involved in ventures that won’t pan out, but if they try for a while and see no results, they don’t persist; they withdraw from that venture. Success doesn’t come without persistence, but excessive persistence also depletes resources. Persistence is a necessary trait for entrepreneurship, but whether it’s beneficial or harmful depends on the situation.

4-DENIAL The fourth step in the Batman cycle is the entrepreneur’s refusal to accept that the business is failing, even when it’s clearly evident and everyone around them tells them so to their face. Believing in oneself, having confidence, and being able to stay motivated are genetic traits essential for successful entrepreneurs. But denying reality when the business isn’t working is dangerous. An entrepreneur who reaches this stage pins his hopes on a savior. He bids on a major order, failing to see that he’s not being taken seriously. He posts an ad to sell his business, failing to see that he’s scaring off buyers by being too demanding. He spreads the word left and right to find a partner, failing to see that he has no chance. They ask acquaintances for loans, failing to see that they aren’t trusted. In a panic, they call their real estate agent, bank, broker, and acquaintances every day, asking for help. At this stage, they grow increasingly isolated; everyone sees the gravity of the situation, but they alone cannot. They can’t say, “It’s better to cut my losses now.” They miss the final chance to escape before the collapse.

5-ACCEPTANCE The fifth step of bankruptcy is the stage of reluctantly accepting the situation. Those who have gone through the first four stages only accept reality when their strength is exhausted and they have nothing left to do. They realize they’ve gone under when the bailiff arrives, the landlord demands eviction, suppliers halt shipments, the police shut down the shop, and employees quit and flee. There’s no genetic factor at this stage—it’s purely technical; when time runs out, the referee blows the whistle.

It’s impossible to avoid these stages entirely; a business can’t be built without dreaming, it can’t start without investment, and success won’t come without persistence. But if what you’re experiencing in your business closely resembles the sequence above, you might not be seeing your situation clearly and could be heading toward disaster.

An entrepreneur cannot know whether their strength and resources will suffice for the business’s needs; time will tell. Due to traits common among many entrepreneurs—such as self-confidence, a sense of independence, the drive for success, and determination—they may fail to recognize when they fall short. An experienced individual who views the situation from the outside, understands the entrepreneur’s potential, and knows the business’s requirements can see this. Seeking consulting advice, consulting with experienced individuals, and bringing in experienced outsiders to the board of directors provides benefits in this regard. It tells the entrepreneur what they may not know—or at least what they haven’t seen.

At the core of F&M’s consulting philosophy lies understanding the entrepreneur’s inherent traits and making recommendations tailored to each individual’s potential. Since franchisees are typically new entrepreneurs, our priority is not on making a lot of money but on avoiding failure. Our training programs, entrepreneurship assessments, and franchise coaching aim to help entrepreneurs first choose a business that won’t fail, and then focus on making money.

An ancient Hittite prayer concludes: “God, grant me the courage to change the things I can, the patience to accept the things I cannot, the wisdom to know the difference between the two, and friends to protect me from the blindness and lies of love.” You can’t expect everything from God; you have to tie the camel to a sturdy post. The “blindness of love” at the end of the Hittite prayer resembles the entrepreneur’s state of mind. How much of an entrepreneur’s dreams, waste, and persistence is necessary to succeed, and how much is enough to fail— one looking from the inside cannot see this; an advisor who observes from the outside is needed.

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