Why SMEs fail

By Rosemary McCracken | March 10 2015 10:00AM

According to a recent BMO Wealth Management Survey, Entrepreneurs: Definitely Not Your Ordinary Business Owner, only 51% of small and medium-sized businesses survive to the five-year mark. And the odds of a business’s survival fall each year after that.There are many reasons why SMEs fail. Financial experts who work with SME clients say that these are the some of the most common ones:

The business is under-capitalized. “The more equity in the business, the better. The less interest you’ll have to pay,” said Myron Knodel, director of tax and estate planning at Investors Group in Winnipeg. “Running out of capital is a result of failing to put together a good business plan.”

The business is badly managed. “People who start businesses may have great ideas, but they may have no capacity to manage people or deal with finances,” said Terry Zive, president and financial advisor at Zive Financial Inc. in Toronto. “A business owner needs to know the skills he doesn’t have, and whether he can afford to buy these skills.”

The owner or partners lack vision. “The world changes around you,” Zive said. “The product or service that is successful now may become obsolete in a few years.”

Family members are doing jobs they don’t have the skills to do. “This can be especially problematic if they’re doing accounting for the business,” said Colin Montgomery, a financial advisor with Edward Jones in Regina.

The owner has not looked for an appropriate successor. “The business owner may assume that his eldest son will take over the business,” Zive said, “but the son may not have the knowledge, skills or interest to run the business.”

The owner is unwilling to retire. “The owner of a family business may need to hand the reins over to the younger generation at some point,” Knodel said.