This article are provided for information purposes only, and are not intended as legal advice.


Business strategies in tough times – Part II

March 10th, 2009

Your business is shrinking and your overhead is high. You know it is only a matter of time before you lose enough customers to cause you to close the door.  If you get additional customers, you prolong the situation but your overhead is too high and you do not have enough critical mass. An example of this is the alarm industry.  If you have a monitoring station, you must man the station 24 hours per day, 7 days per week no matter how many customers you have, if you have 1 customer or 10,000 customers, you still have to pay the rent, people to staff the monitoring station, the telephone lines etc., these are all fixed costs.

 

Many companies in the alarm monitoring business do not build their own station, they subcontract to another company’s alarm station.  The phone is answered as it is the monitoring station as if you were dealing with your company but in fact it is an employee working for a larger corporation who answered the phone.  Many smaller alarm companies did not consider the financial obligation of building their own monitoring station.  What makes good business sense?  In this example, we found two other alarm companies who were in the exact same situation, too few customers and too much fixed overhead.  None of the companies had reached critical mass yet. 

 

The best thing that could have been happen was to merge the three companies who owned three separate monitoring stations.  What would this accomplish?  Lower overhead, there was only 1 station open 24 hours per day, 7 days per week, you needed only one monitoring station staffed, less phone lines since you did not need the same number of lines going to three locations.  You lowered your fixed operating expenses, consolidated all the overhead into one location instead of 3 and were able to get critical mass to run the business.

 

The three owners of these businesses all agreed that this was an excellent idea and it would help keep all three of them from bankruptcy.  What went wrong – egos.  Each of the owners thought that they were better than the other two.  You only needed 1 person to run the business and not 3.  None of the three owners wanted to retire and all thought they were better than the others.  Each wanted to be President and each wanted the other two owners to retire.

 

In the end, the three companies did not merge and they all went bankrupt.  Their egos were more important than the financial survival of their business.  In tough times, you may not like the decisions that you must make however good business judgement goes a long way.  It is better to own a smaller portion of a larger business then 100% of a bankrupt company.


Filed under: Business strategies — Gary Landa @ 10:24 am


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