Failing Companies: When the Ship Is Sinking Do You Bail, Paddle, or Swim?

Many companies falter, and some will fail. How you lead your ship through the storm can make all the difference.

Thanks to the Great Recession, I happen to know three businesses that are currently on the way out.

All three were stunningly profitable -- in 2008. But now, all three are losing money. All three have a business model that is probably past its prime. Not one is paying the owners any salary at all.

Despite these similarities, the owners of these companies have very different perspectives on how to handle impending failure. One is frantically bailing. One is paddling as hard as he can. And one is preparing for a long solo swim.

#1: Bail Faster

If a ship is taking on water – or a company is losing money – most managers’ first reaction is to cut costs. Throw the deadweight overboard. Bail out the water with every available bucket. In a large measure, these entrepreneurs are smart, forward thinking, and it’s likely that they will survive the recession.

But where will they be when it’s all over? Probably in the same place.

If you put effort into bailing, you’re not pushing forward, and you’re not making progress. In the end, you are a smaller ship, just as far from shore, but with less manpower to move you closer to your goal. Is the original goal so important that you put all your efforts into cost cutting and downsizing?

#2: Paddle Harder

If cutting costs does not come naturally, the temptation is to chart a path around the storm and paddle harder in a new direction. Or when the market is shrinking, you don’t give up, and you just change course and work like heck to make progress. The good news is you might feel the wind in your hair. You’re moving – you're going somewhere.

But a new direction takes you into uncharted territory. You have no experience in the new markets you are entering and no understanding of the perils ahead.

Are you really any better off? It’s easy to get that sinking feeling all over again.

#3: Swim for It

The third option is to abandon ship. When irons turns to broach, even the best captain wonders whether he is doomed to go down with his ship. An experienced entrepreneur hears the siren call of new adventures and might just decide to jump overboard and swim for shore.

But when a company leader calls it quits – closes the doors and sends the crew packing – who benefits? Not the crew. Not the customers. And not the captain who was counting on equity to buy his retirement yacht.

Still, the prospect of cutting losses can sound better than the forecast of continued stalls – or squalls. And bailing out can be a lot easier than bailing water.

The swimmer I know seems prepared to go it alone – maybe even to sit out the storm and do very little until better weather goads him back to the entrepreneurial seas.

Lessons Learned

The recession continues to hamper all kinds of businesses. And if it’s not the recession, then it's changes in technology, in consumer spending, or in government regulation. Eventually, all businesses face the perfect storm.

So prepare now. When your ship takes on water, are you going to bail, paddle, or swim? I want to hear about it. We all do. After all, knowing how to chart your own course through the roughest of seas may be the truest mark of a worthy captain.

Dedicated to your (smooth-sailing) profits,

David