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Five businesses that failed

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Starting a new business, especially when you're full of enthusiasm and have managed to secure the all-important finance, might seem like a breeze. You've got the money, you've got the great business idea, so what could possibly go wrong?

The harsh truth is that there's an awful lot that could happen to send your business on a downwards spiral, whether it's a start-up or an established operation.

Recent analysis from Deloitte revealed that the number of businesses going into administration increased by 26 per cent between 2005 and 2006, and research published by Lloyds TSB in January showed that a third of the nation's four million small businesses cite fear of failure and personal financial loss as their main concerns.

If those statistics give you doubts about your start-up idea, let's go one step further and take a look at some companies which succeeded before failing, and see if there are any lessons that can be learned.

First off, let's start with last year's high-profile business disaster that most Britons will have heard of.

Farepak

Farepak, the company promising to shower festive food hampers and vouchers upon consumers who deposited money with them throughout the year, finally went into administration in October 2006, after its parent company European Home Retail found itself in irreversible financial difficulties.

High street stores had demanded to be paid upfront at the start of 2006, dramatically increasing the amount of money Farepak needed to operate. Already in debt, European Home Retail could not increase its borrowing and, when Farepak's bank, HBOS, called in the company's overdraft, the final nail had been driven into the coffin.

As if its image couldn't get any more tarnished, it emerged that Farepak had continued to accept payments from customers even after it had accepted its days were numbered, as it tried desperately to pay back some of its overdraft.

Typical Farepak customers lost around "400, with some losing as much as "2,000, leaving many with ruined Christmases and a decidedly sour taste in their mouths.

Benjy's

Even more recently, consumers have witnessed the demise of Benjys, a low-cost sandwich chain with 46 branches nationwide.

Established in 1989 by the Benjamin family, the business was sold in 2000 for "25 million. The company entered administration for the second time since July 2006 this month, blaming its losses on difficult trading conditions in the highly competitive food retail sector.

Ansett Australia

For the latter part of the 20th century, Ansett Australia was a major domestic and international airline down under, with a long record of prosperity dating back to its establishment in 1935 by Sir Reginald Miles Ansett. Despite a glowing history, the business started to fall apart when it was bought out by Air New Zealand, previously a 50 per cent shareholder, in February 2000.

Within months, competition from Qantas and start-ups, overpaid staff, aging planes and the grounding of Boeing 767s due to maintenance issues meant that the business was running at a loss, with its new parent company also being dragged into the mire.

Air New Zealand was bailed out by its nation's government, but Ansett's fleet was grounded and the firm placed in voluntary administration in September 2001. Another company to go bust in recent times was Airfix, a UK manufacturer of, among other things, plastic scale model kits of aircrafts.

Airfix

Founded at the start of the second world war, Airfix went into receivership in 1981 and was bought by Palitoy, bringing it under the American General Mills toy group umbrella. The company was then purchased by Humbrol in 1986, but the firm which owned the moulds for the models, Heller, went into insolvency in 2005, leaving Airfix without any more kits.

Even a new management team failed to resurrect the dying company, which was also suffering due to competition from computer and video games, and Airfix's parent company went into administration in 2006.

Tiny computers

Finally, remember the demise of Tiny computers? Granville Technology Group, which traded as Tiny computers and the Computer Shop, went into administration in July 2005 after facing up to the reality of its "1 million to "2 million monthly losses for the previous six months.

Falling PC prices and increased global competition had been too much for the Tiny brand and two of the company's directors walked just one month before the company went into administration, leaving two executives to see the business through its final days. Around 1,500 jobs went down with the sinking ship.

All five of these business failures suffered from financial difficulties, but the causes of those problems were clearly diverse. On occasion, it simply doesn't matter how well you manage your finances if fate and unforeseen events, such as a supplier going into administration, conspire against you.

However, there are certain disasters that can be avoided, or at the very least mitigated. Take, for example, a warehouse fire. You may have the most comprehensive fire safety plan and an insurance policy which covers you for the value of your lost goods, but in the meantime you'll have no product to sell, no money coming into the company, and a baying pack of suppliers and employees hassling you for your money.

If your product is quick to manufacture and you have the necessary equipment on another site, you might be struggling for a couple of weeks at most and then be able to claw back a healthy bank balance over time. But in the majority of cases, a business could find itself out of pocket for weeks, months, and possibly years until it is forced into administration.

The answer, according to Douglas Barnett, head of customer risk management at AXA, comes in the form of business interruption insurance. Many small firms choose to buy a package policy which includes business interruption cover as a feature.

"It covers if there is a fire or a break-in and the business can't actually trade for a certain amount of time," Mr Barnett explains. "The business interruption policy picks up the difference - the amount that's lost in trading during the interruption. It covers any interruption - if you are a retailer or a pub or a restaurant or whatever - if you opened and then you had to shut for three months or six months, that could actually mean your business shutting."

There are various types of cover available under a business interruption policy, such as an extension that provides cover in the event that your supplier fails to deliver. "The main thing the business has got to do is have a look and think about what could impact them most," says Mr Barnett.

The trick to keeping your company afloat should the unforeseen occur, according to the risk management expert, is to make sure that every element of your business is covered, including your building, stock, contents, and employees. "People can find out about [insurance cover] on the web, through a call centre or, more traditionally, through intermediaries," he adds.


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