Episode 16 – How Small Businesses Fail and Why It’s Too Important

Episode 16 of the “Law & Business” podcast is about How Small Businesses Fail and Why It’s Too Important.  Anthony Verna sat down with Jim Huerta of the Nessa Group, a senior-level advisory firm that helps companies realize their potential, achieve their goals, save money, and increase their profits.

What’s on the mind of a business advisory firm?  How small businesses fail.  Many small businesses fail – it’s why the Lanham Act requires proof that trademarks are in use between 5 and 6 years after registration.  But small businesses don’t have to fail – small businesses can grow and become big businesses.

The goals of the Nessa Group and Verna Law, P.C. are aligned – to help businesses grow.  The conversation that Jim and Anthony have revolves around different strategies both Jim and Anthony have taken in order to help their clients grow.

Jim is a seasoned executive with senior line management experience. He has held positions in a wide variety of industries including Intellectual Property, Entertainment, Strategic Business Consulting, Market Research, Mining, and Security & Commodity Trading and Trade Finance.

Here is a lightly-edited transcript of the podcast episode:

Anthony
Verna:
So welcome to the Law and Business podcast. Jim, how are you doing?

Jim Huerta:
I’m doing fine. Thank you, Anthony.

Anthony Verna:
All right, I’m here with Jim Huerta, who is cofounder of the Nessa group. How
was my accent there in your last name?

Jim Huerta:
I liked it perfectly, phonetically correct.

Anthony Verna:
I do my best despite not speaking Spanish. French, yes. Italian, not so much.

Jim Huerta:
Just use your hands. The curse of the Latin races, you know, French, Italian,
Spanish.

Anthony Verna:
So Jim, tell us about the Nessa group so everybody can get to know you.

Jim Huerta: . The Nessa group has been together for about three and a half,
going on four years. We’re advisors and consultants in, in most all
disciplines, including helping to raise capital. And we’re working with SMEs,
so we stay in that particular space. We believe that underserved space in the
streets when it comes to the smaller businesses and we feel we can bring them
advice and help that they need to survive.

Anthony Verna:
I think a lot of small businesses need a lot of advice for survival.

Jim Huerta:
Yeah, yeah.. I mean if you look at the statistics and I’m sure you and I will
touch on a little while it’s amazing of the amount of startups that are coming
up in North America, the US every month and which more astounding is the amount
of failures that are coming out of it.

Which brings to mind the thing that when you look at these companies and they
have the right product, even have some of the right targeted markets, but they’re
failing because of other more theoretical business structures that we set in
business in this country or any country. And that’s what they’re failing. It’s
the doing things that they don’t really know how to do. And I’m sure you can
appreciate it. You are a lawyer. I mean, it could be what they think. The
Missouri lawyers and I say, don’t be a Missouri lawyer. You don’t have a JD you
going to get killed.

Anthony Verna:
Don’t be a Philadelphia lawyer.

Jim Huerta:
Okay. I call it the Missouri lawyer somehow.
But it’s that searching off of the right advice to the right help. I think it’s
important.

Anthony Verna:
So, what are some reasons that businesses fail?

Jim Huerta:
Well, right now the research that we’ve done and the things that we do, we find
that companies fail because of improper management of people who are, that’s
really seasoned or knowledgeable, the areas they’re taking. I mean, if you have
a guy who’s created a company in Pecos, he has a certain expertise. I think he
should always be the face of the company. Why would you force that same
individual? Why would he force himself, to take on roles that he’s not good at
and take away what he is good at. In other words, that’s working to a person’s
weakness. I don’t see the point of that. I also think when they find themselves
in those situations they look at it as I’d need help right away.

Let me get my cousin Anthony to come in and help me. Anthony, could you do
this? I’ve never done that in my life, Jim. Well that’s okay. At least I don’t
have to do it. In comes Anthony. And so now the management’s getting worse
every single day.

Anthony Verna:
Because there’s in-expertise on top of in-expertise.

Jim Huerta:
Exactly right. It’s layers. It just as a self-fulfilling prophecy, it’s going
to keep on going. You had the same situation in terms of failures with some of
the deals they make funding deals would banks, so private lenders or investors,
you can see it in the deal that that deal is really not a favorable thing for
them to be in. That they have nowhere to go but to lose. So, a lot of times
they don’t seek help. Get me out of this deal. Get me out of this facility.

Anthony Verna:
Are you thinking)
of maybe the terms of a loan aren’t quite right? Maybe the percentage is too
high, or the terms of the payback are too quick so that the capitalization or
maybe a business is just under-capitalized from whatever financial deals are.

Jim Huerta:
All the above, above. Okay. I think that’s the best, all of the above. I think,
again, it’s the lack of, of knowledge, the lack of perspective, where they’re
trying to go. The lack of planning, which is also finds itself in those areas, it
hurts them. The other thing is communication, that communication. So, some of
these companies that fail horrible they’re not looking at their operations and
they’re looking at their cost and not keeping a trigger finger on what’s my
burn rate. And before you know it, they realize, you know, I’m spending more
money than I’m making. I’m selling this for 10,000. It’s costing me 15. Well,
that’s because that’s not where they were grooming to do, where they started
the business in the first place. You need the guys that come in and say, you’re
really taking this to a place that you shouldn’t.

My worst of all of these. I want to tell you my worst and I’m sure you you’ll
get a kick. My worst, it throws me back when it’s listed as one of the bigger
failures is little companies that are doing well. They have gotten beyond those
four or five things I just mentioned to you. The growth starts happening and
they’re ready for it and have to fold because they can’t meet the growth of
their company. That’s to me is mind boggling. There is something so totally
wrong there when you’re not prepared for that. That to me that should be the
first thing in the minds of people in their going concerns. Suppose we get
50,000 units ordered one month and we’re producing only 10. How do we survive
here? And that happens much too often. And I think that’s just not a thing to
do.

Anthony Verna:
One of my favorite business failure stories. This comes from unfortunately a
former client of mine from years ago who was looking for funding. And we spoke
with somebody who was a money person and we had him review what the product
was, what our timeline was, and eventually he said, you know, the biggest
problem wasn’t really the product. The biggest problem wasn’t really the
timeline. The biggest problem wasn’t any other contract that this company had.
The biggest problem was that the owner of the company wanted the owner’s name
in every single slot of the organizational chart.

Jim Huerta:
That’s right. That was the main pride. My name is there. That’s all that
matters. Yeah, I know. That’s that ego thing that drives sometimes to too bad mistakes.
But yeah, I’ve seen those. And you see that a lot with inventors and I know you
were in that business for trademarks. Inventors, when you talk to them about
whatever you and I might do with it be a patent, whether it be a trademark, copyright.
It’s like, that’s my firstborn. Don’t touch it. I said, no, you gotta let me do
my job here. Okay, please, I’m begging you because your first born might not
make the teenage years. We keep them. But it happens all too often.

Anthony Verna:
The one issue that I often talk about is the need, I don’t want to say the need
to pivot because I don’t think pivots quite the right word, but from a branding
standpoint, if a company’s brand has issues, and maybe it’s because there’s a
third party that’s challenging it or maybe it’s because it’s too descriptive,
so it’s not going to be a registered trademark in a certain period of time. If there
needs to be a change, a lot of small businesses really fallen in love with a
particular trademark and trying to say, maybe the best business judgment is not
fighting it because it’s going to cost, 10 X to fight it. But maybe changing it
is better cause they’re gonna cost 0.5 X, you know? And so, you’re dealing with
the big, gigantic leap. But from that, yes, that ego sense from that falling in
love with a certain sense it just really hurts, and the business might spend
more money than it really can afford to over its brand.

Jim Huerta::
Absolutely. Right. And they do it much, much too often that goes on you. You and
I have a  name to be remain unmentionable
but you and I have an example of that situation that we know together.

Anthony Verna:
Absolutely. Absolutely. So we we’re coming out of the great recession. Some economists
say we’re still in it. Some economists say we’re out it, the economy is looking
better now than it did. How are businesses still not capitalizing properly. How
are businesses still failing now that the economic outlook is different?

Jim Huerta:
Well, it’s interesting that you would ask that question that I’ve been always
looking at it and trying to do some writing on it. But I think the small medium
size enterprises are the core to the stability of the recovery of this country.
And I can give you information of what they were doing when all these big guys
were killing the economy. I think it’s the little guys that really kept the
economy going and didn’t get worse. That’s my belief and that’s what the
numbers tell me. I think right now, in addition to the help that I think these
small companies need in terms of getting themselves in the right track and the
right planning and the right decision making process, they need help from
government agencies. They need help from agencies that they’ve been out to all small
business agencies.

They need real help. They need help that can give them a leg up when it comes
to the financial stability of their companies. I don’t think they get enough of
that. I think the banks, I mean, I remember the keyword and I used it in the
piece that I wrote, “Too Big to Fail”, while the banks are too big to fail. So,
we all chipped in and bailed them out and thank God a lot of them have paid.
But you know, how you helping the small, medium sized guy? Are you really
understanding the impact that they could have if their economy falls apart, If what
they’re doing falls apart? You’ve got to take care of that. And I don’t think
we, it a  disservice to the SMEs in this
country and you look at the political environment right now, people running for
office, people running for the highest office in this country, the first thing
out of their mouth during the debates is entrepreneurs help and support
entrepreneurs.

Anthony Verna:
Well, entrepreneurship, I don’t want to say is the sexy way of making money,
but it certainly feels like it’s the sexy way of making money today. But more
so to the point of gee, how are bigger banks helping? And I’d say I hear a lot
of examples when I listened to small business shows about, you know, banks
going through universities and helping, you know, the businesses through
universities. But for example, my wife and I were just at a startup event in
New York city this past week. And they were just angel investors there. There
were no banks there. And still for every angel investor there was probably 20
entrepreneurs, or small businesses, startups and the chances of getting funding
from the angel investors, the chances of getting some kind of interest from
these angel investors of course is low to begin with. And when you’re kind of
doing the speed dating event for entrepreneurs, it’s really low. The chances in
the long run of any

one entrepreneur getting funding. I’m sure some will. Yes, absolutely. But I’m
sure more are going to be left off that off that table. And it sometimes it
feels like a feeding frenzy rather rather than some kind of some kind of stable
way of building small businesses up.

Jim Huerta:
Sure, exactly right, exactly right. You know, they one of the things I had
mentioned you when you were talking, we talked about the survival at the
beginning of the company. So, I just want to point something out which is relative
to what we’re trying with the discussions going. When you look at the evolution
of the SMEs after two years, seven out of ten are out. After five years, half
of that is left. After ten years, a third of it is left, in fifteen years, af quarter.
So, meaning after ten years, out of ten companies, two are still alive.

Anthony Verna:
Sure.

Jim Huerta:
And some of the one of the two, some of them could be barely alive. And that
reasoning and that dose statistics is what leads to some of the stuff that you
and I been talking about, or how do you help that not to happen? How do you
deter the ultimate consequences or how do you turn these statistics around? And
that’s that to us is the crust of what we need to do, how we need to help these
folks. And if we can…

Anthony Verna:
So, I mean, part of that is why intellectual property law, trademark law, which
revolves around business. If there’s no business, there’s no trademark. That’s
why there’s a required file filing between five and six years. That’s why the
renewal happens. And then another five years after that in year ten, because
gee, the amount of businesses that are around at those points keeps going down
and therefore having something in the patent and trademark office that’s
reserved space for a dead company.

Jim Huerta:
Sure.

Anthony Verna:
It makes no sense whatsoever. So, we make sure that gets weeded out should that
years five and ten.

Jim Huerta:
Sure. Exactly. Right. I wanted to make mention when we talked about the
beginning and I said to you about the whole idea of the contributions that were
being made and were being looked at during the beginning, the 207, the 208
session when that word came up for the first time, the phrase too big to fail. The
companies that were working to prevent it to help you to help our economy. It
is mind boggling for the SMEs. I’m going to read some of the studies. I don’t
want to subject it to memory, but companies, startups and grew up 28.4 million
companies, of which 200 K were designated as medium size companies evolve
during that very period when the big guys were getting hammered and they
couldn’t come up with any money and the taxpayers were carrying their freight. Over
50% or 150 million of the working population who works in small businesses. In
addition, 44.5 million work for medium sized companies. That’s a hell of an
employment grouping. 82% of the medium size firms survived the dark years of 2007
to 2008 compared to 57% of small firms, again, the medium size who started small
moving up the ladder with help.

Anthony Verna:
As the old saying goes, if you want to start a business, do it in a recession.

Jim Huerta:
Exactly right. It’s where the openings are. During the great recession and
ongoing recovery, small business created 60% of new jobs, medium size firms added
2.2 million new jobs during the same period. And forgive me for this, but this
stuff to me, it’s so relevant to what we’re trying to do as a firm. In 2010,
the front of the medium size firms increase employment by 3.8% compared with
the growth of 2.5 by small firms and .8% by big businesses –  0.8%, not even 1% coming out of big business
sector.

In 2012 medium sized companies, average revenue growth was sub set at the three
quarters of the celebrating growth. So that means they did a spark at that
particular moment and approximately 500,000 new small businesses were added monthly,
which is the thing we started this conversation with. Unfortunately, we also
talked about how many fail, sorry, at a 50 out of 500 K you’re looking at
probably less than maybe a thousand or 1200. So, you’re looking at a big
downfall there. Um, but I think that the way the economy is going in the way
the states are trying to motivate themselves with SMEs particularly, I think
it’s the way for this to grow, to take place. As statistics change and keep on
being reevaluated, I think we’re going to find that a lot of the employment
that we’re seeing right now, which without five point something percent lowest in
umpteen years is coming from some of these SMEs that just we’re not looking at
it. A lot is coming from these guys.

Anthony Verna:
Jim, what do you think government can do, if anything? I mean, I’m gonna fully
admit that I’m a total cynic and skeptic when it comes to some government
actually helping smaller businesses. And I think governments, uber inefficient.
I mean, we could look at what Rhode Island did with the Curt Schilling software
company and how all that money is now missing, you know, as, as I would say one
example. But how can government help small businesses keep growing into the
medium sized businesses?

Jim Huerta:
Okay. Well, the first thing I would say is don’t try to manage these small
companies. We don’t want that to happen. What we do need is programs. We need
programs that actually become, I mean you have things like Score out there. You
have firms like the Nessa Group out there. That’s all fine. Well, I mean Score is
a free way of getting good advice and I’m an advocate of it.

I don’t think you should run away from them. I don’t think we’re in a
competitive stage. They’ll go some the stuff we do is stuff that they would
never do, but the government needs to create ways that if in fact small
businesses can be given the credit for this stability, if any stability could
place to in these past umpteen years, then my philosophy is let’s help them,
like we decided to help the larger companies. Create programs that are not over
aggressive because some of these programs create a paperwork volume that’s
beyond what any small company wants to deal with. But they can certainly help
and kind of looking for in roads and finding ways that these companies could be
more prepared for the markets that they’re trying to penetrate. They can help
us with bank supports. I think the government could say if it’s a small
business that meets these particular levels of lending or credit, then we will
support it to some kind of government paper.

That’s, that’s doable. It’s done in many other industries. I mean AAG, how much
money do we give those guys? Those numbers were off the charts, but I think the
banks right now, because the interest rates are so low are really not helping
the SMEs, why would they? It’s a business call. If you telling me that I’m
going to give Anthony and Jim this kind of money and I’m going to get 1%
interest where I can get 10% with another facility or another product, why
would I do, why would I help Jim? I like them. They’re great guys, but when I’m
a businessman, I’m going to make money, so I think the government needs to do
the things that they are capable of doing short of not interfering in their
business. That’s when it gets tricky.

Anthony Verna:
Do you have any tips for small businesses to help themselves?

Jim Huerta:
Yeah, I do. I think the tips that I would recommend is that they look at their
management, work on the business plan, think about their business plan. If they
don’t have one, they should have one. They should lay it out. Since it’s
already something that’s chipped in. Granted, people think, oh, if I do this
business plan, everybody’s gonna think I can’t. No, no. It’s a guide. It’s like
writing a map. Maps change. You get better trails, but you need to do that to
be prepared for the ups and downs that your business will face. You find
programs out there that permit you to go and get help from them. Go do it, go
do it. Don’t hesitate, and it’s not just the networking. I mean you would, I
would say networking is great, but it’s small business guy site. If I go there
and sit in that location for two hours or two hours that I’m not working my
business, I get that.

Especially if they thing that that network group is not going to be
client-based, but go learn whatever you can. Make sure you have the right
finances. Make sure you have the right management. If you can’t afford the
right management, you can afford devices like the Nessa Group. There’s ways to
go to the universities, look up intern programs within the intern program in university.
They have different programs for kids that are business majors, accounting
majors, who you can get your hands on and they’re bright kids and you just need
to get away from the fact that you need to be out there selling whatever you
have as a product. You don’t have the skill set to do what I’m asking you to do
and that’s nothing to be ashamed of. By the same token, I couldn’t go out there
and sell what you’re selling. I get that.

I chose my field and I think that’s the help that they should seek in the
secret all the time and look for people who are willing to help them because if
not, you know, they will tend to have the failure rates will continue and I
don’t believe we can afford that level of failure rate in SMEs. I think SMEs
are the backbone of this country. That’s why I say when I talk about the AAGS,
when I talk about these companies that we labeled and gave him that title, too
big to fail. I always had my compensation. And so now that I’ve told you about
SMEs, I’ve told you what they contributed, what they continue to contribute.
Don’t you think they’re too big to fail? That’s philosophy that I have to carry
because I believe that.

Anthony Verna:
As a sector it’s a very big sector. And yes, there’s a high failure rate.

Jim Huerta:
Yeah, much too high.

Anthony Verna:
Jim, thank you very much. You’re going to be coming back.

Jim Huerta:
I’m going to be coming here all the time. You’re going to have to say leave, I
don’t want you here anymore. Thank you for the opportunity to come by my
thinking of what’s going on. I appreciate it. Thank you very much.

Anthony Verna:
No problem, Jim. Talk to you soon.

Jim Huerta:
Okay.