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How do businesses end up filing for bankruptcy? - Part I

Many of our Escondido readers are probably used to seeing news reports about business that file of bankruptcy. Indeed, many previous posts here have detailed some examples of companies that file for Chapter 11 bankruptcy - businesses like clothing retailers and sporting goods stores. Some people may think, "Oh well, another company that wasn't selling something that people wanted to buy." But, is there more to it than that? How do businesses end up filing for Chapter 11 bankruptcy? There is no short answer, but there are some concrete possibilities in almost every case. In Part I of a two-part series, we will examine some of the possible reasons.

First, there is a concept that has been mentioned here previously: adapting to the marketplace. We are all familiar with some huge companies that no longer exist due to the failure to adapt to the times - such as Eastman Kodak, the former mega-camera and film company. Digital cameras ended up sinking that company as consumers switched to a newer and easier way to take pictures.

But, selling a product that is no longer needed isn't the only way a company can fail to adapt. A company can also fail to adapt to how consumers are making their purchases. The best example of this is probably clothing retailers that have a heavy mall presence throughout the country. Consumers are shifting more toward internet shopping and away from retail locations. The failure to adapt can decrease a company's value very quickly.

Next, and somewhat tied to adapting, there is the issue of expanding too quickly. In this instance, think Krispy Kreme Donuts. The company expanded at a seemingly exponential rate, with donut shops opening throughout the country. But it was an expansion that was too quick to support sustainability, and the company was forced to severely constrict as a result. Part II of this series will take a look at a couple more common problems that lead to a business bankruptcy: problems with business concepts and ownership decisions.

Source: footwearnews.com, "4 Critical Mistakes That Lead Business to Bankruptcy," Sheena Butler-Young, Sept. 19, 2016

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