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Five Businesses That Did Not Survive 2011

Financial Woes
CNBC.com
Financial Woes

It has been another tough year for many small businesses. One in four, according to the National Federation of Independent Business, believes the biggest problem is weak sales. No matter what other challenges they face, said William Dunkelberg, the federation’s chief economist, “the key to everything is cash coming in the front door.”

Inevitably there are businesses, like the Elizabeth Anne Bed & Breakfast in Crested Butte, Colo., that struggled. And inevitably, there are owners, like Kevin and Denise Reinert of Elizabeth Anne, who held on as long as they could. “We kept thinking we could turn it around,” Ms. Reinert said. “We rented out rooms until the day we moved out.”

Here are the stories of five small businesses that were not able to survive 2011.

A Poorly Timed Refinancing

The Elizabeth Anne Bed & Breakfast was bought in 2003 for $650,000 and closed last August.

AT ITS PEAK After buying the Elizabeth Anne, the Reinerts steadily increased revenue, from $78,000 in 2004 to $104,000 in 2007. “We got to know the guests,” Mr. Reinert said, “and they got to know each other.”

WHAT WENT WRONG In 2007, the couple refinanced, taking out some equity to renovate the kitchen. They wound up with a 10-year, interest-only loan that increased their mortgage payment by $1,700 a month. But with people taking fewer vacations, Mr. Reinert said, revenue declined 21 percent in 2009. In 2010, they fell behind on their mortgage payments and were not able to modify the loan. The bank foreclosed in June. LOOKING BACK Ms. Reinert blames the refinancing: “It’s what did us in. Back then, we didn’t anticipate things slowing down.” Today, the Reinerts run KR Construction, which does handyman jobs. Ms. Reinert also works at a local restaurant, and Mr. Reinert plays bass in a Beatles tribute band, Dr. Robert.

‘We Did Everything Right’

Just Moulding, based in Gaithersburg, Md., sold and installed decorative molding. It opened in 2004 and closed last April.

AT ITS PEAK Mark Rubin and Kevin Wales started with a single workshop that handled small jobs larger installers did not want. In 2007 things were going so well they decided to sell franchises in the business and raised $700,000 from 21 investors. After Mr. Wales left the company in 2010, Mr. Rubin’s father-in-law, Richard Hayman, took over as president. Soon after, sales increased by 20 percent and the company became profitable.

WHAT WENT WRONG The recession. The company, Mr. Hayman said, sold a product that people wanted but did not need: “It was crown molding, not a furnace or a roof.” And while the business had the high legal and accounting costs associated with selling franchises, it had sold only three by the end of 2009. Potential franchisees had trouble raising the $100,000 to $250,000 needed to get started.

LOOKING BACK “We did everything right,” said Mr. Hayman, who sank $470,000 into the company. “We hired the best people and had a great product. We could not overcome the bad economy.” He and Mr. Rubin declined to discuss what they are doing now.

‘1 Percent of $500 Million Is a Lot of Money’

P & H Capital, a commercial mortgage company in Brooklyn that specialized in finding loans for small businesses, opened in 2009 and closed in March.

AT ITS PEAK Shawn Porat and Ismail Humet started P & H Capital with $4,000 while Mr. Humet was working as a Wall Street analyst and Mr. Porat was running Recovery of Judgment, which helps clients collect legal judgments. The friends saw the subprime crisis and tightening of credit as an opportunity, believing they could match small businesses with lenders offering alternative financing. In January 2010, Mr. Humet and Mr. Porat were piecing together a $500 million deal that they believed had a good chance of working. “Our commission was 1 percent,” Mr. Humet said, “and 1 percent of $500 million is a lot of money.”

"We did everything right. We hired the best people and had a great product. We could not overcome the bad economy." -former president, Just Molding, Richard Hayman

WHAT WENT WRONG For one thing, the big deal fell apart. Lenders were skittish because the money would be used to build a factory in Asia, Mr. Humet said, and they were wary of dealing with a foreign government. In addition, lenders wound up imposing stricter parameters for alternative loans. He also said that P & H clients often had unrealistic expectations about how much money they could get. “We had a restaurant owner that needed $300,000 to open another location, but we could only get him $150,000,” Mr. Humet said. “He didn’t go through with it.”

LOOKING BACK Mr. Humet said he and Mr. Porat did not anticipate how difficult it would be to place even their best applicant’s loans. Since closing P & H, Mr. Humet has helped start MyFreebeez.com, which promotes small businesses online using free giveaways. Mr. Porat operates Recovery of Judgment and Judgment Marketplace, an online marketplace where money judgments can be bought, sold and traded.

‘I Didn’t Project My Costs Very Well’

ScooterFood, a maker of all-natural dog food based in Brooklyn, opened in 2006 and closed last August.

AT ITS PEAK Shortly after Sept. 11, 2001, Michelle Lewis found herself unemployed when the online art gallery where she worked — in the shadow of the World Trade Center — went out of business. An animal lover with time on her hands, she began cooking all-natural meals for her dog, Scooter Mae, who did not like canned food. Friends suggested she turn the meals into a business, and in 2006, she started ScooterFood. The company was promising enough to win a second prize award of $5,000 at the PowerUP! Business Plan Competition at the Brooklyn Public Library in 2006.

WHAT WENT WRONG Ms. Lewis said her business plan was more hopeful than it should have been. Because her food was perishable, she sold it frozen — but did not realize that in 2006 few pet stores had freezer space. In part because frozen food was expensive to ship, ScooterFood was priced higher than other dog foods.

LOOKING BACK Ms. Lewis said she should not have done her own bookkeeping: “I didn’t project my costs well and never really knew if my revenue was covering them.” Over five years she invested about $60,000. With a clearer picture, she said, she might have closed the business sooner. In September, Ms. Lewis started Spoonable, a line of caramel sauces. She has hired outside bookkeeping help.

‘Profits Would Have Been Huge’

SmartyVA was an online training program for virtual assistants who specialize in social media management that was based in San Luis Obispo, Calif. It opened in 2009 and closed last February.

AT ITS PEAK In 2009 Starr Hall, a public relations consultant who was overwhelmed with requests for social media help, saw an opportunity. She invested $10,000 to create SmartyVA training materials and a Web site with a search engine that aggregated job leads. The six-week training program cost $1,000 and was aimed at stay-at-home mothers and disenfranchised women, like victims of domestic violence. When graduates took jobs through leads on the site, SmartyVA received 10 percent of their earnings. The company generated $100,000 in revenue its first six months.

WHAT WENT WRONG SmartyVA’s profitability depended on graduates following up on job leads they received through the system. “A hundred virtual assistants finished the program, but only 21 of them were working,” Ms. Hall said. “If all of them had been working, profits would have been huge.”

LOOKING BACK “I didn’t anticipate how different the mindset of the women I was training was from my own,” she said. Ms. Hall has returned to consulting. Her new book is, “The Social Wave: Why Your Business Is Wiping Out with Social Media and How to Fix It.”

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