Outward signs of a private company failing

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miamivice
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Outward signs of a private company failing

Post by miamivice » Wed Feb 28, 2018 3:56 pm

What are the external signs that a privately held company is preparing to file for bankruptcy?

There is a company that has asked me to invest in it. I'm thinking they are not doing well, but their business development folks are saying everything is rosy.

I'm wondering what external signs I should look for to see how they are doing?

I'm talking about things like cars in their parking lot, etc.

AZAttorney11
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Re: Outward signs of a private company failing

Post by AZAttorney11 » Wed Feb 28, 2018 3:59 pm

Why don't you invest your time reviewing their audited financial statements instead of stalking cars in the parking lot?

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randomizer
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Re: Outward signs of a private company failing

Post by randomizer » Wed Feb 28, 2018 4:02 pm

Instead of gambling on a single company, buy a broad low-cost index fund.
75:25

miamivice
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Re: Outward signs of a private company failing

Post by miamivice » Wed Feb 28, 2018 4:06 pm

Please, let's focus on the question at hand. What are the external signs of a failing private company?

mak1277
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Re: Outward signs of a private company failing

Post by mak1277 » Wed Feb 28, 2018 4:08 pm

AZAttorney11 wrote:
Wed Feb 28, 2018 3:59 pm
Why don't you invest your time reviewing their audited financial statements instead of stalking cars in the parking lot?
This! It may not be "the question at hand", but if you're worried about the business failing you'd be foolish to invest without seeing the books.

HornedToad
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Re: Outward signs of a private company failing

Post by HornedToad » Wed Feb 28, 2018 4:10 pm

miamivice wrote:
Wed Feb 28, 2018 4:06 pm
Please, let's focus on the question at hand. What are the external signs of a failing private company?
They stop hiring.
They are much more aggressive trying to collect on AR's.
They say things like "it'll be ok once our funding cycle closes"

If you are an employee, they cut your salary "temporarily".

From investor standpoint, growth slows, market is shifting, they no longer attend conferences that are relevant, etc.
Last edited by HornedToad on Wed Feb 28, 2018 4:11 pm, edited 1 time in total.

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Tamarind
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Re: Outward signs of a private company failing

Post by Tamarind » Wed Feb 28, 2018 4:11 pm

Spikes in employee turnover. A later stage (usually incurable) symptom is trouble making payroll. This doesn't always show in the books - you'd have to talk to current or recently former employees to learn this.

spectec
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Re: Outward signs of a private company failing

Post by spectec » Wed Feb 28, 2018 4:12 pm

One external sign is that they are seeking private investors rather than bank financing.
The question before us is "If the bank won't loan them money, why should I?"
Get a TRUTHFUL answer to that question and you're well on your way to making a wise decision.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

livesoft
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Re: Outward signs of a private company failing

Post by livesoft » Wed Feb 28, 2018 4:12 pm

They start an ESOP.
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hand
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Re: Outward signs of a private company failing

Post by hand » Wed Feb 28, 2018 4:17 pm

Late / non payment of vendors...
Perhaps a trailing indicator, but Dun & Bradstreet provides business credit reporting.
Perhaps additionally, talk directly to some of the companies key (as well as smaller) vendors.

KlangFool
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Re: Outward signs of a private company failing

Post by KlangFool » Wed Feb 28, 2018 4:18 pm

OP,

They asked you to invest in their company.

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BogleMelon
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Re: Outward signs of a private company failing

Post by BogleMelon » Wed Feb 28, 2018 4:19 pm

HornedToad wrote:
Wed Feb 28, 2018 4:10 pm
miamivice wrote:
Wed Feb 28, 2018 4:06 pm
Please, let's focus on the question at hand. What are the external signs of a failing private company?

If you are an employee, they cut your salary "temporarily".
Not necessarily, I once worked in a small private company that was struggling and cut managers salaries in half! Employees had their overtime cancelled (Yes the country laws of this company allows it! I was handling the payroll and I had a fight with the CEO about it because he failed to give an advance notice to workers about the change :D )
Anyways, the company did recovered and now is a strong company and doing way better than anytime before..
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

jminv
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Re: Outward signs of a private company failing

Post by jminv » Wed Feb 28, 2018 4:21 pm

#1: Look at their audited books. Never make an investment when you can't. Otherwise, on what basis would you be making your investment? Not a good one.

The #1 bad sign: You've been asked to invest in their company. Along those lines, how persistent are they in seeking your investment? That's also a signal. Why are they asking you? Would you normally be someone a company like this turned to for investment?

Apart from that, it depends what sort of business it is. You said cars in a parking lot as a signal, so is it retail or a restaurant, something consumer facing? Is it small, big, sounds at least medium sized? There are industries that are unattractive to begin with and you could get an idea about the level of competition.

Run a business credit report. Also, if you can find out who their suppliers are you could try to find out if they're paying their bills on time (hence the credit report). See what sort of legal actions they have pending against them. You could talk to their customers.

If they're big enough they might have a number of glassdoor reviews from current and former employers. You can glimpse from that what sort of work culture it is, where the pressure is, sometimes if the company is having problems.

You could try to talk to one of their current employees. There are different ways to go about that, you can put some thought into how you would do it. Since they're asking you to invest with them, you should at least be allowed on site to talk to someone about that potential investment. You can notice if their office looks empty.

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nisiprius
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Re: Outward signs of a private company failing

Post by nisiprius » Wed Feb 28, 2018 4:44 pm

"There is a company that has asked me to invest in it."

So far, in life, I have always had much better results with things I have sought out, then with things that have sought out me. If a company asked me to invest in it, I would run for the hills.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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bligh
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Re: Outward signs of a private company failing

Post by bligh » Wed Feb 28, 2018 4:50 pm

HornedToad wrote:
Wed Feb 28, 2018 4:10 pm
miamivice wrote:
Wed Feb 28, 2018 4:06 pm
Please, let's focus on the question at hand. What are the external signs of a failing private company?
They stop hiring.
They are much more aggressive trying to collect on AR's.
They say things like "it'll be ok once our funding cycle closes"

If you are an employee, they cut your salary "temporarily".

From investor standpoint, growth slows, market is shifting, they no longer attend conferences that are relevant, etc.
All good signs. Especially the one where they are going around actively finding independent individuals to invest in them. :)

Also, depending on the business this company is in, employees pick up on these things.. so another sign to look for is the general mood/energy level/ambiance in the office or on the floor. Having worked at a couple of companies that went through hard times, there was an obvious and definite shift in employee morale. Fewer smiles, fewer water cooler conversations, general office areas got silent, more empty desks, and so on.

123
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Re: Outward signs of a private company failing

Post by 123 » Wed Feb 28, 2018 4:52 pm

Asking for money or a loan is a frequent indicator of financial failure whether the amount is $2 for a "cup of coffee" or a million dollar business "infusion".
The closest helping hand is at the end of your own arm.

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DaftInvestor
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Re: Outward signs of a private company failing

Post by DaftInvestor » Wed Feb 28, 2018 4:57 pm

I agree with others - if they asked you to invest - they are not doing well (unless you have $5M to invest with them them).
A strong company doesn't want to deal with a lot of small external investors - they would rather go to a VC for funding or, better still, a bank for a loan (giving no equity nor control away).
If you are an employee and they are allowing you, as an employee, to participate in a private equity round that might be a different case (they sometimes invite employees to invest for skin-in-the-game success incentive).

There may be no outward signs they aren't doing well. And Engineering, and possibly even the bus-dev folks, may also have no idea how well the company is really doing (I worked for a company where everyone in engineering thought we were doing well until the day everyone was gathered together and told money had run out).

Theseus
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Re: Outward signs of a private company failing

Post by Theseus » Wed Feb 28, 2018 5:05 pm

Very good points made by others so I won't repeat that.
miamivice wrote:
Wed Feb 28, 2018 3:56 pm
....their business development folks are saying everything is rosy.
No disrespect to any BD person, but every BD person I have met or hired has always said rosy things even when things were terrible. It's just in their personality/duties. So I'd be careful at taking their word. OTOH operations/engineering director/manager would have a different view.

spectec
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Re: Outward signs of a private company failing

Post by spectec » Wed Feb 28, 2018 5:25 pm

You could also volunteer to work in their accounts payable dept for a couple of weeks.
But you may get your answer in a couple of days. :)
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

dbr
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Re: Outward signs of a private company failing

Post by dbr » Wed Feb 28, 2018 5:29 pm

When they no longer supply free coffee to employees. Seriously, I have a sample of one in which this is true.

TomCat96
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Re: Outward signs of a private company failing

Post by TomCat96 » Wed Feb 28, 2018 5:45 pm

miamivice wrote:
Wed Feb 28, 2018 4:06 pm
Please, let's focus on the question at hand. What are the external signs of a failing private company?

I don't know how applicable this is to private companies, but I have heard that one sure sign of trouble is that the auditing firm resigns. It makes sense that the auditing firm would refuse to sign an audit they know to be comprised of false records.

I also agree with many who say they come asking YOU for money. Healthy companies don't ask for nickel and dime investments from small parties.

Other signs include excuses for lack of payment, lack of transparency, and urging people to be a little more patient. While insufficient it itself to allow one to conclude the company is failing, any time any enterprise starts making excuses, I always increase my personal scrutiny by an order of magnitude.

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