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Colt Goes Bankrupt: 3 Lessons for Small Businesses

By Christopher Coble, Esq. on June 16, 2015 10:54 AM

Colt Defense, LLC, one of America's oldest and most storied companies, filed for bankruptcy this week. It seems impossible that such a historic brand (and a gun manufacturer in America at that) could go bankrupt, but bidders weren't exactly chomping at the bit for the company when it went up for auction.

If it can happen to Colt, it could happen to you. So what can small business owners learn from the legendary gun maker's mistakes? Here are 3 lessons:

1. Check That Debt.

At the time of its Chapter 11 filing, Colt had $500 million in assets ... and $500 million in debt. While some debt is acceptable and even necessary to get your business off the ground, extensive debt that funds controller salaries, "distributions," and "advisory fees" is a bad idea.

Make sure all of your debt is in service of your core business needs, and that you have a manageable repayment system.

2. Strike While the Market Is Hot.

One of the more stunning revelations of Colt's bankruptcy, as reported by Bloomberg Business, is the company's failure to capitalize on the "Obama surge" in small arms: "a run of strong civilian gun sales prompted by fears whipped up by the National Rifle Association that the Democratic president would stiffen federal gun control." And with just about every mass public shooting followed by a spike in gun sales, it seems impossible that these two market forces wouldn't boost Colt's sales enough to keep the company profitable.

Make sure your company is ready, willing, and able to take advantage of opportunities in the market.

3. Diversify Your Customer Base.

Having a few big customers or clients can seem like a great idea when the money is flowing in -- fewer buyers can streamline your business and keep you focused on your product instead of hunting for new customers. But they may not always be there. With military activity in Iraq and Afghanistan winding down, Colt's profits, so heavily tied to government contracts, flagged as well.

Make sure you won't miss one or two clients too much.

And, should the day come when filing for bankruptcy might be your best option, make sure you have an experienced business bankruptcy attorney on your side.

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