Executive Education

Expert Advice: Knowing When to Close Down your Business

Only 50% of businesses survive their first 4-5 years, while 96% of businesses fail in 10 years.  According to a report by the USA Census Bureau back in 2016, there are 400,000 new businesses being launched every year.

But the sad truth is many of them never thrive – or even go over their first 18 months. 

Closing down a business is the biggest decision that over a half of this generation’s entrepreneurs will face with a high certainty.  But how do you really go through and think over this kind of business setting? When most business owners (if not all) are only enthusiastic and focused on growth.

Optimism is a good thing. As a business owner myself, I have never felt the stress when we were starting our company 6 years ago. However, having too much optimism bends and breaks our ability to see what’s really out there.

In reality, “running a business” is worlds apart from “starting a business”. It will mold a better person in you, but will suck the life out of you. We tend to overlook the idea of closing down our business when we think about all the sacrifices we have made to make it to the next stage.

But how would you know if it’s really time to walk away?

I talked to several small business experts a few weeks ago, to get their views on knowing when to call it quits.

Here are the key pointers they have shared:

Passion – lose this drive on a daily basis and it’s time to quit.

Barry Moltz, author and public speaker, shares that the best indicator that it’s time to close down your business is “when you no longer look forward to going to work each day.”

Nevertheless, it’s still imperative to take time to evaluate your situation, as pointed out by Holly Reisem Hanna – founder of the award-winning website The Work At Home Woman.

“Evaluate if you’re just burnt out and need a vacation, or if you need to hire additional staff. If some R&R and restructuring don’t help, you may want to consider selling or closing your business.”

Small businesses are passion-driven. The same goes for leading a successful team, Dave Crenshaw says: “If an entrepreneur isn’t excited about their small business, it will be difficult to get anyone else to be excited.”

Passion may perhaps be the most important driving force of many successful businesses today. But it shouldn’t be the only factor you have to consider.

“Regardless of how much passion you feel or love you have for your business, a business is a business and it exists primarily to provide you with a livelihood,” said Gene Marks, a small business expert and columnist for The Washington Post.

Negative Cash Flow – Without cash, time is not on the business owner’s side

Kevin Daum, the book author of ROAR, shares: “The best rule of thumb when closing down a business is to do it well before bankruptcy becomes your best or only option.”

The challenge for most people is they become too emotionally attached to the business, according to Mark Kane, CEO of Sunwise Capital. “Once this happens, you become blinded by the need to be “right” versus making money. It’s game over.”

With Mark’s 17 years of Wall Street experience, he offered to share his principle in building a strong mental discipline to sticking to your business decisions:

Investing and starting a new business is easy. Mark continues, “The tough part is determining how much you are willing to lose and knowing when to cut your losses. Whenever I purchase a stock or start a business, I determine how much I am willing to invest and maybe more importantly, how much I am prepared to lose.   

You must know your numbers.  You need to understand how long you can survive at your current churn rate.  Losing some money is OK.  Losing it all and not having some dry powder to try again is not.

However, it’s advisable not to rush on your decisions – even when your business is already running out of cash. Holly Reisim Hanna also imparts: “Evaluate your business costs to see if there are excess expenditures that can be trimmed down, as well if there are areas of missed income potential. If your evaluation is grim, it may be time to get out.”

Evaluating your cash flow can result to bigger opportunities. Lewis Kent, President of Anvil Media, offered to give a couple of examples from his professional experience.

In one case, a company Lewis left less than a year previously had prematurely shut its doors based on the threat of a large anti-piracy lawsuit and fine from the government. The $300,000 liability that drove the decision to shut down an otherwise healthy interactive agency turned out to be a $3,000 fine.

In 2009, he was faced with a $35,000 debt after the first year of starting up his second agency, Formic Media. “I was seriously considering closing it down and dispersing the employees and clients,” Kent says.

But he decided to fund it for one more year. Within five years, it was a $1M business before merging with Anvil Media. That loss turned into a meaningful gain. So the secret sauce, according to experts, is ensuring you have sufficient cash runway to get momentum for a startup or turn the tides with a struggling business.

If you can’t turn a business on or back on track in 6 to 12 months and debt is piling up, you have two options: try to sell the remaining assets or declare bankruptcy.  There’s nothing wrong with shutting down a business that isn’t making money.  It doesn’t mean anything about you other than your business wasn’t making money.  

Ivana Taylor, Founder of DIYMarketers, adds, “Thousands of entrepreneurs have started and shuttered businesses and then have gone on to create thriving profitable businesses.  There’s nothing wrong with that.”  
More than 500,000 small businesses close every year.  And the reason they close are because they aren’t selling the right thing to the right customers.  

Exit Strategy – Quitting is not a surrender and it does not mean that you are a failure.

Remember that the winners in this world actually know when to stop.

Barry Moltz also said, “By quitting, the small business owner can stop doing what is not successful and start along a path that changes their trajectory.”

Susan Gunelius, Editor-in-chief at Women on Business, thinks that the decision as to what to do with your business when that happens should be made long before it actually happens (so you never truly arrive at the final point of failure).

Every business owner should have a comprehensive exit plan in place from very early stages that includes not only what happens if the numbers tank but also what happens if the owner’s heart (or health) simply aren’t “in it” anymore.

One final thought, from VC and serial entrepreneur, Evan Carmichael: Most people quit on their business too soon and don’t allow the time for momentum to grow. Most people also start a business for the wrong reason. If you’re in a business just to make money then you should quit right now.

You won’t win. The reason to do a business is because you’re insanely passionate about it. That’s the only way you’re going to win. Because you care so deeply about it that you’ll handle any obstacle that gets thrown at you.

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Jason Acidre
Jason Acidre is the Co-founder and CEO of Xight Interactive, where he has managed and developed marketing strategies for numerous SMBs, startups and Fortune/Inc. companies based in the US, UK and Australia since 2011. He is also the author of Kaiserthesage, where his works have been featured by publishers like Inc., The Huffington Post, BBC and BusinessWeek.