Throwing In The Towel - Knowing When To Close Your Business

The fact is that not all businesses will be successful.  Some have even heard that 80% of new businesses fail by the 5th year, although this is disputed by many and evidence suggests that the failure rate is closer to 50-60 percent.  Even so, there may come a time in your business venture when you start questioning wheather to stick with it despite the pain or quit, getting out before the pain gets worse.

I recently read a book by Seth Godin called The Dip: A Little Book That Teaches You When To Quit (And When To Stick) and the general idea behind the book is looking for the cues that should tell you when to quit and to push through knowing there is a better future.  The "dip" is that point, in whatever venture you are pursuing, where things get hard and looking into the future there is only uncertainty. 

At times when you push through the dip the rewards on the other side is that uphill climb to success.  At other times you may languish at the bottom of the dip wasting time and resources you could be spending on another project.  Or, as the author puts it himself in an interview with Guy Kawasaki "It’s time to quit when the things you’re measuring aren’t improving, and you can’t find anything better to measure."

When a new business reaches that point, when they are in the bottom of the dip, there are only four things that they can do to stay in business:  Put in More Equity, Get a Loan, Reduce Expenses or Increase Sales.

Most entrepreneurs do not have a bottomless pot of money that they can keep throwing at a project, in fact, the opposite it usually true.  So the first thing that comes to the entrepreneur’s mind is another loan (or equity investment).  But, a new loan is a short term solution to a long term problem. 

If a company is burning cash, getting a shot in the arm from a working capital loan can help stem the bleeding for a while, but it also adds another payment on top of the mounting expenses that caused the problem in the first place.  You need to change your business model or in the long run you will end up in the exact same spot a year later looking for another loan.

A change in business model can only take the form of the last two items on our list: reducing expenses or increasing sales. 

Most business owners believe they run a pretty tight ship, especially if they are struggling financially and have cut costs numerous times to stay afloat. But I would challenge you to have an outside observer take an objective look at how you are operating your business.  They may find a more efficient way of delivering the same products or services.

The truth is, the success of a company usually relies on the sustainable growth in sales over the long term.  If you company has seen its sales plateau and you still are not cash flowing, there is a strong chance you will fail without a change in your business model. 

A new business model could mean:

  • attacking a new market - geographic or segment (B2B, B2C or B2G)
  • launching a new product  - complimentary or ancillary
  • adding a service - such as repair, technical assistance or implementation
  • A new marketing / branding campaign
  • Addition of marketing or sales staff

Regardless of the model that is right for you, without a plan the addition of financing to a failing business usually digs the hole deeper rather than fixing the problem. 

Before you go to your local lender for a working capital loan, dig that old businesses plan out of the filing cabinet, dust it off and review the assumptions you made that didn’t pan out.  Make some new assumptions based on your new, more informed, knowledge of the marketplace as a current business owner.

Update the financial projections based on your historical financial statements to create a baseline pro forma cash flow.  Then, perform a scenario analysis adding the changes that will occur with your new business model, both on the sales and expense side.  Once you have a business model that cash flows based on reasonable and prudent assumptions then you can start looking for the financing to put your plan into action.

If you can’t find a model that works based on you current financial position, then it might be time to cut your losses.  Build a plan to divest the company and minimize your losses.  Speak with your current lender and make sure they are aware of your situation so that you can work out a scenario for liquidation where you get the highest dollar for your company’s assets.  Then work out a plan to pay off the remainder over a period of time. 

If you have come to the decision that quitting is the only reasonable option, know that most successful entrepreneurs failed at something in their past…some spectacularly!  But, if you are like most entrepreneurs, the next big idea is just around the corner.  And, if you failed gracefully, there will most certainly be someone out there who will provide you the funding to pursue your next venture.

Donovan Wadholm
www.DIYBizPlan.com

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