How do you measure success? As an entrepreneur, you probably thought of many ways – reaching a revenue goal, customer base or profit. I discussed different ways of measuring success in an article a few years ago: How Do You Measure Success? One measure that I didn’t mention is making the hard, though sometimes right, decision to close up shop. As entrepreneurs we are fighters, we scratch and claw to be successful, we do things differently. And if we don’t attain the traditional measures of success, does that mean we’re a failure? Not at all.
Success is recognizing your economic reality and making the difficult decisions. And if there are lessons to be learned: seeing them, getting back on the horse, and applying the lessons to your next venture.
I’ve worked with many clients who have been in crises (see my November newsletter article on surviving a cash crisis). They got behind paying vendors or remitting taxes. They had an unexpected expense because equipment broke down. Or they hadn’t properly budgeted for growth. They found themselves overwhelmingly deep in debt.
As we created plans to get out of the hole, we discussed whether it is, in fact, possible to get out. While being “too deep in the hole” is certainly relative to each entrepreneur’s resources, there are commonalities among businesses that should consider ceasing operations. Below are five critical questions to ask yourself when considering whether it might be time to close up shop:
1. Do you have what it takes to be a successful entrepreneur? Entrepreneur.com’s article on 25 Common Characteristics of Successful Entrepreneurs resonates with my interpretation of the answer to this first question. You must love what you do and take it seriously, of course, but successful entrepreneurs succeed in the long-run by also having the ability manage money wisely, ask for the sale, build a top-notch team, be accessible, negotiate successfully, and stay organized.
There’s also a big difference between what it takes to be a successful entrepreneur in start-up mode versus in business growth mode. There comes a point where you need to start delegating. All the technical skills that got you started successfully (whether it’s how to work the soil, build a customer base, or run a restaurant) won’t help you get to the next phase of growth. In the growth phase, you need to be able to transfer your skills and vision to your team, so you can work together to grow the business. If your business is struggling, it may be that you need to bring in a CEO to help you take your business to the next level. Check out an article I wrote back in 2013 on 10 Tips for Effective Delegation: 10 Tips for Effective Delegation.
2. When you pull debt out of the equation, do you have a profitable business model? If you’ve gotten yourself in debt, and feel like it’s getting deeper, it’s important to understand why. Is the burden of debt digging you deeper or is the business model at its core not profitable? In other words, can you cover your operational costs solely from your operating revenues, without influxes of cash from the outside (loans or grants)? It’s critical to understand your operating income outside of non-business related revenue and expenses. You obviously can’t rely on loans in perpetuity to keep your business afloat. Likewise, it’s very likely unsustainable as a for-profit business to rely on grants – you never know when charitable funding dollars might dry up.
Often times, an entrepreneur’s income statement has interest expense and debt repayment buried within the operating expenses. By pulling them out, you can see what the income statement would look like if you didn’t have any debt. Without the burden of debt, do you have a profitable business model?
3. If you look back at your historical financial data, can you see what success looks like? It may very well be that right now you don’t have a profitable business model. After all, something happened that led to mounting debt. Beyond the existing debt burden, review your historical financials, either by month or by year, to see if you can identify a period when you were profitable. When you look back, and you do see a time when business was profitable, think about what made that time different than today: Were you operating at a smaller scale or with fewer employees? Was your revenue higher? Were your expenses lower? Did you sell different products or sell through different channels? Can you replicate the circumstances that made the business profitable?
4. Can you support your debt service? If you are struggling to get out from under your business debt, the first thing to do is communicate with your creditors. See if there’s an opportunity to work out a plan to consolidate the debt and not accrue additional penalties and fees. You can then create a debt service plan. Once your debt service plan is in place, be sure that based on your historical revenues, you can reasonably project to make enough operating profit each month to make at least the minimum monthly payments on your debt. Based on what you can afford to pay toward decreasing the debt each month, how long will it take to pay down all of the debt in full? Can you afford to wait that long for the business to once again start generating substantial cash flow? If your operating income isn’t going to be high enough to keep up with your debt service payments, it’s time to re-asses your business model as a whole.
5. What is the consequence of waiting? Think about the worst case scenario if you continue to operate. What will you sacrifice? For example, do you need to tap into your retirement funds significantly and retirement age is just a few years away? Or perhaps you still have a strong brand that you can leverage to sell now that you won’t have in a year’s time as the business continues going downhill and the brand degrades.
When you’re in the hole, it’s important to be realistic with yourself about your business’ situation and prospects for the future. Denial will only cost you more in the long run.
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