How to Know When to Close Your Business and Start Over

A few years back, I was working as a business consultant for a venture located in a small city in India.

The company used a mix of offline and online methods to connect job seekers and recruiters. After one year as a consultant to the business owners, I realized it was not in a position to succeed.

The sales numbers did not look very encouraging, their growth was slow, and they were continuously missing all the targets we set.

Worse, they had little to no cash in their bank accounts.

For months, the founders knew deep down that we were just around the corner from closing, but they just hung on to the hope that things would improve.

I explained the scenario and firmly advised them to wrap up before it was too late, but the owners still wanted me to find ways to help the business survive.

How to do you know when it’s time to shut the doors and move on to something else?

Emotional attachment to your venture

Having worked with multiple ventures, I knew where they were coming from.

Starting and running a business is like giving birth to a baby and watching it grow up in front of your eyes.

Irrespective of all the advice you receive from fellow entrepreneurs about being practical and not getting emotionally attached, you do anyway. It’s understandable—you’re working hard to grow your business.

In the case of the failing business I was advising, one of the founders had left a decent job and invested his savings. The other, just out of college, had taken money from his family.

Since the company was bootstrapped, they spent frugally, lived without any salary for months, and worked hard to make it a success.

Unfortunately, when things were starting to decline, they were so invested in and focused on the day to day challenges that they refused to see the obvious.

And that’s the story of the majority of entrepreneurs I work with.

They obviously know “8 out of 10 startups fail,” and theoretically understand that odds are against them from day one.

Still, they are unable to decide when to quit.

Not quitting at the right time can lead to disaster. You can end up with bad debt, emotional stress, or liabilities that can take you years to repay. And just because your business closes doesn’t mean you have to give up entrepreneurship all together. But if you don’t get out before you’re in financial ruin, you’ll have fewer resources to put into your next business.

Based on my experience, here are some indicators that it’s time to move on:  

The financial troubles are too big to handle

Think of finance as the fuel of a car. Without money, nothing moves in a business.

No cash is one of the top reasons for startups to fail. How do you look for signs of financial trouble in your company?

Any new venture should look at their break-even point as the base value for success. If you can’t achieve your  break-even point, you’re in serious trouble.

Break-even points are important—that’s when most business owners start picking a salary or the company starts seeing positive cash flow.

If you continuously misses the break-even point deadline (ideally, there should be only one deadline) it’s time to look seriously at where the business is heading. In fact, it might be time to quit if you have given a hundred percent and have tried everything possible.

Make sure your really on top of your financial metrics so you’re not suddenly surprised that even though you’re bringing in revenue, you don’t have enough cash flow to survive.  

If your company has been up and running for years but you don’t have positive cash flow or your business doesn’t have enough savings to survive longer than three months, you’re in trouble. Ideally, every company should have at least six months of money saved, but the number lower when you are running a considerably new venture.

The market has moved beyond the product/service:

“If you do not change, you can become extinct!”

― Spencer Johnson, “Who Moved My Cheese?“

The first example to come to my mind when I think of a company that failed despite being a market leader was Nokia. While they were complacently enjoying their top position as a market leader, the market moved on to smartphones.

By the time they moved out of their comfort zone, they were on the verge of closing.

If it can happen to Nokia, it can happen to any of us.

The change in market scenario or a market condition which is outside your control can be enough reasons for you to quit—or make a significant pivot so your product meets the market need.

Recently, one of my relatives who owned a restaurant by the side of the highway had to close their venture because a flyover bridge was constructed to allow vehicles to bypass the city’s traffic—and the restaurant.

The restaurant’s main target customers had always been the people who used the highway. When the construction of bridge started, I remember asking what they would do when the bridge became operational.

They were clueless, as they had run a successful restaurant at the same place for years. When the bridge was finished, they lost their footing and eventually closed because they weren’t bringing in any customers.

Had they quit or moved the venture the day the construction started, they could have survived.

And this is not the only example. There are times when businesses fail to improvise or think out of box. They hang on to their old business models and ideas, only to see the new competitor beat them. Think of local taxi service going out of business because of Uber.

Doing a SWOT analysis on a regular basis can help you think through your strengths, weaknesses, opportunities, and threats, so you’re not blindsided or paralyzed when faced with a challenge.

You stop enjoying the work

“A business has to be involving, it has to be fun, and it has to exercise your creative instincts.”

― Richard Branson

The day you stop enjoying the work is the day you should quit. Passion plays a big role in any business’s success.

For a year, I helped my dad with his liquor stores while running my own business. The liquor store business fetched us a decent amount of money, but I never really enjoyed the work.

To start with, there was too much corruption to deal with (something I hate to get involved in) and then, from my perspective, there was nothing creative or fun to do in the business.

By end of the year, I was exhausted and hated myself for doing something I did not enjoy doing. The money was good. Life wasn’t tough, as it was an established business. Still, I did not want to do it.

One fine day, I told my dad that I would not be able to help him any further as I did not enjoy the work. Spending too much time working on something you don’t enjoy can, at times, lead to depression.

One of my friends recently went into depression because he had been forced to become a part of their family business. He’s a creative guy who could have been a good engineer, but he was forced by circumstances to join his family’s business as the father became ill and there was no one else.

I had never heard of anyone going into depression because of not enjoying work. It was a new learning for me.

When I asked him the reason for the depression,  he said “there is nothing creative in the business for me. It’s not fun to do this business.”

He was right. It was his father’s dream, not his.

30 percent of all entrepreneurs experience depression, according to a study by Dr. Michael Freeman, a clinical professor at the University of California, San Francisco.

Depression and even suicide are part of the dark side of entrepreneurship, though it’s not often discussed. As an entrepreneur, the day the emotional stress gets out of hand, is the day you should quit.

Life is precious, you can anytime start afresh.

The day you do not want to get out of the bed to go to work is the day you should take a hard look at what exactly went gone wrong.

It pays you less than the going rate

I think of starting a business as a long race—a race in which you eventually beat your friend from day job days in terms of the money you make.

I hate to get paid less than what I’m worth. Initially, your friend might be taking home a fat paycheck and you might start with little or no salary, but from day one, you should know your worth. Start by documenting the salary/profit you want to start taking home after company achieves the break-even point.

If your company has been around for years and you’re still not making the salary that you hoped, it’s time to start evaluating whether there’s anything else you can do to reduce expenses and increase profit. If not, look at your business model—maybe it’s simply unsustainable.

At the end of the day, money is a big motivator.

It is not easy to let go of a dream. There is some unavoidable emotional and financial attachment for every entrepreneur, but you should be realistic about when to walk away, so you’re in the best position to to start again.

Make sure you’ve done everything you can do before you give up. Ask veteran entrepreneurs about how they handle challenges with their business, and stay on top of your finances so you’re never caught by surprise.