When to Close a Business

When should you close down your business?

How do you know if you should shut your business down and how to take this decision? When running your own business you will often question why you do it and whether you should keep at it. Although this is absolutely normal to have doubts, there is a fine line between determination and being stupid stubborn. No matter what type of exit is on the horizon (shutting down, selling or replacing yourself), you need to analyse a list of factors showing that it may be a good idea to make a major change. Let’s look into what may be valid reasons for closing a business.

Main reasons for closing a company – the big picture

No matter what rewards may be awaiting if you succeed, there are things in life not worth the sacrifice, which in my opinion you should prioritise before your business. Here the three most important reasons why you should close a business.

Closing a business – top 3 factors

1. You are running a loss
2. Your health is declining 
3. Your relationship or family are suffering

However, it is often more nuanced, the situation is more complex and there are more things to weigh up. Let’s look into more details.

Signs you should close or sell your business

Things to consider when deciding whether you should continue running your business or not:

• Losses

  If the numbers don’t stuck up, it’s not a business worth your time. Your business should be profitable, this is what companies are for. After the fist 1, 2 or maximum 3 years a business should become profitable or at least self-financing. There are cases when you can plan to operate without profits, e.g. to build a big customer base within the first two years. But other than that you should plan for profits, how much and when they will come. If you don’t meet the targets at at least at 70%, you should consider closing. 

• Cash flow problems

  Can you reduce the costs? Are your customers paying on time? If you are unable to operate with lower costs and start making savings, this is a bad sign and it may be better to close the business. 

• Too low profit margins

  If your margins are too low to stay in profit, consider if you are focusing on the right products and the right customers. If you can’t improve anything here, there is no point in just saying busy. 

• Your health

  Tis is a big one. There is really no point to run a business, if you have to spend all the money on your healthcare, or you don’t even have the time to spend it and enjoy your life. The price of your health is always too high, no matter how much you’re making. 

• No sales

  With the exception of a seasonal business, where low or no sales may be a natural market fluctuation, business which is not selling should simply close down. 

• Ineffective marketing

  Without good marketing you won’t sell. Perhaps something used to work but doesn’t anymore, e. g. WOM is no longer enough or old ways of marketing are no longer working. If you can’t improve your marketing, you are at a dead end.

• Poor customer retention and recommendations

  This is a sign that the quality of your service or product isn’t meeting the customers’ expectations. 

• No interest in your product or service

  Consider if there is enough interest in your product or there will be in the next couple of years. Sometimes you may have a great offer but the timing may be wrong, e.g. the market isn’t ready for it. On the other hand, the market trends may have changed and your offer no longer meets the needs. 

• Key employees are leaving

  This happens when they know that the business is going down, and they often see sooner that something is wrong. 

• The love is gone

  If you no longer enjoy working in your business, no longer have the passion, it may be better for you and for the business if you close it, sell it, or find your replacement. If your customers or team annoy you, it may be a sigh of burnout. Take a longer holiday and see if after a couple of weeks you can’t wait to get back to work. 

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Planning your business exit

Reasons you are reluctant to close your business

Unfortunately many entrepreneurs decide to shut down too late. Here are some examples of your own thinking biases to be aware of:

• You think you don’t have an alternative
• Shame of failure
• You feel you’ve something to prove
• You are worried about others judgement
• Trying to save the investment by investing even more

All of the above are bad advisors and are holding you back from taking the right decision. Bear in mind, that your first business usually will not be your most successful one. Most entrepreneurs fail in their first business ventures and start over again. 

Mistakes to avoid when closing a business

How to close a company the right way and not get in trouble? Here are common mistakes to avoid: 

• Taking loans

  When your business is already in financial trouble, the last thing your should do, is to increase your liabilities. Taking loans and hoping that something will improve thanks to the extra cash is an easy way to go bankrupt. 
  
  

• Cutting prices

  Price reductions will only drain your pocket, they won’t save the business but leave you with less. 
  
  

• Going through all the money

  When closing a business, you want to think about your next steps. You want to have something to reinvest, to start over or for your retirement. 
  
  

• Thinking that the business has to continue running
  

  Why would it have to keep going?
  
  

• Fear of failure

  Closing your business down does not mean it’s a failure, it just meant that this chapter in your life is over. Remember about all the learning – this is an invaluable gain. 
  
  

• Too many projects

  To finish well, you still need to keep focus. Even at the last stage of running a company you can try to make the most of it and keep your priorities right. 

How to close or make shift in your business?

If you think you could make changes in your business and turn thigs around, here the options you can consider:

• Increase prices
• Improve marketing
• Start licensing what you were doing
• Change your activity

Remember: one door closes, another door opens. 

Final note

What to do after closing a company?

So you’ve closed or sold your business… what’s next? It’s always a good idea to look back and reflect. Write down everything what went well and what went wrong, what would you do differently. You can do it just for your own learning – there will always be something you could apply in your next project, but you can also consider sharing your knowledge with others. 

Next time I will write about how to decide whether you should close or sell your business or find your replacement.