One of the most agonizing choices an entrepreneur inevitably faces is whether or not to close their business. But rather than make this choice on their terms, most business owners wait until liquidity issues doom their enterprise--they wait far too long to see the writing on the wall, and simply run out of the cash needed to continue the fight.
Shutting down my first startup was one of the best decisions I've ever made in my life. Had I not walked away, I would still be beating my head against a wall with a business that would never, ever get me to the outcomes I was seeking.
But wow, it wasn't easy.
At the start, like all entrepreneurs, I had nothing but optimism for what lay ahead. But after the Great Recession triggered a catastrophic decline in the business, I found myself working longer and longer for less and less. It was clear that the market for our services had changed for the worse, and permanently.
Determined not to fail, I stuck with it, pouring hours and dollars into the rebuilding effort.
Looking back on this experience, I now know there are three signs that should have noticed, all signaling to me in flashing, neon red lights that it was probably time to shut it down and work on my next idea.
1. Business is humming, and you still can't make money.
We were slammed with business. In fact, for most of the five years we were in business, I was turning business away because I didn't have the capacity to take on new work when I was already growing nearly 80 percent a year.
The problem was, after the recession my business wasn't generating sufficient profits, even at full capacity. What should have been an 8-12 percent net income operation was break-even most months with losses far too frequently. All that work was going into the business and nothing was coming out. Despite our best efforts to implement systems and processes to improve operations, the needle didn't move.
If you can't get your business to a predictable level of profit no matter how hard you work, you might be in the wrong business.
2. Customers churn at a rate that's not sustainable.
After the recession, our market changed, and it was difficult to build a true differentiator into our service-based business model. I watched new entrants enter the market month after month and win business by lowering prices. Because of the low differentiation, we needed to either cut prices or give better terms.
I chose the latter, and our flexibility led to an influx of customers who had short-term needs rather than long-term partnership potential. As a result, we saw customers churn at rates approaching 15 percent per month.
The dynamics of our market had boxed us in: I didn't have the massive cash reserve to discount my prices to win long-term contracts (see number one), and I couldn't sustain a business whose customers churned that quickly.
Your business model matters. When customers are expensive to acquire but don't stay long enough to return the cost it took to acquire them, that's unsustainable.
3. You're not enjoying it anymore.
When you combine the effects of numbers one and two, it added up to a fairly miserable entrepreneurial experience. Everyone was working insane hours because we couldn't add headcount, and I was losing sleep over our declining financial health.
I didn't expect business to be easy, but I did expect the challenge to be enjoyable. Yet, here I was, running as fast as I possibly could but moving backward one inch at a time. It was frustrating and demoralizing.
A seasoned entrepreneur who knew me well took the time to pull me aside and give me the best advice on entrepreneurship I've ever received: give yourself permission to quit.
"It might feel like you're admitting defeat," they counseled, "but what you're really doing is stopping the bleeding and giving yourself the chance to work on something far more productive with your time and money."
At this friend's suggestion, I looked out six months and set three goals for the business that, if not achieved, would compel me to close down the business.
Six months later, despite putting every ounce of reserve effort I could muster into moving the business forward, I missed two of the three targets. I immediately took steps to shut it down.
And thank goodness; I would have spent the last eight years pounding rocks in a business that would never have produced the results I wanted. Instead, I cut my losses, launched my next best idea, and never looked back.
If you've been struggling with these issues, perhaps it's time for you to take a look at what you're doing, and ask the tough question.