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Starting a Business: Failure & Exit Strategy

I love entrepreneurship. I love the idea of running my own business, being my own boss, doing what I feel like when I feel like it. We’ve all seen the lists of pros:

  • Be your boss.
  • Your income is based on your decisions.
  • Do what you love.
  • Work the hours you choose.

That sounds amazing, but what are we missing? So many people, including myself, pound the pros of starting a business, but the grass can’t be entirely green, can it?

No, and often the grass turns out to be rough, knockoff astroturf. I love small businesses, and I love entrepreneurship, but I can’t pretend that there is a whole other side to running a business: failure. With that said, I will present the other side of the story.

Reasons for Business Failure

Businesses fail every day, and according to the SBA, about 30% of new businesses fail within the first 2 years. Those don’t seem like bad odds, but what goes wrong at those 30%?

  • Revenues are over estimated.
  • Expenses are under estimated.
  • Customer volume is under estimated.
  • Locations are poorly chosen.
  • Failure to keep business and personal money separate.
  • Bad credit choices.
  • Health problems.
  • Unexpected costs.

Many of those I’ve read over the years at SCORE.org. SCORE.org is an excellent organization that helps small business owners succeed, and they do it for free.

Read: Entrepreneur: Starting a business with SCORE

As you can see, there are quite a few reasons for failure, and there are far more than I could ever hope to write into a post. To be honest, if you can think of something bad, it probably caused a business somewhere to fail at some time.

Business Exit Strategy

People generally don’t enter a business thinking it will fail, but you should. The first thing you should do when deciding to become an entrepreneur is to figure out if your business is viable in your area. If it isn’t, then your idea shouldn’t leave paper until it can work. After that, you need to come up with an exit strategy.

Lots of things look great on paper, but that doesn’t mean customers will come flying through your door. This isn’t like Roller Coaster Tycoon, or CafeWorld where you open the doors and customers start walking in. You have to have an equitable way to shut the doors and minimize the amount of damage you do.

What is At Stake During a Failure

Bootstrapping a business is great, but few people have the time or patience to do it. Depending on how your business is organized, there could be a massive amount at stake, or just a lot at stake. If you’re setup as a sole proprietorship, then you could lose everything, as you’re personally liable for all of the business debts.

But if you’re a LLC, then everything is rainbows and unicorns, right? OK, I was just making sure you were paying attention. Wrong. A business failure will be just as bad as losing a job, if not worse. Not only do you lose whatever income it was generating, but you will probably lose your initial investment and any collateral that you put up for it.

If you bootstrapped the business then you lose a lot of cash, time and effort, and if you borrowed, you’ll probably lose the collateral. The effects of a failed business will be felt by you, and your whole family.

Don’t Be Afraid of Business Failure

I’m not trying to scare you out of starting a business, but I feel like the book and infomercial industry have overly romanticized the pros of owning a business and don’t provide an adequate understanding of this side. This information could make all the difference between you browsing in the Entrepreneur or Career section of your local bookstore.

Having a job can be safe, but I think much of the perceived safety is overblown. I think that many people can successfully start a business, but you just need to take proper measures. Below, I will be providing some resources for you to use so you know what to do in the event of a possible failure.

Exit Strategy Resources

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