Today we’re going to address the question of when to shut down a small business.
We learn a lot in school and at college about how to do things so we can get more. But what they don’t teach us is when to rein things in. After all, if you’re going to live an extraordinary life of working less and doing more, you need to know when enough is enough. For example, One pet unicorn is great! Ten pet unicorns is even better! … But 100 unicorns? Too much. You can’t take that much fertilizer to market each week, and Unicorn burgers aren’t yet approved by the FDA.
Listener Andy’s business doesn’t involve unicorns. (I don’t know what it involves—maybe knitting exciting underwear—but I’m fairly sure there are no unicorns.) Andy asks: How do you know when it’s time to pull the plug on a small business?
New listeners may not know this, but when I’m not being the Get-it-Done Guy, my secret identity is as a Harvard MBA, serial entrepreneur, and executive coach. So my answer comes from a combination of first-hand experience, advising other entrepreneurs, and of course, drinking too much coffee and not being fully responsible for what my fingers are typing.
Know Your Affordable Loss
There’s a wonderful concept from entrepreneurship research called affordable loss. That’s how much money, time, reputation, and opportunity cost you’re prepared to lose when you go into a project. For example, you might decide you’re willing to risk $50,000 of your retirement savings on your new venture, but no more than that.
If you didn’t set an affordable loss in advance, you may have found yourself adding money a bit at a time. If that’s the case, stop now, and decide now how much you’re willing to risk total.
Now that you know your affordable loss, add up the money you’ve put into the business so far. If you’ve put more money into the business than your affordable loss, then you have a decision to make: do you believe that you’ve learned enough so far that you would be willing to put in more time, money, reputation, and opportunity cost? If so, decide how much and give yourself that much more runway. But if you decide not, then it may well be time to pull the plug.
Beware of Sunk Costs
The reason we decide on the affordable loss up front is the Dastardly Sunk Cost fallacy. A sunk cost is money you’ve already spent. When deciding to move forward, you should not consider your sunk costs. The only thing to consider is how much additional you have to put in going forward, and how much return you’ll get.
Suppose you’re trying to build a trans-matter ray that can let you transport gold bars out of the local bank vault. You set an affordable loss of $5,000 total you’re willing to spend, and you’ve spent it all. It isn’t quite working, yet. The gold bars seem to liquify on their way out, and end up smelling like cumin. You figure that with another $500, you can get finish the ray and steal $10,000 worth of gold bars.
At the same time, you have another opportunity to buy $500 worth of time-travel remote vision equipment, see tomorrow’s winning lottery number and win $11,000 in the lottery.
Today’s Decision Ignores Sunk Costs
Either way, right now, you’ve already spent $5,000 and gotten nothing for it except a ziploc full of cumin-smelling ex-gold bars. Going forward, you can spend $500 and get $10,000 by finishing your trans-matter ray, or you can spend $500 and win $11,000 in the lottery. When you put it like that, the answer is obvious: abandon the bank robbery, and use the $500 to win tomorrow’s lottery.
In the middle of the decision, however, the sunk costs call like the sirens call to Odysseus. You think, “I’ve put so much into my trans-matter ray so far. I can’t abandon it now! Just another $500 and I can complete the heist!” When deciding if you’ve put enough into the business, ignore those sunk costs!
Remember Your Why
But let’s say your business is making money, so the issue isn’t hitting your affordable loss. Maybe you’re making money, but it’s no longer fun. You just don’t care about it. Well, it might be best to call it a day. It does no one good for you to be tied to a business that makes your life miserable.
But why shut it down if it’s making money? If it’s big enough, find a business broker and sell it. There are a lot of young entrepreneurs launching search funds just looking for profitable businesses to grow.
100 unicorns is too much; you can’t market that much fertilizer.
But even if it’s not big enough to sell, if it makes enough to hire someone to run it for you, consider doing that. If you’re paying them a salary, there may not be enough left over for you, so you may still need to find another job. But if you chose your manager well, they might grow the business to the point where it eventually does generate enough income to give you income with your having to work.
If It’s Just Money, Experiment More
If the business is only making you miserable because it’s unprofitable, the issue may just be that you need to beef up your sales efforts. Or you need a bit of marketing to figure out how to get a better product/market fit. If you decide to stick with it, make up a list of possible sales and marketing experiments to try. Give each experiment an affordable loss and get to learning! Do several experiments and once you find the combination of product, message, and market that can make money, then start planning to scale it into a giant, world-spanning multinational commercial empire.
Deciding to close a business is tough. Andy, it might just be that you need to tweak a few things and it will start going well, in which case, design and execute experiments to do the tweaks. But regardless of your sunk costs, if you’ve spent more than your affordable loss in money, time, reputation, or opportunity cost, it might be time to move on to something new. Maybe a fertilizer company. Maybe there’s a market for it among politicians. After all, it is an election year.
This is Stever Robbins. Follow GetItDoneGuy on Twitter and Facebook. I run programs to help people have Extraordinary Lives and extraordinary careers. If you want to know more, visit http://ift.tt/1l2uWN6.
Work Less, Do More, and have a Great Life!
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