For small-business owners, failure isn't an option – it's a reality.
Consider the roughly 733,000 businesses that launched in the U.S. in the year leading up to March 2016, for example. Only about half made it to March 2021, according to the Bureau of Labor Statistics.
“One of the inside secrets of great entrepreneurs, and business people in general, is they are resilient when it comes to failure,” says Mark Coopersmith, co-author of “The Other 'F' Word: How Smart Leaders, Teams, and Entrepreneurs Put Failure to Work “ and a faculty member at the University of California, Berkeley's Haas School of Business.
What can set you apart is how you respond to failure – and what you learn from it when you look back.
Shut down correctly
Before you walk away from your business, make a list of everything you need to do to shut down properly. A lawyer or financial adviser can help with this process.
“If you're in dire straits, sometimes people do foolish things,” says Manny Henson, a certified financial planner and founder and president of Maryland-based Gamma Wealth Management. “Talk to your consultants to make sure you understand what you need to do.”
That process includes paying taxes, paying employees and closing books correctly. If you miss any of those steps, you could face fines – and put your reputation at risk.
Care for yourself
Once you've closed up shop, take time to care for yourself.
A business failure can feel like the death of a friend, says Penny Pompei, who coaches small-business owners in the Palm Beach, Florida, area and is a certified SCORE mentor.
Before you investigate what happened, “stop and breathe,” Pompei says. “You've just got to be able to just decompress and give yourself permission and time to mourn.”
If others ask why your business went under, you don't have to give an answer right away.
“Don't even try to go there, because your first inclination is going to be to blame,” Pompei says. “You really don't know yet what happened.”
Figure out what went wrong
Once you're ready to look back at your business, Coopersmith recommends bringing together trusted stakeholders – such as customers, partners, key employees, investors or funders – for a postmortem.
To start, ask: “What were the risks that we missed?”
Outside forces do play a role. Sometimes a disaster, like the COVID-19 pandemic, suddenly hits. Sometimes the timing is just wrong.
But you can still learn a lot from looking back.
“The ultimate failure,” Coopersmith says, “is if you fail and don't walk away with an insight that says, 'This is what I could do.'”
Do it differently next time
Pompei says many entrepreneurs who experience a business failure will try again. Before you launch a new venture, she says, make sure your business plan includes an exit plan specifying what will trigger the closure or sale of the business so that you protect your personal finances.
Think critically about your last team and ask back the people you'd like to work with again. And when you launch, be upfront with your peers, staff and investors about the challenges you're facing, because they're there to help you navigate them.
Finally, don't fear failure – it's part of every business in some way, even those that don't go under.
“Respect the fact that (failure) happens all the time,” Coopersmith says. “Go in with that, then manage your risks throughout the process.”