When to close a business

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Four things to consider before closing your doors for good.

Recently, a friend of mine, let’s call him Mike, had one of his worst fears come true.  His business had run out of money.

This was strange.

Mike owned a deli with a cult following.  Every week customers waited in long lines to buy one of his sandwiches.  Anyone familiar with Mike’s deli assumed he was “killing it.”

Instead he was broke.  How could this be?

Was someone stealing money? Were his books being “cooked”?

Nobody knew.  So, Mike started to investigate.

It didn’t take long to figure out what was wrong.

The first problem was bookkeeping.  Yes, he had professional looking financial statements.  But they didn’t match reality.  Invoices were missing.  Statements weren’t reconciled.  Deposits were off.

Not only did Mike lack a strong grasp of his business’ finances, he was making decisions based on numbers that didn’t exist.  It was a recipe for disaster.

The second problem was debt.  Six months earlier Mike borrowed money to expand his business.  But he didn’t borrow enough.  His bookkeeper should have sounded alarm bells.  Instead she played “whack-a-mole” with outstanding bills.  Whichever vendor complained the most got paid with the limited cash on hand.  Bills kept piling up until the finances were swamped.

Lastly, payroll was bloated.  Some of this was intentional.  Mike was training additional staff to further expand his business.  This was a good idea, but you need to have spare cash to do it.  It was a luxury he couldn’t afford.

Once Mike knew the causes of his problems, he felt overwhelmed.  He asked me a simple question.  “Am I done?”

The answer was clear to me.   “Absolutely, not”

Here’s why:

1. Sales are half the battle.

Mike had done an awesome job of building sales.   This is hard to do.  If your business has no sales, it’s a legit reason to close.  But this wasn’t his case.   The problem was bad financial management.  For the past several years Mike was so focused on operations he had taken his eye off of the numbers.  This was on him and he knew it.  Although the situation wasn’t good, its easier to fix a bookkeeping problem than building sales.

2. Popularity contest.

When my bakery first opened our sales were terrible.  On our six month anniversary the business was barely surviving financially.  What our bank statements didn’t show was how much our customers loved us.  We just didn’t have enough of them.  We soldiered on, word spread and sales grew.  Two years later, things were going so well, we moved to a larger location.

Mike’s business has a cult like following.   Some of his customers buy from his multiple times per week.  Its easy to assume if sales are strong your customers love you.  Not true.  My local Walgreens is always busy.   When was the last time you heard someone say they love Walgreens?

A customer base that loves your business is a big asset.  Their loyalty can be the foundation of long term success.  This is something that shouldn’t be disregarded.

3. Cash poor, asset rich.

Mike was broke but he wasn’t poor.  His business had a great brand and sales were strong.  He also owned 100% of his company.

If you’re in Mike’s shoes and you need cash, there’s two options:  Borrow money or sell equity in your business.

Because Mike’s financial problems are fixable he shouldn’t have a hard time getting capital.  Even if a bank isn’t willing to lend him money, I bet he could find an investor in his community.  Best of all he doesn’t need to sell a huge stake of equity to solve his financial problems.  In other words, he could still be the majority owner.

4. Do you want to keep going?

When things are tough, you have to make a simple decision:  Keep going or go home.

Mike didn’t want to give up.  He loved running his deli.  But he didn’t want to make his situation worse.  Once he understood how to overcome his challenges he was excited to get to work.

That was a few months ago.  Today things are getting better.  In a few years I’m sure he will be doing great.

 

Have you closed a business? Are you struggling to keep on going? Send me an email with you experiences.

 

 

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