Failure, risk all part of a business

For small-business owners, failure isn’t an option — it’s a reality.

Consider the roughly 733,000 businesses that began operating in the United States in the year leading up to March 2016. Only about half made it to March 2021, according to the Bureau of Labor Statistics.

“One of the inside secrets of great entrepreneurs, and businesspeople 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. “Failure happens a lot.”

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.

“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 your books correctly. If you miss any of these steps, you could face fines and put your reputation at risk. “It’s a small world nowadays, and you’ve got to treat people well,” Henson says.

CARE FOR YOURSELF

A business failure can feel like the death of a friend, says Penny Pompei, who coaches small-business owners in and around Palm Beach, Fla., and is a certified SCORE mentor. After you’ve shut down, it’s OK to grieve.

“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.

When you’re ready to look back, Coopersmith recommends gathering trusted stakeholders — like customers, partners, key employees, investors — for a postmortem. To start, ask: “What were the risks that we missed?”

As an investor or when presenting a business plan, Coopersmith focuses on mitigating risks in five areas:

■ Ensuring you have a product customers actually want.

■ Creating a high- quality product.

■ Having team members who can execute well.

■ Designing the right business model and securing adequate financing.

■ Surmounting legal or regulatory hurdles.

This framework is “a really good way to look and say, ‘Where do we think we failed?’” Coopersmith says. “Was there one domino that tipped? Or was it all of them?”

Outside forces do play a role. Sometimes it’s a disaster, like the covid-19 pandemic. 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.’”

NEXT TIME

Pompei says many entrepreneurs will try again. Before you start 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.

“It can be time-related, it can be money-related, it can be age-related,” Pompei says.

Make sure you and your family are emotionally, physically and financially ready, Coopersmith says. Find a group of peers who can share challenges, resources and advice along the way. Think about your last team and ask back the people you’d like to work with again.

Finally, don’t fear failure — it’s part of every business in some way, even those that don’t go under.