When a business just isn’t working, it may be time to call it quits and do something else. But how do you know? In this episode, Stever tackles the question of deciding when it’s time to shut down a business.
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.