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Paul Bernard

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What To Do When Your New Business Flops

Posted: 10/24/2012 9:26 am

There's no question about it: America loves entrepreneurs.

As the economy continues to struggle, an almost obsessive focus on entrepreneurs has captured the public imagination. From the press to the politicians, entrepreneurs are talked about as being the "business engine of the future." There's even a growing sentiment that of all Americans, entrepreneurs are the "most American" -- the self-made, go-it-alone small businessmen and women carved in the image of our nation's founding fathers.

But despite the rosy picture painted in campaign speeches and magazine cover stories, an extremely high percentage of new businesses fail in the first five years. The estimates range from a low of 50 percent -- the Small Business Administration's figure based on the failure of businesses approved for small business loans -- to The Economist's estimate of 90 percent, which includes early-stage start-ups that would be ineligible for SBA loans. So if you're an entrepreneur and you feel you're in over your head, how do you know when to fold your cards? And, more importantly, what do you do next?

Signs it may be time to make an exit
No matter how good your service or product, the demands of running your own business are great. But there are some telltale signs that "sticking it out" may no longer be your best option:

1. You're still losing money after three years
The rule of thumb of starting your own business is that you have to be prepared to lose money for at least two years. But if you're not moving into the black after three years, you should consider moving on.

2. It's taking a toll on your physical or mental health
No matter how much of a "born entrepreneur" you are, the early mornings, late nights and fast pace of running your own business can be stressful and exhausting. But if you find the stress manifesting itself in chronic sickness, anxiety or depression, you should think very carefully about whether or not the entrepreneur's lifestyle is in your long-term best interest.

3. You have an almost "allergic" reaction to being an entrepreneur
As is true with any job, some people are and some people are not temperamentally suited for entrepreneurship. If you were initially wooed to start your own business by the idea of being your own boss but find you can't stand the long hours or are continually overwhelmed by having to do everything yourself, the entrepreneur's life might not be for you.

Of course, there are no cut-and-dry answers. And because the business is your "baby," the separation anxiety associated with calling it quits is bound to be stronger than if you were just another employee handing in his resignation. But if you're unhappy and your gut is telling you it's not going to get any better, you might want to think about making your exit.

Plotting your next move
An entrepreneur who's just decided to close shop is at a career crossroads. This is especially true for people in their 50s and older. Do you take a chance and try again? Go back to an old job or industry? The answer depends on a number of factors.

Giving it another go
If you're very confident in your idea, and if you have seriously evaluated the outcome of your first business venture and believe you understand what went wrong and how to avoid the same missteps in the future, you might consider giving it another go. But remember -- it was a lot easier to be an entrepreneur before the Internet bubble burst, and between 2002 and 2007 when there was a lot of easy credit. Even if you can reduce the likelihood of failure in your second venture from the 90 percent quoted by the Economist to 60 percent, are you comfortable with that risk? And do you have the financial resources to weather a second failed enterprise? This may be of particular importance if you're thinking about retiring in the next five to 10 years.

But if you've already rolled the dice two times, should you hazard a third? Sure, for some people "third time's a charm" really does pan out. Ulysses S. Grant was a failed haberdasher and a failed horse trader before he went on to save the Union. But the perpetual failure who turns into a successful entrepreneur is a rare one. And the perpetual failure who is not so beaten up that he or she will be a confident and hard-working employee is extremely rare.

Re-entering the workforce
If you're thinking about returning to a previous industry or job function, consider how your stint as an entrepreneur should influence the way you craft your career narrative for prospective employers. There are several key components to this.

First, there's a time element. How much time did you spend trying to make it on your own? If your business failed in two years, which is not uncommon for many new businesses, employers will generally view you as being easy to reincorporate into the workforce. But if you were in business for five years or more, be ready to answer questions about whether or not you are temperamentally suited to work for someone else, and whether you could be loyal to the company -- in other words, have you become too independent?

Second, how relevant was your business to your area of competence? If you are a lawyer and you left a gig as a senior associate at a law firm to become a sole proprietor with your own law firm, many prospective employers will view the move as a sign of chutzpah, and perhaps a willingness to hustle. On the other hand, if you left your position as a senior attorney to try your hand as a cupcake artisan, prospective employers might view your decision less favorably. Such a move is far afield from your core competencies, and calls into question your motives in returning to the workforce as well the commitment you will display as an employee. Are you still passionate about the field, or are you backpedalling after a failed getaway? Your career narrative may become particularly labyrinthine if the nature of your failed enterprise presents conflicts of interest with the industry you're hoping to reenter. If you just spent three years running a solar energy firm, it could be difficult winning back your position as a Chief Marketing Officer in Big Oil.

On the other hand, if you're having trouble reentering your old industry or want to try something new, you might consider exploiting your failed enterprise from a marketing point of view. For example, if you started a food company and can assess what went wrong, you might be able to market your expertise to find a position in the food industry. This could be an especially fruitful path if you have made contacts throughout the industry or in related industries. Or perhaps your stint as an entrepreneur alerted you to talents and interests that you were previously unaware of. If you quickly tired of crafting cupcakes but found you excelled at managing people or negotiating with vendors, you might talk about your business from a people perspective and try to move into a position in human resources or in contract management.

A practical approach
The bottom line is that in this volatile economy, we need to continuously evaluate our career prospects both as entrepreneurs and as a prospective employees. Certainly, there are cases of entrepreneurs striking gold. However, given the high rate of failure, it's best to be practical and to do your due diligence rather than believe every story that runs in your favorite business magazine or online franchise report.

 
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