How to decide if a business has to be closed?


2

An obvious point is if there is no sales for a given period of time and if your costs keep piling up, you have to close down.

But if the product was not sold like hot cake but had some sales (though not very profitable), is it worth keeping or closing it?

What are the factors one should consider while making such a decision like "I call it a day" and quit the business?

Business Exit Strategy Exit

asked Feb 3 '12 at 17:58
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Muthu
159 points

5 Answers


3

Corporate Finance 101!

You should close your business if the value you are creating is lower than the cost of creating that value. Note: I am not defining value as pure cash. But in order to make this decision you have to apply some kind of cash value to intangible assets (R&D, fulfilling a dream, etc).

  • Could you be getting a better return on your time doing something else? (if you are losing money, then the answer is definitely yes. But even if you are making money... if you aren't making enough given your other choices, the business or your choices should change).
  • Some of the answers talk about hard to quantify topics like "vision" and "goals" of the founders, but remember that a business is not a person, it's simply a legal entity. If your goal is to create a successful business, the one you created might not be it.
answered Feb 4 '12 at 01:20
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Michael Pryor
2,240 points
  • Yes and no. Just because I do not make moenmy NOW does not mean it is not valid to keep it alivve because I have a larger vision where it does fit in. Sometimes long term views on thigns are neede that go above the "make profit now" of business 101. – Net Tecture 5 years ago
  • @NetTecture you just have to assign a value to what you are doing. ie. just because a business is losing money does not mean the value you are creating is lower than the cost. it could be that you are investing in something that will be worth much more in the future. – Michael Pryor 5 years ago
  • I know. I jsut want to point out that it is not as eay as "income vs. expenses" in many cases. – Net Tecture 5 years ago
  • We hear a lot of people saying they had 5 or 6 failed startups and they succeeded in the last. I don't understand if they are creating an entirely new product/business or try improving something related to their already existing ones.. – Muthu 5 years ago
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1

An obvious point is if there is no sales for a given period of time and if your costs keep
piling up, you have to close down.

Not necessarily. This is a decision of the owners - maybe there are other reasons to keep development going.

But if the product was not sold like hot cake but had some sales (though not very profitable),
is it worth keeping or closing it?

Again that totally depends on the vision, goals, prospect the owners see.

What are the factors one should consider while making such a decision like "I call it a day"
and quit the business?

You tell me. Seriously. A company with an hour work in the evening making 1000 euro a month - worth or not? Not for me (distraction from long term goals). For someone going employed programmer it may be worth just keeping it around.

This is a personal decision. Have you heard of twitter? They nearly shut down because of a lack of interest, until very recently things exploded. There are no guidelines, unless you can not pay the bills.

answered Feb 3 '12 at 18:28
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Net Tecture
11 points
  • Very interesting point of view. Especially good info on twitter. – Muthu 5 years ago
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1

Work out your profit/loss taking account your lost earnings (what you could earn working for someone else or in another venture). You should quit when you are making a loss for a significant period (a few months) and you cant feasibly change this figure significantly. (you don't have the capital for improvements or advertising)

answered Feb 3 '12 at 21:09
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Tom Squires
1,047 points

0

You need to consider:

  1. Your break even point. The sales point up to which you are at no loss or profit.
  2. What are your fixed cost (such as rent) and variable cost.
  3. The probability of achieving your break even point at near future.
  4. Will you incur any cost even after closing down the business such as interest, legal fees etc. How much? Are these cost substantially higher than your loss now?
  5. What is the cost of closing down?

Once you ponder on these issues, I feel you will get a clear idea about the decision you take.

answered Feb 3 '12 at 22:55
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Natwar Lath
294 points

0

Allow me to suggest a different take on this. I think what you are saying is that you have a relatively new product that is selling and sales are growing perhaps slowly. It is not loosing money if you don't consider the value of your time, but probably not making as much as you would hope or perhaps you think you could make doing something else.

The math part is easy, you can plug your numbers into a spreadsheet and see how much you will make in the future if things continue the way they are.

The two things you should consider are:

1) What else would you do with the resources (your time perhaps) that you would free up by shutting down the business?

2) Is there something that could happen to dramatically improve the business?

Only you know about number 1, but number 2 is interesting because many businesses fail simply because they shut down too soon, generally because they ran out of money (under capitalized). It takes time to build a reputation and become known. Also some businesses are seasonal, retail in the US generally makes most of its money just before Christmas. Starting a store in June and shutting down in October would miss all the Christmas shoppers for example. You need to give the business enough time to gather enough data.

Assuming you have enough experience and data, and it looks like something needs to change for the business to really take off, then consider what that might be and how realistic it is that it will happen.

Some things are beyond your control, such as when the US was attacked on 9/11. Suddenly sales of American flags sky rocked over night and manufacturers could sell all they could make. There is really no way to predict something like this, but it could happen for your product.

The other thing to consider is what could you change to make a big difference. An example is Orville Redenbacher with his popcorn. He was selling the popcorn part time and not making much money. He was frustrated and hired a marketing firm to help him. The suggested he call it "gourmet popping corn" and the rest is history. Sometimes a simple change like that can make all the difference.

What generally does not work is doing nothing with a belief like "our product is so much better that soon everybody will want it". Better doesn't always win, the question is what will be the defining event that will change things? Consider free, open source software. Many will tell you why Linux and Open Office are so much better than Microsoft Windows and Office. Maybe so, but why should I believe that this year will be the year that suddenly people stop buying Windows computers? What is the defining event that will change everything?

answered Feb 4 '12 at 14:39
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Jonny Boats
4,848 points

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