Failure analysis is arguably the most important consideration before starting a business, yet it is often the most overlooked. Some entrepreneurial archetypes struggle to recognize or accept failure, driven by immense grit and a willingness to self-sacrifice. Many believe that enduring more pain will lead to a greater payoff in the end. However, struggling business owners who adopt mantras like "failure is not an option" or "I'll sleep when I'm dead" often lack a clear understanding of when to call it quits.
What Does Total Failure Look Like to You?
Experiencing feelings of embarrassment, shame, loss, and depression is normal when a business fails. Emotionally, losing a business can feel akin to losing a loved one. Financially, it can leave owners with debt, bankruptcy, and collections. Without careful planning, you may face complete financial and emotional devastation. The purpose of this exercise is to help you avoid choices that lead to deep depression, lawsuits, financial ruin, and/or thoughts of suicide.
I want you to imagine losing everything you own: your house, transportation, savings, income, and investments. On top of that, you are deeply indebted and cannot afford health insurance or basic necessities, making self-reliance impossible. This level of stress can also cause divorce and sickness. This kind of failure is truly "rock-bottom." Now you know what "Total Failure" looks like!
Next, write down everything you could lose on the left side of a sheet of paper. Don’t be shy, you must be truthful about what is at stake. Then, go through each one and determine which of these things you would sacrifice for the sake of your business, writing "Yes" or "No" in the right-hand column. Everything that is labeled with a “Yes” is called “Acceptable Risk.”
Acceptable Risk vs Total Failure
Now that you know what "Total Failure" looks like compared to "Acceptable Risk" you can make a plan that will help you if your business runs into trouble. I recommend discussing this list with your spouse and business partners will do the same exercise. Build a failure exit strategy and risk mitigation plan, collectively. Doing this simple assessment will also help you understand each other's risk tolerance.
When starting your business, you must regularly address your fears, risk, and uncertainty to help you stay within the boundaries you set. Reviewing your risk assessment often keeps you accountable to your business plan and risk profile. Sometimes business goes the wrong way, and you need to know when you are leaving acceptable risk and drifting into failure territory.
Many Entrepreneurs, me included, may take on bad risk without realizing it – especially when things are going great. Maybe you have a huge opportunity, and you need capital. Your business is thriving and your bullish on the outcome of this deal. You know that your house in on the “No” list, but you decide to take on a second mortgage. Now what? If the deal fails, then you’re outside of your acceptable risk profile. Worse, you will feel intense pressure to make more bad decisions to protect your home. Before you know it, you will experience a total failure.
Quit Your Business Before Your Business Quits You
Taken out of context, this might sound like bad advice, suggesting you should cut and run at the first sign of trouble. Remember this exercise is specific to businesses that are already under duress and are at a higher risk of failing. When your business starts to use up the resources you were willing to sacrifice and you're getting close to using some “protected” resources, it's time to reassess.
Weigh the possibility of business failure against the remaining opportunities and potential pivots. I hope that you will decide the risks are too great before sacrificing everything you have. Ending your business on your terms is much healthier than being forced out of business. Not only will you recover faster financially, but you will also side-step the guilt, shame and embarrassment of losing your dream.