How you deal with the situation will determine whether you will recover and come back stronger.
Any seasoned entrepreneur will tell you that failure is an important rung on the ladder to success. How you handle the situation will determine whether you will recover and come back stronger.
Here are our top tips for surviving business failure:
Protect your mental health
This is the most important step in dealing with the failure of your business. It is not an exaggeration to say that many failed business owners sink to suicidal depths when they see years of hard graft fall out of the sky and into the hands of an administrator. Desperation can be overwhelming when your liable assets include your home and savings. It is vital that you began the process of finalisation with a rational perspective and armed with practical advice. Talk to friends, family and if necessary seek out some professional counselling.
Know your liabilities
When a business folds, there are debts to be paid and your creditors will want their money back one way or another. Back when you started this business, flushed with an entrepreneurial spirit, you may not have fully considered what you stood to lose if all went belly-up.
If you are operating under a sole proprietorship or partnership – in the eyes of the law, you and your business are one and the same. If your company doesn’t have the cash or assets to clear debts, your creditors can, and quite often will, be knocking at your door.
If your business was organised as a corporation or Limited Liability Company (LLC), you are considered legally separate from the enterprise and creditors can only claw back what the administrators can manage for them.
Check for loopholes
Most small businesses owners are personally liable for some, if not all, of their debts, even if they did register as an LLC. Loopholes in the limited liability cloak will be found if you signed a personal guarantee for a bank loan, offered up your property as collateral or signed a purchase agreement or service contract in your name, rather than on behalf of the LLC.
Check all filed documents carefully.
If you were hoping to reap the benefits of registering as an LLC but operated the business personally, you could be hauled into court to justify your business practices. Make sure you have a clear knowledge of what you owe and to whom.
Seek professional advice
You may be panicking about money, but getting some professional advice before any external administration sets in could save you a lot. Always consult a lawyer before declaring bankruptcy as this can seriously affect your credit score and prohibit any further business ventures.
There is sometimes room for negotiation in paying off your debts – get legal advice on how to strike a deal with your creditors and settle your liabilities out of court.
Be aware that your spouse, business partner or cosigner can be liable for your debts, especially if you consider filing personal bankruptcy.
Conduct careful analysis
The temptation will be to bury your head in the sand when your business dreams have failed, but this will only make things worse. Look at the damaged head on and carefully analyse your debts, liabilities and most importantly the mistakes that led your business to this point. This knowledge will be vital for your immediate recovery – both emotional and financial – and in any future ventures.
Once you have worked out what the errors in your business practices were, be sure to take responsibility for any that are specific to you. If you were bad at cash flow management – admit it. If the business failed due to a critical decision you made – don’t deny it. Cultivating a ‘culture of blame’ is an easy trap to fall into as your ship begins to sink, but unless you can accept your failings, you are unlikely to learn from this experience or, indeed, apply the lessons learnt to further enterprises.
Gather your assets
Things will seem very gloomy at the point of business failure, but it can’t have been all bad. To move forward, you will need to identify what was right about the company and what you can take with you.
Make a note of specific successes and why they happened.
Take the contact details of key clients with you and try and keep on good terms with your best staff members – you never know who you may need to call on in the future.
Administration, liquidation or receivership?
If you have failed to convince bankers and creditors to agree to more flexible terms – you will probably have to go down the routes of either administration, liquidation or receivership. The administration will take place after you or one or more of your creditors ask the courts to step in. The court will appoint administrators who will attempt to manage the business with the best possible returns for creditors before liquidation. Crucially, under this reign, your business is exempt from any legal action.
If your business is under external administration, it cannot be forced into liquidation, but this is often the only sensible option. With your agreement, administrators will help you release as many assets as possible to pay off creditors.
While external administrators are sent by the courts; a receiver works for either a bank or other creditor who has a hold over the majority of the business’s assets.
The receiver acts in the interests of the major creditor and at this stage, you are still vulnerable to legal actions.
Accentuate the positive
Notice the difference between what happens when a man says to himself, “I have failed three times,” and what happens when he says, “I am a failure.” your perspective on the demise of your business will be vital to the success of your next enterprise.
Take what you have learned and come back with a sharper business mind and a stronger resolve to succeed.