Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
For small-business owners, failure isn’t an option — it’s a reality.
For example, consider the roughly 733,000 businesses that launched in the U.S. in the year leading up to March 2016. Only about half made it to March 2021, according to the Bureau of Labor Statistics.
“One of the inside secrets of great entrepreneurs, and businesspeople in general, is they are resilient when it comes to failure,” says Mark Coopersmith, co-author of “The Other ‘F’ Word: How Smart Leaders, Teams, and Entrepreneurs Put Failure to Work” and a faculty member at the University of California, Berkeley’s Haas School of Business. “Failure happens a lot.”
What can set you apart is how you respond to failure in the moment — and what you learn from it when you look back.
Shut down correctly
Before you walk away from your business, make a list of everything you need to do to shut down properly. A lawyer or financial advisor can help with this process.
“If you’re in dire straits, sometimes people do foolish things,” says Manny Henson, a certified financial planner and founder and president of Maryland-based Gamma Wealth Management. “Talk to your consultants to make sure you understand what you need to do.”
That process includes paying your taxes, paying your employees and closing your books correctly. If you miss any of these steps, you could face fines — and put your reputation at risk.
“It’s a small world nowadays, and you’ve got to treat people well,” Henson says. Memories of your business failure will fade, but “how you go about addressing and reacting to that situation is going to impact you for longer.”
Care for yourself
Once you’ve closed up shop, take time to care for yourself.
A business failure can feel like the death of a friend, says Penny Pompei, who coaches small-business owners in the Palm Beach, Florida, area and is a certified SCORE mentor. It’s OK to grieve the loss.
Before you investigate what happened, “Stop and breathe,” Pompei says. “You’ve just got to be able to just decompress and give yourself permission and time to mourn.”
If others ask why your business went under, you don’t have to give an answer right away.
“Don’t even try to go there, because your first inclination is going to be to blame,” Pompei says. “You really don’t know yet what happened.”
Figure out what went wrong
Once you’re ready to look back at your business, Coopersmith recommends bringing together trusted stakeholders — like customers, partners, key employees, investors or funders — for a postmortem.
To start, ask: “What were the risks that we missed?”
As an investor or when presenting a business plan, Coopersmith focuses on mitigating the risks businesses face in five areas:
Ensuring you have a product customers actually want.
Creating a high-quality product.
Having the right team members who can execute well.
Designing the right business model and securing adequate financing.
Surmounting legal or regulatory hurdles.
This framework is “a really good way to look and say, ‘Where do we think we failed?’” Coopersmith says. “Was there one domino that tipped? Or was it all of them?”
Outside forces do play a role. Sometimes a disaster, like the COVID-19 pandemic, suddenly hits. Sometimes the timing is just wrong.
But you can still learn a lot from looking back.
“The ultimate failure,” Coopersmith says, “is if you fail and don’t walk away with an insight that says, ‘This is what I could do.’”
Do things differently next time
Pompei says many entrepreneurs who experience a business failure will try again. Before you launch a new venture, she says, make sure your business plan includes an exit plan specifying what will trigger the closure or sale of the business so that you protect your personal finances.
“It can be time-related, it can be money-related, it can be age-related,” Pompei says. “It’s just a critical piece of the puzzle.”
Make sure you and your family are emotionally, physically and financially ready to try entrepreneurship again, Coopersmith says. If you are, he recommends finding a group of peers who can share challenges, resources and advice along the way.
Think critically about your last team and ask back the people you’d like to work with again. And when you launch, be upfront with your peers, staff and investors about the challenges you’re facing, because they’re there to help you navigate them.
Finally, don’t fear failure — it’s part of every business in some way, even those that don’t go under.
“Respect the fact that [failure] happens all the time,” Coopersmith says. “Go in with that, then manage your risks throughout the process.”