When to Quit
One of our biggest challenges, and often a hurdle with new engagement, is helping a client get to a point where they understand where they are on the map to success. I’ve had many meetings where the investors are trying to convince me that the company they poured money into is worth saving. They shouldn’t have to convince me at all. It should be obvious.
Sometimes the company is worth saving, sometimes it isn’t and realizing that it’s not worth saving is a difficult day. Nobody wants to get to that point where they face a complete loss of their investment and never recover so much as a penny on the dollar. In some cases, investors are liable for shut down expenses, especially in receivership, and those costs could be in the millions. I worked on a shutdown that was shockingly expensive just to close the doors and broom-sweep the last building.
In that unique case, I looked at the company more than two years earlier and I made the recommendation to pass after the brief pitch by the founder. I made the recommendation because I knew that at that moment, I was hearing the best story I was ever going to hear, and it was all going to be downhill from there. I never hear the true story in those situations. I’m getting the sugar-coated version about all the potential, and money that could be made. My point is that the pitch wasn’t compelling, so imagine what the company was really like! Two years later, it was the terror scene I imagined.
This was a case where an investor puts in a little money, then when things don’t go as planned, adds a little more money thinking that will solve the problem, and rationally assume adding more investment protects the prior investment when all it does is add more to losses. It’s like a bad gambling habit, where you think that next bet will turn things around, and it doesn’t. Carefully analyze where you are at all times.
Don’t build a half bridge over a river, then destroy that half just because it’s more expensive than anticipated. Finish the bridge. You know it will be useful or you never would have started, but don’t toss money on a half built bridge if you don’t know if it can be completed because of technical issues. Know where you are at all times.
Most of the time, individual investors don’t have the discipline to stop throwing money into the black hole. They keep doing it, completely lost in the belief that they will somehow make the business work. This group rarely calls us until they run out of money. It’s only then that reality creeps in.
Here is my advice.
First, when you own a business and it’s not going well, don’t just assume tomorrow will make up for it. Confront the problem immediately!
Recognize that your best day in that business could already be behind you. Get advice from experts, and I don’t mean just us. Talk to others who know the business and get their candid view. Ask them to tell you like it is rather than what you want to hear. If you don’t know, then hire someone like us to go in and take a look. If we can turn it around, we will tell you. If we can’t we will tell you that too. The important thing is to get other opinions. If someone says it’s a bad business, get a second opinion. We encourage all of our clients to not just talk to us, get points of view from others who have knowledge.
Once a few people tell you that you don’t have a winning business. Stop! Don’t wait until you’re broke. Stop! Change the business if you can, but again, get other opinions.
Now, about those opinions. People come in lots of flavors, so know that going in. When I acquired Open Interface North America, everyone I spoke to who had relevant experience, and I do mean everyone, said I was in pursuit of a bad company. So what was the difference? I knew from my own experience what needed to be fixed and how it could survive.
Once you’re convinced the business can’t be turned around, don’t hesitate to shut things down. Do it immediately and move on with your life.
If the business can be saved, know that there are still risks. Even when you hire experts such as Middlerock, it doesn’t mean our or other consultants recommendations will work. We’ve had situations where we were hired, made recommendations yet the founder/CEO refused to follow our recommendations. We can’t help that outcome.
We’ve turned around every company where we had complete control so far, but it doesn’t mean the next one will recover. But, if we say it’s time to stop, chances are we’re very right. The most important thing is to talk to us early, even if you think we’re going to tell you some bad news. Our chances of turning things around are much better when the company isn’t already dead. Don’t wait until you’re in a nosedive!
The most important thing is to not beat yourself up if you do fail, and don’t assume all ventures will fail or that entrepreneurship isn’t for you. Many successful CEOs have had one or more failures before your success. Use your lost investment as a learning exercise, or a degree in what NOT to do. Leverage your experience and get out there and try again. Use that expensive lesson! Don’t throw it away too.