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Keep your eye out for signs it’s time to throw in the towel

Statistically speaking, your small business has a high likelihood of failure. Keep your eye out for the signs of failure and have a plan to throw in the towel promptly and intelligently.

Whether you are a startup or a mature business, there is no guarantee of success. Lack of capital, a shortage of management experience, market conditions, supply-chain issues and competition are only a few of the challenges you face every day.

While you know the pulse of your business better than anyone else, you may also be too close or emotionally attached to be objective about its likelihood of survival. Failing to see the signs of failure means you could be throwing good money after bad and creating more liabilities than you should.

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The first time you should look for signs of failure is before you even start your business. Writing a business plan is usually a must if you plan to borrow money or look for investment, but it should be a priority even if you are self-financed. A well-researched and written business plan will help you identify most of the business's risks and opportunities. It should not be viewed as a document that proves your business is viable, but, rather a process that answers the question of whether it is viable or not.

It is a common mistake to massage your business plan to create a business case that supports your dream rather than letting it scare you out of a startup altogether. In fact, a business plan that teaches you not to proceed is every bit as valuable as one that proves out your idea. Put time in to your business plan and it will reward you.

Once the business is up and running, measure its performance. You may be the chief cook and bottle washer and not have time for the day-to-day bookkeeping and accounting, but the information that comes from that data is critical. Watch for the obvious clues, such as expenses rising faster than sales, low margins and troubles with receivables collection.

You should look much further than that though, when benchmarking your business. You might want to track trends in average selling price, repeat customers, manufacturing throughput, sales per employee – the list is endless and specific to your business.

I'm not suggesting collecting data just for the sake of it. The idea is to keep it simple and focus on data points that really display the health of your business.

Compare the actual results to those you projected in your business plan and look for causes and corrective measures.

One day you may find the data showing signs of real trouble. If that is the case, you should rewrite your business plan. Let the result teach you what your options are. Call your lawyer and accountant early in the process so they can remind you of the personal and business risks to which you have committed.

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"Throwing in the towel" is not easy, simple or cheap. Nor is it unemotional.

If you find yourself needing to shut down or declare bankruptcy, you will still need to consider the financial obligations that will survive that decision, such as personal guarantees on debts, employee obligations and taxes payable.

Most successful business people have experienced some form of failure in their careers. It's difficult but it may be a stepping stone to something bigger and better. So, write and maintain a business plan, measure your business's performance and be honest with yourself.

Understand that a failure can be successful if you are aware of the possibility and have a plan to manage it.

Special to The Globe and Mail

Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and exited seven businesses.

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