Bankruptcy

How Do You Tell Early Investors that You’re Going Out of Business?

Borrowing from friends, family, and fools is very different than borrowing from a professional lender. Despite the consistent, good advice of ‘get everything in writing,’ these investments are rarely formalized.

Going out of business? Now What?

Opening up your own business is always a gamble. According to the Small Business Administration, around half of all new startups fail within their first five years. Only a third of new ventures survive to ten. And, if your startup unfortunately fails, dealing with your investors can be very tricky, especially if you pulled seed funding from the 3 F’s – family, friends, and fools. These investors don’t vet ideas like, or ask the same sort of questions that, professional lenders do. Rather, they’ll listen to your pitch and offer to give you what they can because they know personally, and trust you. But, unlike professional lenders, they normally don’t have ways to recoup that loss, which puts them in a financially devastating position. So if you’re forced to shutter your doors, how do you break that news knowing what it means for the people who trusted you with their money?

Don’t hide until the zero hour

You don’t have to send out a mass-update every time your business hits a roadblock. But you do need to start talking to people once the writing is on the wall and it looks like failure is on the horizon. Do not just want to show up at their door one day, tail between your legs, with the unfortunate news that their money is gone. Rather, you need to keep them up-to-date on what’s going on during your last few months and weeks. The idea is to soften the blow, and help them adjust to knowing they may never see much, if any, of their investment again.

Be ready to answer a lot of questions

Once you clue everyone in on what’s happening to your business, you are going to be hit with a barrage of questions and comments. This will push your patience to its breaking point. No one wants to see their business fail, and you’ve likely done everything you possibly could to keep it afloat. Regardless, people are either going to try to tell you what you should do, or will be asking about your plans. And you owe it to these people to answer every, single, one of those questions. These are your investors; they deserve your full attention, even if they’re also your friends and family. The months during, and following, your company’s demise will strain your relationships with them. Don’t add any stress to the situation – be patient, and answer the questions.

Offer to pay back what you can

You probably won’t have a lot of money to give away once your doors are closed and your creditors – the professional ones, who repossess property – are paid off. But if you have anything left over, give what you can back to those friends, family, and fools who believed in you. Just make sure to clarify how they want it back. Some may have seen their investment as a gift, while others may want payment with interest. Either way, making a goodwill gesture to give back some of the money they trusted you with will be vital to repairing and salvaging your relationships.

Borrowing from friends, family, and fools is very different than borrowing from a professional lender. Despite the consistent, good advice of ‘get everything in writing,’ these investments are rarely formalized. Further, your family and friends make up a major part of your life. This isn’t like your credit score going down – the very relationships that fill and enrich your life are on the line. That’s why it is so important to be upfront, honest, and patient; and to diligently pay back whatever you can. Your business may be gone, but your friends, family, and even the fools will still be there to help support you during a very trying time.

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