Failure is not a topic that many entrepreneurs want to think or talk about, but the truth is that roughly 50% of new business fail within 5 years of starting up.  For an entrepreneur, knowing how to wind down a failed business is as essential as knowing how to start up a business.  Close down a startup the wrong way, and you may face many legal and even financial consequences (it is advised, and essential, to consult with a legal professional when closing down a business).

Startups get to the point of exasperation, wherein they must be wound down, for many different reasons.  Perhaps the most common reason that has startups needing to wind down is inadequate capital to keep the business functioning, and inadequate access to diversified sources of funding.  Maybe the startup had adequate funding, but was unable to make the business model work and generate sufficient revenue to become profitable.  Other cases could include disagreements between leadership personnel on where the business is and should be headed, or simply shutting down because of circumstance outside of your control and the lack of an interested buyer.

The process of winding down a startup is not all that incredibly different than the process of winding down and closing an established business.  If the startup is somehow profitable and needing to be closed down, all profits should be distributed between shareholders and all obligations must be reconciled.  If the startup company must wind down due to money issues, then the startup company’s assets are divided amongst creditors and stakeholders based upon the specified terms of any financing agreements.  It is wise to withhold a portion of the money from the sale of the assets to pay for any business and payroll taxes that may be owed, as any money owed to the government will not be discharged during bankruptcy proceedings.  Also reserve money for any service costs incurred to attorneys and accountants.

Even in the midst of winding down and closure, remember that service is important.  Employees and partners, if there are any, will be stressed out and disappointed as well.  Additionally, make sure that all contracts, orders, etc. by customers are finished and fulfilled – you never know if you will end up doing business with them in or the people that work at them in the future.  Handling the closure carefully and with an attitude of servitude will speak volumes about your character, and that of any business you be start up in the future.

Finally, keep in mind that closing down a failed startup is not the end.  As cliche as it sounds, it is important and essential to learn from mistakes.  Doing so will aid you as you look toward future success.