Firm Closure, Financial Losses and the Consequences for an Entrepreneurial Restart



Non-technical summary

Individuals who want to become entrepreneurs need to spend time on an important as-
pect: risk. They risk not only their financial well-being, their career, their family relations,
but also their physical well-being. Indeed, asking nascent entrepreneurs about anxieties
preventing them from becoming entrepreneurs at the end, they prominently refer to fi-
nancial risks. However, is their fear justified? How likely is it that entrepreneurs suffer
private losses from business closure? And what does it mean for their entrepreneurial
career if private losses occur? May it even be more likely that losses at other stake-
holders are more important for an entrepreneurs’ further entrepreneurial career?

Financial losses arising from business closure can befall various stakeholders: sharehold-
ers, banks and public institutions, or suppliers and other stakeholders. It is reasonable to
expect that financial losses impact the likelihood of a restart as a function of the stake-
holders who have been forced to bear losses. Because most start-ups rely on entrepre-
neurs’ own capital there is a high probability that entrepreneurs themselves are finan-
cially affected by loss-making business closures. This would, as a consequence, reduce
their personal wealth, the fundament of future actions. However, it is of twofold impor-
tance if banks suffer losses. First, losses at banks are likely to be strong correlated with
personal losses of the entrepreneurs reducing entrepreneurs’ personal wealth. Second,
losses at banks are “public” debts impeding the chance of credit from other banks. Both
are bad for restart feasibility.

Multivariate analyses reveal that the occurrence of private losses of the entrepreneurs
does not affect the restart likelihood. Losses are merely important if they arise at banks
or public institutions. Then, restart is less likely. This effect may be the result of the role
that banks play with respect to start-up financing, where they are often the first address
to turn on. Furthermore, the type of closure matters. Restart probability is higher if the
closure was result of management disagreements. Surprisingly, restart probability is in-
dependent from closure types that can be considered a business failure. This means, that
if closures took place because the business development does not meet the entrepre-
neurs’ target thresholds of performance or because of liquidity problems or excessive
debts arose, restart likelihood is not affected significantly. This was not expected since
other studies show that restart is less likely in the case of business failure. However, it
might be that there the closure type measures capture effects that actually come from
incurred losses for which it was not controlled.

The major finding of this analysis is that financial losses due to business closure are im-
portant for the occurrence of an entrepreneurial restart - if the losses incur at banks.
This has an important implication for entrepreneurs. Entrepreneurs who want to continue
their entrepreneurial career after a business closure should avoid losses at banks or pub-
lic institutions.



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