What happens when you have used your 401K to Self-Directed 401k to start a business and the business is failing? What do we need to do?

Not sure what you're asking here. If the business is failing, then the value of your self-dircted IRA investement has declined - perhaps to zero. Just as if you had invested in a failing stock. Are you wondering what options you have for whatever may be left in your self-directed IRA account? I suggest you talk to your plan custodian.

Thank you for your response. We bought a franchise last year, it has not done well and our money from the 401K we used to fund the business is almost gone. What should we do?

Not knowing any details about your situation - if you don't think there's much hope for a recovery by ths franchise, you might want to just take whatever you can out of the investment and cut your losses - if that's possible. Then you should work to build your retirement fund back up. Investing in a franchise is obviously a very risky thing to do with your retirement money - I would counsel a more traditional approach built primarily around bond investements, at least until the market signals a turn around.

Thank you, can I ask what type of bond investments?

For most people a bond fund makes sense. Buying individual bonds is not recomneded unless you have enough to adequately diversify across multiple issuers.