There’s a Right Way to Do It
The decision to close a business is never easy. Unlike the hope and optimism that comes with starting, buying, or growing a business, closing a business feels like surrendering.
It seems like an admission of mistakes, such as bad timing, failure to evolve, or poor judgement in running the business. It’s tempting to just turn out the lights, lock the doors, and walk away.
Unfortunately, it’s not that simple. Winding down a business that you acquired or built requires handling a multitude of details in a thoughtfully orchestrated way.
Closing down the business correctly preserves your professional reputation, self-image, community goodwill, and the value of the remaining assets. Overlooking even a few details could lead to costly penalties or messy lawsuits for years to come.
It’s a process.
One business-law expert compared winding down a business to performing due diligence for an acquisition, but in reverse.
Instead of seeking hidden assets, look for hidden liabilities related to finances, taxes, contracts, employee layoffs, and regulatory compliance. Before the banks get involved, hire accountants and lawyers with experience in business closures.
Below are just a few tasks to consider when planning a wind-down project.
Hire a legal advisor who understands state laws with regards to the process of dissolving your business entity. Your legal advisor can help you outline what actions will take place over the next 18 to 24 months. Be prepared to stay the course.
Create and follow a plan. This will help you anticipate and avoid problems that might surface before and after the business is closed. Map out the sequence of actions so you will be prepared to answer key questions your customers, employees, and community have when you announce plans to close. For example, employees will ask you about when they will be paid, COBRA benefits, and any assistance you can provide in helping them find new jobs.
Collect accounts receivable before you tell customers you are going out of business.
Accept the reality of your situation and get an accurate picture of your financial situation. Is all of the data related to income, assets, liabilities, and capital structure up to date?
List current obligations to suppliers and contractors. Make arrangements to pay them for provided products and services.
Review the status of jobs in progress. Return deposits or payments for services that won’t be rendered after the facility closes. Maintain good relationships with your best customers and industry peers by suggesting alternative suppliers.
Re-read existing contracts with lenders, vendors, and landlords. Look for details and procedures related to terminating the loan, lease, or any service agreements in effect when you plan to close. Which obligations take precedence? What penalties are imposed if you default on the agreements? Can the terms of any agreements be re-negotiated?
Get your real estate appraised. Ask an expert to help you evaluate your options for selling or leasing it. Which route might return the most value?
Understand the procedures for filing final tax returns in the cities and states in which you do business. What tax filings will be required after your company stops operating? Will you need to set aside funds to pay taxes after your company is dissolved?
Compile a list of all tangible assets, including office equipment, production equipment, and inventory. Retain professional appraisers and determine the best channel for selling different categories of assets. For example, general-purpose office equipment might fetch a higher price on eBay or Craigslist. A business-closing auction might be a better option for specialized equipment related to your production processes. As you prepare to close the business, you never know who might be interested in the tangible assets of your distressed business.
Consider the value of intangibles such as patents, copyrights, trademarks, and domain registrations. Have you created software, apps, or other services that could be licensed?
Plan how you will break the news to employees, customers, and strategic partners. Choose the timing, messaging, and methods of delivery carefully. A PR firm with experience in business transitions might be able to suggest ways to minimize possible negative repercussions. An outplacement firm might be able to help with your communications to employees.
Review federal and state regulations regarding the closing of the plant. For example, the Worker Adjustment and Retraining Notification Act (WARN) requires employers with 100 or more employees to provide at least 60 calendar days advance written notice of a plant closing and mass layoff affecting 50 or more employees at a single site. Keep all paperwork that proves you complied with all the regulations.
Don’t close bank accounts, licenses, permits, and business insurance policies without getting legal advice from a lawyer who specializes in business dissolutions. Every agency may have different procedures and requirements. Request a written letter that confirms cancellation of the policy or permit.
Save all the documents that prove you have complied with proper procedures and tax filings. Business closures can cause difficulties for everyone. You never know who might question whether or not you followed all of the correct procedures.
Other Issues
Consider what will happen after you close the business entity. If you are closing one business unit within a company you acquired, consider how the shutdown of that unit will affect the performance of the business units that will remain open. Was the closed division performing essential functions for the other units in the company?
Are there specific colleagues, employees, strategic partners, and vendors who might be able to help you with future ventures?
Closing a business is likely to stir up unpleasant emotions — in yourself and in those you have worked with. As you leave the business behind, be honest and transparent with everyone involved. You never know when or where your next opportunities and strategic partnerships might come from. Integrity matters. Your legacy matters. .
At the LaManna Consulting Group, we can help you through this stressful transition. We can recommend experts in bankruptcies, judgements, and business dissolutions. Call me at 561-543-2323 and discuss your situation in confidence. Perhaps we can suggest some alternatives.