Sometimes circumstances seem to thwart even the most skilled and efficient company. A common example of a failing business is one that has been left behind by new technology. Blockbuster passed on buying Netflix for $50 million; Netflix has since nearly eclipsed Disney in market value, and Blockbuster is a memory. Running a business is hard, and knowing when to close is even harder. There’s a lot that goes into running a business - and closing that business down.
But there is a right way to close up shop, and if we want to be fiscally and legally responsible, we need to make sure we are doing things the right way. When debts remain, a wind-down has to handle four things: collecting and paying debts, the people affected, the final tax filings, and the sale of whatever is left, with every obligation accounted for so that nothing surprises you after the doors close. A wind-down plan should look like a business plan, with a strategy and tactics behind it. Each item should have a clear value, an attached timeframe and an assigned owner. You need to set clear goals for each of the steps in the wind-down process. Create an “order of operations” for each task that you plan to accomplish, making sure the deadline for each phase of the process is set. Before you start winding down a business, make a list of everything you need to do to shut it down. You should also write down everything you own and owe.
The money side comes first, so reconcile your accounts and bill all your customers as quickly as possible. You will need all the money you can get. It’s not so easy to get what you’re owed once a business stops trading. Once the company has been dissolved it is harder still, which is why an aggressive collections push belongs before dissolution rather than after. The last thing any owner wants is to find themselves chasing down debts after shutting down their business. Make sure your last round of revenue is credited to the right accounts and your last expenses are paid and documented.
Next, list all the creditors you owe money to. Your creditors are probably the most important to inform. Lenders need to hear from you, and so do the rest: inform all vendors, suppliers, creditors, insurers and service providers of the forthcoming cessation of operations, then pay off what is outstanding. How you pay down your debts has to be legally and financially correct. And you should know what you signed up for before you start paying them off and winding down the business. Take a look at the details of each loan agreement to identify restrictions and requirements you must meet. That debt could be a line of credit, equipment loan, or vehicle loan, or the rent on your space. But read it slowly and carefully. The first thing to look for is any personal guarantee exposure for the shareholders. A personal guarantee is a signed agreement to repay the debt personally if the company goes belly up. If there are personal guarantees on your debts, the amount will still be a liability. Make a list of the personal and business debts in separate columns so you can see the total amounts outstanding.
Customers and Employees
Then there are customers and employees, who are often the ones who feel the loss most. Be sure to keep them in mind. Even if you have no long-term contracts or regular clients, talk to the customers you do have, through a press release or a direct note to your mailing list. Make sure you inform them as soon as you can about when the business will be shutting its doors, if it hasn’t already been announced. Jobs in progress should be finished before the business officially closes. Completing them does two things for you. First, it shows your clients that you intend to provide a level of service expected of you. Second, if you don’t, those jobs represent a liability that opens you up to potential consequences. It also keeps relationships intact for future projects.
It’s a good idea to keep employees abreast of your intentions to shutter the business, and they will appreciate transparency. Be cordial and try to give your employees as much notice as possible to give them enough time to find another position, and make sure they are paid what they are owed. This is not only a matter of decency. Owners often have fiduciary responsibilities to employees, and unpaid wages may provide grounds for personal liability. The same goes for payroll taxes. The last thing you want to deal with when you’re winding down a business are problems that come out of left field because you’ve done a half-assed job. All of this has to be tracked and documented.
Final Tax Return
That brings us to taxes. This is not a fun part of winding down a business. The order matters. Once the last paychecks have gone out, file your federal and state employee tax forms. Next comes the state sales tax form, along with a call to your state agency to close out the tax account. Then the final income tax return. Closing your business usually means you’ll need to file a final tax return, so you need to know what’s being asked of you. The process differs depending on whether the business is a sole proprietorship, partnership, LLC or corporation. Note the due date and make sure you file the required returns. And don’t forget about your own personal tax filings either. The last form on the list is your personal employer tax return. Don’t wait until after dissolution to handle the company’s tax obligations.
Sell Off What Remains
Only once the debts, the employees and the taxes have been paid should you sell off what remains. Now is a good time to sell anything from outdated inventory to excess machines to assets such as vehicles. Get whatever cash you can for them. Intangibles such as a trademark or goodwill count too. Even if it looks like there is nothing left to sell or that everything you own is already spoken for, create an inventory of these items as well. A retail business can hold a going-out-of-business sale, and there are inventory liquidators who will buy excess stock directly. There are online sites for selling the stock such as Amazon, eBay, Craigslist, and so forth. Look around the online world and see if you can get rid of it for top dollar. Whatever cash or assets remain should go first into the business to fund its own obligations. The owners sit at the bottom of the waterfall and only get what’s left over. It’s not fair, but you’re not the only one who has to be satisfied when the business fails.
The role of a business owner is to make a business plan and see it through. But as soon as that business faces a number of problems, the mindset should shift from expansion and growth, to a focus on closure. The important thing is to document every step of the process, especially when debts remain. The list of things to do before you close your business is long, but you need to make sure it is completed before you dissolve the business. A game plan will help you get through it. Don’t leave a mess when you close your business, and make sure you’re doing everything the right way.
