Going Out of Business

The writing is on the wall and your company must close. Despite throwing everything you had into making the business successful, it’s not working. The funding is depleted. You have drained all your personal resources, emptied the retirement nest egg, mortgaged the home and you are out of cash. You have talked to all the right people–the bankers, the accountants, other business owners–but no one can provide the miracle cure. Payroll is due again, and your not sure where the cash will come from. It’s time to cut your losses. It’s time to close the doors, and you know it.

Somehow you miscalculated the market and you committed yourself to large fixed expenses–rent, equipment purchases, marketing campaigns–that cannot be cut quickly enough. The business is generating cash, but not profits. If you could start all over you would do it differently, but it is too late for that. It’s time to close the doors and start over, but how do you do that?

There is a right way and a wrong way to close a business.

Some owners get nervous and greedy when closing a business. They know the bottom is going to fall out so they stop paying bills, sell off or transfer equipment and stuff money in their own pockets before it all blows up. Maybe they start a new firm and transfer all the assets of the old firm to a new company in the dark of night. This would be the wrong way to close.  Like the cheating spouse who packs his bags and drains the marital bank account before his wife comes home from work leaving a note that says “sorry, I found someone else who makes me feel alive again,” you can imagine the bitter litigation that will ensue.

There is a better way to close a business, a way that leaves your dignity and honor in place.  A way that allows you a fresh start while leaving creditors unhappy but understanding and accepting of the situation.

  • Will you Start a New Business? First, you must decide whether you will continue the business under a new company in the future or if you will work for someone else as an employee. Closing a business is simpler when you plan to work as an employee in another business. In fact, taking a break from being an owner may help distill the lessons of a business failure. But if you will start a new business immediately with all the painfully acquired knowledge of how not to start a business–a wisdom and knowledge you should not undervalue–then you need to consider many things.
  • Incorporating a New Business:  If you will start a new business, it is important that you start with a clean slate.  You should not start a new business using the old corporation and existing company bank accounts. That company is probably “toxic” with liens, judgments, debts, and other baggage. The first step in starting the business over again is to incorporate a new entity with a new taxpayer identification number and with new bank accounts opened at a new bank. New business goes in the new company and old business stays in the old company. Hire an experienced business attorney if possible to organize the new company.
  • Bank Liens, SBA Loans & UCC Statements:  Chances are your old company has a bank loan that may be a Small Business Administration (SBA) guaranteed loan that is secured to all of the equipment, receivables, cash and assets of the old company. You cannot simply transfer assets subject to a bank lien (typically secured by a Security Agreement and perfected by a publicly filed UCC Financing Statement) to the new company without violating the bank’s security agreement. Violating a security agreement is a serious matter. The banks consider this fraud and it is a basis to deny a discharge of the your debts in bankruptcy. Banks can go after assets transferred to the new company improperly. Transferring assets from the old company to the new company is dangerous and should not be done without hiring a competent (i.e., “expensive”) corporate attorney. Generally, it is best to avoid transferring assets at all.
  • Chose a Closing Date:  You need to decide on a date you will close the business.  Maybe you need to finish one last work order. Maybe you feel obligated to deliver a product to a customer or to collect a big receivable first. But you do need to pick a day that you will close the doors and turn over the key to the landlord.
  • Talk to Your Banker:  Your banker is smart. They probably already know the business is struggling and they are watching your account closely. When you decide to close a business start by making an appointment to see your banker. Tell them of your decision to close. Give them a plan of action. There are accounts to collect, equipment to sell, and taxes to be paid. What you are tying to avoid here is an abrupt bank seizure of your assets and freezing of the company bank account. The most qualified person to sell the business equipment is you. Your banker knows that. Since the banker has a lien on all business equipment, they must authorize the sale of the assets. Tell the banker your plan of liquidation. In most cases, the banker is relieved if you can liquidate the assets and turn over the proceeds to the bank.  But why should you go through that effort?  What is the benefit to you? Why not just walk away from the business and let the banker liquidate? That, my friend, is why you need to chat with the banker. This is negotiable. Cut a deal with the banker to keep some of the sales proceeds so you can pay yourself and feed your family for the next month or two. The alternative is to do nothing and let the banker sell the property at an auction. Banks know they get very little at auctions. So, if you know how to liquidate the assets by selling to a competitor or customer, etc., suggest a plan of action to the banker and make the banker sign off on the plan.  You need something in writing from the banker to keep some of the sales proceeds.  If they will not commit to a plan in writing, then sell nothing and let them clean up the mess.
  • Talk to the landlord:  Chances are you are in the middle of a 5-year business lease agreement. Maybe you can no longer pay the full rent. When you know you are closing the doors, call the landlord. Be honest and explain that you are closing the business. If you need time to move the equipment out of the premises, negotiate a date you will have the property removed. Perhaps the landlord would agree to accept a lower rent while you liquidate the business. In fact, don’t ask the landlord for lower rent, just tell them you will pay half the normal rent for the next two months while you wrap up business. It is better to pay something than nothing. Most landlords will grudgingly accept lower rent if you communicate what is happening and give them an exact date you will turn over the keys.  Landlords know it takes many months to lease a property. They have bills to pay too. By giving them advance notice they can advertise the space for lease and benefit from your partial rent payments in the meantime.
  • Pay the Accountant:  When deciding what creditors to pay with the limited cash you have, always pay the accountant first to get the final tax returns filed. Maybe you stopped filing quarterly payroll tax returns because you didn’t want to receive a bill from the IRS.  Bad decision. Get those tax returns filed now. Pay the accountant in advance to complete the year-end tax returns. Importantly, when you do close the business you must check a box on the final quarterly payroll and sales tax returns to say that “this is the final return for this business.” Checking that box tells the IRS that the business is closed and no further returns are required. If you don’t check that box the IRS assumes you are still in business and will file returns for you based on the last return filed.
  • Collect the Receivables:  Once you announce that the company is closing and word spreads that the doors have closed, some customers will stop sending payment. If a big receivable is owed you may want to time the closing after the account is collected. If a bank lien is present, you should negotiate with the bank about how much of the receivables you must turn over to the bank and how much you may keep. The bank would prefer that you do the collection work and will normally agree to some type of split of the receivables.
  • Who Owns the Business Website and Telephone Number?  This is an especially important detail if you plan to continue the business in a new corporation. Did you register the website and phone under your personal name? If so, you may personally own the website and telephone number that may be used in the new company. If the company owns these rights it may be subject to the bank’s lien. Proceed with caution when transferring these to a new company.
  • Talk to the Employees:  This conversation strikes fear in business owners because the moment you tell employees that your business is closing they start to look for new jobs. Another concern is that employees talk, and I mean they talk a lot. Employees who blab about the company closing cause hurricane force rumors to spread throughout your community and competitors and customers pick up on that fast.  So, should you tell employees what is coming their way now or should you wait for that last week and make a surprise announcement? It really depends. Most employees already have a visceral notion that the business is closing, so why not be open about it and talk through the transition? That will make it easier to let nonessential employees go now and it gives employees a head start in looking for new employment. Some will leave sooner than you like, but most will stay to the last day and appreciate every work hour you can give.
  • Don’t Cheat Your Employees:  If you can’t afford to pay employees for their wages, let them go now.  Don’t keep them working only to announce that you don’t have enough cash to pay their wages now but that you will try to pay them later.  They say that Hell hath no furry like a women scorned, and cheated employees are not far behind.  If you scam them they will poke back with sharp objects.
  • What to Tell Creditors: When you can’t pay invoices on time, the phone will ring. What do you tell creditors? If bankruptcy is going to be filed, that is usually the best thing to say. When creditors hear that you are filing bankruptcy they usually stop calling and wait for the court notice.
  • Get Organized:  If filing bankruptcy is in your future, your bankruptcy attorney will need a complete list of the debts showing the name and address of each creditor, the amount owed to each creditor, tax returns for the past 2 years, bank statements for 6 months, and a Profit and Loss Statement for the past 6 months.

When you know a business must be closed, don’t go it alone.  Get expert advice now from experienced counsel.  Set an appointment to chat with an attorney who knows how to land a Boeing 747 on a two lane highway.  Click here to schedule a consultation.

Image courtesy of Flickr and timetrax23.