I have not failed. I've just found 10,000 ways that won't work.
- Thomas A. Edison
For whatever reason, you've determined that it's time to close the doors and walk away from your business. Shutting down your business may be the hardest thing you'll ever do, but it's not uncommon. In fact, 90 percent of start-ups and early-stage companies close each year in the U.S.
If it's any consolation, most successful entrepreneurs have failed previously at some venture - or several. Walt Disney was reportedly fired by a newspaper editor for having no imagination and lacking good ideas.
Currently the world's richest businessman, Jeff Bezos had several failed ideas before Amazon took off. Most notably, his auction business called zShops never gained any traction. It's important to realize that it's okay to stop pursuing an enterprise that isn't working and start doing something else.
Closing a business, however, involves more than just shutting the doors and walking away. If you do this, you could open yourself up to unnecessary fees, loss of personal and business reputation, and even lawsuits. When making decisions about closing a business, visibility to see issues coming is vital. Good financial advice is a great place to start.
Reasons for Closing a Business
No one sets out to start a business with the goal of eventually closing it. But this happens with alarming frequency, and it's something that every business owner should realize as a possibility - even a likelihood. As a CEO or entrepreneur, what might cause you to walk away from your dream? According to a variety of authorities on this subject, this can happen due to:
- Incompetence. This may seem harsh, but nearly half of all small businesses fail due to incompetence. You may be an expert at designing or making widgets but know next to nothing about marketing them, connecting with customers, or paying bills. A successful business requires this balance.
- Burnt out owners. Starting a business is a significant amount of work. If you've treated this as a sprint instead of a marathon, the exhaustion could catch up to you and lead to failure.
- Lack of funds. One statistic reveals that 82 percent of failed businesses had cash flow problems. If you aren't taking care of the money side of your business, your doors won't stay open long.
- Market changes. Are you correctly marketing your product or service to potential customers? Do you have a unique selling proposition? Or, has a new competitor just emerged to steal market share? Any of these factors, some you can control and others you can't, could impact the success of your business.
- Poor timing. Maybe you started your business around a fad that has run its course, or you are a trendsetter and are still waiting for that trend to "take off." Are you using obsolete technology or something so advanced that clients have yet to adopt its use? Poor timing, which can also include economic factors such as a national recession, could spell disaster for a new business.
What Are Your "Exit" Options?
You've decided that this business isn't right for you for any number of reasons. Maybe it isn't what you pictured, isn't producing the growth you projected, or you've found a better opportunity. Depending on the circumstances of your business and the state of the industry, you may have several exit options. These include:
- Sell, Merge, or Succession. Even if your business isn't the most successful or is just something that you don't like anymore, there might be someone else who sees it differently. Businesses and their products can be emotional endeavors for some, and there might be another entrepreneur, company, or even a family member that would be happy to take over the reins. In these cases, you can explore options for mergers, acquisitions, and a succession of your business.
- Scale Back. It's possible that your business is facing closure because it tried to scale up too quickly and is facing cash flow issues. One solution might be to scale back some of its operations, such as just closing down a few locations or product lines.
- Liquidate. Few people start a business with plans for later liquidation, but this happens. If you choose to close the doors and sell off your assets, the proceeds from this sale must be used to satisfy its creditors. You will also only get market value for assets and likely damage any goodwill you've acquired with customers and business partners.
- Declare Bankruptcy. Another option, which leaves your creditors in a lurch, is to declare bankruptcy. Depending on the type of bankruptcy you choose, you may be able to continue doing business, but you will receive protection from some forms of mounting debt. This may or may not allow your business to get back on its feet and avoid closure.
Is Closing Your Business the Best Option?
Making decisions about business closure can be tough. This is not only something that impacts you, but it can also affect your employees, customers, and business partners. When determining whether or not closing your business is the best course of action, rely on your CFO for actionable information.
If you don't have a CFO, consider hiring a part-time CFO. This may sound counterintuitive for a business that is thinking of shutting its doors, but this move could assist you with some major decisions. A CFO can help by:
- Clarifying options. A CFO can analyze your business and help you better understand your options.
- Creating cash flow projections. Your top financial manager can generate cash flow projections for your company, so you can decide if you can afford to remain in operation, and for how long.
- Conducting scenarios for improvements. Your CFO can also conduct product analysis for potential margin improvements as well as possible cost reductions, bettering your company's cash position.
- Developing a closing timetable. If the closure is your choice, a CFO can develop a timetable for completing this process.
- Creating a closure plan. Deciding to close is just the first step. Your CFO will also be instrumental in helping you create a comprehensive business closure plan.
Create a Business Closure Plan
If you and your CFO have decided that closing your business is the best choice, they can help you create the right plan to make shutting down your business a success. There is a misconception that this only involves closing the doors and walking away. This is far from the case. When you close your business the right way instead of haphazardly, you enjoy several benefits. These include:
- Owners might walk away with a little bit of something rather than nothing;
- Obligations to current customers can be fulfilled;
- Employees have an opportunity to find other employment rather than unemployment; and
- Relationships with investors, banks, and vendors can be maintained.
Assuming your exit strategy is to completely shut down the business, your business closure plan should be fairly detailed. The items on it may vary depending on your type of business and its industry, but some of the things that your plan should cover include:
- Collect remaining accounts receivable. Before making any closure announcements, make an effort to collect as many unpaid accounts as possible.
- Notify and pay employees. Give your employees the courtesy of knowing first so that they can begin to make plans.
- Notify customers. Let your customers know and return deposits for undelivered goods or services.
- Notify creditors. Tell your creditors and let them know you will work with them on satisfying debts.
- Sell off inventory. Consider having a "going out of business" sale.
- Terminate leases. Give the proper notice on any real estate or equipment leases.
- Liquidate assets. Begin selling off the rest of your business assets to raise funds.
- Settle and pay debts. Use that liquidation money to settle outstanding business debts.
- Make final tax payments. Make your final sales tax payments and federal and state payroll deposits.
- Cancel licenses and permits. Cancel all business licenses, permits, and industry-related subscriptions.
- Close financial accounts. Close out your business bank and any credit accounts.
- File final tax returns. When it's time, file your final business tax returns, including the proper forms if you sold business assets.
- Dissolve the business. You will also need to officially dissolve your business, whether it is a corporation, partnership, or LLC.
Translate Failure into a Future Success
Plenty is written about how to open or grow a successful business, but the truth is that a majority of U.S. businesses never have the opportunity to thrive and scale up. They might start small, give it their best shot, and eventually close their doors. The challenge is not only doing so gracefully but also making sure that all bases are covered for everyone involved in this complex process.
On a more encouraging note, being down in the business world doesn't mean that you are "out." In fact, this could be one of the best and most productive decisions you will ever make. Experiencing an "orderly fail" will give you as the business owner the opportunity to learn from any past mistakes so that you can do it better next time.
If you need assistance getting visibility to what lies ahead of you and planning your next steps, you can reach Becky here and CFO Selections here.
About the Author:
Becky Todd, Western Washington Practice Manager, CFO Selections
Becky is an experienced financial leader with over 20 years of experience in industries that include nonprofits, aviation, software, and retail. She has extensive expertise in helping small to mid-size companies and organizations gain control over their accounting/finance operations and apply their financial assets to support the accomplishment of key organizational objectives.
As the Western Washington Practice Manager for CFO Selections, Becky ensures the alignment of the right CFO consultant to client organizations. Becky can be reached at firstname.lastname@example.org.