When to Close Your Business
Throwing in the towel is never easy, especially when you’ve poured your heart and soul into your small business. But for many entrepreneurs, the day comes when it’s no longer practical to carry on, and knowing when to quit can be as important as knowing when to persevere.
Telltale Signs It’s Time to Close Your Business
The reasons to close your small business can be emotional, financial, professional, or a combination of all three. Therefore, it’s important to assess not only the financial condition of your business, but also the toll it might be taking on your emotional and physical health and well-being.
Remember why you started your business and decide whether it’s still providing the satisfaction it once did. If not, it might be time to move on to your next business.
Here are some of the reasons why small business owners typically decide to close up shop:
Your Business Isn’t Profitable
When you wrote the business plan for your startup, you projected a time frame for breaking even and for turning a profit. If you’ve missed your targets, it might be time to cut your losses and close your small business.
Before you do, take a hard look at your expenses and determine if budget cuts will improve your profitability. However, if you’re already working with a barebones budget, you should decide whether putting more capital into your business will be worthwhile.
Assess your cash burn rate, meaning the pace at which you spend your cash reserves. Determine how long you can sustain a negative cash flow before you dip into your personal savings or seek additional capital.
You’ll want to realistically determine whether using your personal funds or taking on more business debts will turn the situation around or prolong the inevitable.
If your business debts have been mounting and your company isn’t generating enough cash flow to pay your creditors, filing bankruptcy might be your best option.
If your business debts are nominal and you see a path to improving your earnings, it might be wise to stay the course. Maybe you’ve developed a solid customer base that supports your proof of concept and you simply need more time to grow that base. Perhaps the market indicates that you’re on the right path and your business is just a hair ahead of its time.
If you believe there are valid reasons to keep going, adding debt or using personal savings might be worth the cost. But if you don’t see a path to improving your profitability, it’s probably best to cut your losses sooner rather than later, especially if you’d have to take on high-interest credit card debt to continue.
There’s Little Need for Your Products or Services
Markets shift and shopping habits and consumer preferences change. If there’s no longer a demand for the products you sell or the services you offer or if your products, business structure, or pricing can no longer compete, then it’s likely that closing is your best option.
The Business Isn’t Fun Anymore
Entrepreneurship is fueled by passion. Business owners choose startups that excite them, but sometimes that enthusiasm wanes. You might find yourself bogged down with tasks you don’t enjoy. Maybe another idea has captured your attention. When your business doesn’t motivate you to get out of bed in the morning, it might be time to move on to the next business.
What You’ll Need To Do to Close Your Business
Closing a business takes more than closing your business bank account. A sole proprietorship will have less paperwork and fewer requirements than businesses structured as limited liability companies (LLCs) or corporations, but every business must follow specific steps before closing.
State rules for business closings vary, so it’s best to check with the office of the Secretary of State and the taxing authority where you operate your business.
In general, business owners who want to close their business must:
- Get a written agreement from all business partners and shareholders to close the business.
- File legal documents such as articles of dissolution (for LLCs) or a certificate of termination (for corporations) with the state.
- Cancel any business licenses and permits you hold with the appropriate local or federal government agency.
- Pay any payroll and state tax you owe.
- Close out your state tax account.
- Close out your Employer Identification Number (EIN) with the IRS.
- File a final income tax return with the state and the IRS.
Before closing up shop, business owners should also pay any outstanding invoices due to suppliers and collect payments due from customers. Once you’ve completed all the steps, arrange to distribute the remaining assets to business partners and shareholders.
What if You Want To Sell Your Business?
Whether the reasons for closing your business are financial, professional, or emotional, don’t overlook the possibility that some or all of your company might be valuable to someone else. Explore your options, including liquidation of some or all of your assets or an outright sale of the business.
Liquidating Your Assets
Even if your business isn’t profitable, your business property might have value. Liquidating some or all of your assets allows you to recoup some of your investment. In an asset sale, individual assets and liabilities, both tangible and intangible, are sold.
Consider the assets that your business holds, including:
- Equipment and furnishings
- Inventory
- Client lists
- Customized software
- Business name
- Brand recognition
- Key employees
- Real estate
- Databases
Assets like your client lists and databases can be valuable to competitors seeking to expand or bolster their business. If you have a catchy business name that accurately describes the business and is memorable, it too can have value to a competitor. So can your inventory, software, equipment, and furnishings. Business owners from yours or another industry might be interested in buying your inventory, your furnishings, or real estate.
Selling Your Business
If your reasons for getting out of your business are personal, and your business is profitable or approaching profitability, there’s no reason you can’t sell it.
Potential buyers might include:
- An outside third party
- Your employees
- Your family members
- Competitors
Consult a business broker or an M&A specialist who can help you prepare your business for sale, market it, and handle the transaction. Even if you decide to handle the sale yourself, it’s a good idea to hire a broker or M&A professional to get a valuation.
Can You Sell an Unprofitable Business?
Don’t discount the possibility of selling a business that’s not profitable either. Competitors might see a path to profitability that you overlooked or weren’t able to pursue because you lacked financial or other resources.
You might also attract a competitor’s interest if you have a specialized workforce in a labor market where those skills are in short supply.
Finding Hidden Value in Your Business
Even unprofitable businesses can have assets that a buyer might want.
Some of the assets a competitor might value include:
- A location with high traffic or proximity to synergistic businesses. (Some companies are even interested in buying well-located businesses to prevent competitors from moving into the area.)
- An existing lease with very favorable terms that would cut costs for a new owner.
- Intangibles like brand recognition and excellent business reputation can have value to companies seeking to boost their brand or rebrand.
- Customer lists and databases that a competitor can use to develop new business.
- Proprietary technology, processes, or intellectual property that can’t be duplicated.
How Do You Value a Business That Isn't Profitable?
Valuing a business that’s not generating a profit can be challenging. The most commonly used method–using a multiple of earnings–can’t be used when a business has no income. Instead, brokers and M&A specialists maintain a comprehensive database of sales information, and they will be able to develop a valuation using data from comparable sales that have taken place.
Business brokers can be beneficial when the potential buyers are likely to come from the same industry because of their strategic marketing experience and contacts.
While you should be transparent about the business’s financial condition, you can use your selling memorandum to emphasize aspects of your business that a new buyer can leverage to increase revenues and improve profitability.
For example, if there is strong market demand for the products you make or sell, include research data that shows the market’s potential. Likewise, identify areas with good growth potential that a new buyer with more resources or capital can pursue.
The decision whether or not to close your business or when sell your business is a complex process. In either case, developing a thorough exit strategy will help as you tie up loose ends to take the lessons you’ve learned and apply them to your next venture.