How to Close a Small Business - A Personal Experience - Part 2: The Research
This article is an on going series on how my wife and I went about closing our small business. It based on our research and experience and is intended to show what we faced and how we handled the hundreds of decisions along the way. It is not intended to provide legal or tax advice, and you should always consult your own professionals. By sharing what we experienced, we hope our experience can make this part of owning a small business easier for others . We hope to share both the factual and emotional ups and downs along the way. This is the second article in a planned four article series.
After making the decision to close we had to figure out what that really meant. Luckily (or unluckily) as part of a franchise we had the experience of other stores to reference. We were not the first to close our franchise. That said, every one's experience is unique and one of the first thing we did was to consult with our accountant and lawyer to get some advice. They have known and advised other business owners in similar situations and are familiar with the locals laws in your area.
There's a lot that you can do on your own, but its important to get the right legal and tax advice as you close your business. Also, what we found may not apply to your situation so always consult your own advisers.
Using The Internet
Another normally useful tool in research is the Internet. Using Google to search for closing your business comes up with millions of hits (25,300,000 last time I tried). The problem I found is most of these links are for someone trying to sell your their service. Since we were going out of business and had to conserve our cash, this was not really useful.
There are some good sites including the IRS website (note- Most checklists you find on the Internet are just copies of the IRS website's checklist). I included a link to the IRS checklist as well as a few other sites I found useful. Also, the Small Business Association has some useful information. Your state may also have information on their website.
In general, outside of the general checklist I did not find too much useful information on the process. I came up with my own checklist that covers our initial closing plans and augmented this as we went along.
I included a copy below with some minor changes to keep it a little more general. I would not consider this 100% complete and every one's situation is different but it may give you a start. My list started much shorter and as I discussed our situation with our advisers, this list grew close to what you see here.
Our Closing Checklist
- Speak with our accountant
- Setup meeting with Lawyer to discuss our options and liabilities, Get advice on approaching Landlord, Discuss bankruptcy options
- Review vendors we pay money to and any contracts.
- Review outstanding liabilities that are business and that are personally obligated.
- Meeting with Bankruptcy lawyer and review options
- Prepare inventory of all big ticket items in store - Slick sheets with pictures and descriptions.
- Review options for lease. Create break even spreadsheet for carrying costs vs. offering a buyout.
- Meet with Landlord and discuss closing options and if he is willing to work with us.
- If willing to work with us, prepare an offer based on advice from counsel and our break even analysis
- Confirm with Lawyer on lease offer letter
- Talk with Store Manager about closing - Offer incentive to stay through June
- Post on Craig's list for sale (for one final try)
- Schedule 2nd Meeting with Landlord and present offer. Try to negotiate an agreement and get commitment to a general release from liability.
- Set closing formal closing date
- Send email / notice to customers on closing and reminder to use gift cards before we close
- Contact vendors with recurring services and advise on closing date. Send form letter.
- Schedule sign removal
- Research best way to sell assets - Craig's list, Auction, Sell to equipment supply, Complete trade study based on other stores experiences
- Create cash flow analysis for see how much money we need and when
- Arrange for financing of closing debts
- Finalize plan to sell equipment – List on Craig’s list
- Inventory all small goods to offer for sale and make price list
- Send email to customers for small good sales.
- Move any items that will be kept
- Get contract from fast track auction and review, if items don’t sell on Craig’s list plan to setup online auction
- Follow up with landlord and lawyer on general release docs
- Open PO Box and change of address
- Schedule utilities for disconnect or transfer - Phone, Electricity, etc..
- Contract with Fast Track Auction (if needed)
- Send out emailer to customer base on last week of closing.
- Last day, hold a “yard sale” to sell off any remaining goods
- Clean up space prior to turning over store
- Last equipment sell off once operations are completed
- Move any remaining items to storage or consignment
- Cancel website
- Stop any automatic payments
- Turn over Store to Landlord
- Cancel Insurance
- Cancel Permits with State, Sales Tax, Etc
- Submit final sales tax forms
- Dissolve Business (by end of year)
Working the Check List - Our Plan
The checklist formed the foundation of our closing plans. We added due dates and assignees to the list in Excel and daily kept track of our progress and added items as they came up. In our situation, we decided to take about three months from the first meeting with our advisers to close the store. We both had full time jobs to manage and needed the time to get all our tasks done.
Having the list and setting the closing date goes a long way to feeling like things are moving forward. When we first made the decision to close we felt this overwhelming sense of too many things to do and no clear idea on where to start. By creating our checklist and adding due dates and assignees, we developed our action plan to move forward. Each time we marked something done, we knew we were one step closer to our goal of closing the business.
Dealing with Our Liabilites
In this area, I think every one's situation is unique but by sharing our experience it may help you. Like most small business we had both business liabilities and personal liabilities. A quick summary of the major items are listed below:
- The Lease which was personally guaranteed (and 10 years!)
- A home equity loan against our house
- A HELOC against our house
- Personal loans from our family
- Gift Card obligations
- Credit Card Debts
The most difficult liability was our lease, which we personally guaranteed. We also had borrowed against our home to open our business. Both these were related to the business but also a personal obligation. Even if we went through bankruptcy for the business, we would not eliminate the biggest obligations and personal bankruptcy was not an option for us. Every one's case is different and if you must go through bankruptcy, please get good legal advice.
The home loans were ours personally so we planned to just keep paying these debts. My wife and I both have good jobs and can afford to pay these. Unfortunately, when we tried to consolidate these to a single mortgage we found the housing recession has also hit us in upstate NY and our equity to loan value with all the loans was over 90%. We were not under water but we would have to pay PMI to refinance. So for now, we will pay down this debt till we reach 80% LTV then refinance at a later date.
Our personal loans from family will also be paid back once we get back on our feet. Our family is understanding and is willing to work with us on paying back these debts. We will make our family whole on these debts and hope to do so within the next 18 months. We will be working the Dave Ramsey's Money Makeover plan to work down all our debts...
The business obligations were the most onerous and we will discuss these including the lease in our third segment - Part 3- Liabilities and Assets. We were able to reach an agreement with our landlord we both found acceptable and will discuss that in more detail.
The Rest of the Story
- How to Close a Small Business - A Personal Experience - Part 1: The Decision
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