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How to Close a Small Business
Business owners dream about success and invest a lot of blood, sweat and tears into developing and growing a business. The first year is always challenging as the business works toward the magic break even point with the ultimate goal of a healthy profit margin. Unfortunately, not all business achieve that dream.
According to the US Department of Labor and census data, 552,600 businesses were started in 2009. Another 660,900 businesses closed in that same year. This is approximately 10% business loss for that year. The struggling economy has contributed to the numbers of business closures.
Closing a business can take a few days, weeks to several years depending on the type and complexity of the business. It is important to have a good understanding of the steps that need to be taken to have a smooth business closing process.
11 Steps to Closing a Small Business
1. Closure Decision
It is important to identify the right time to close the business and it helps to have specific goals or criteria to help make that decision. Decisions to close a business should be made at the board level and should be directed by the corporate bylaws or partnership agreements. All decision should be documented and signed by all affected parties.
2. Form Closure Team
This team should include members of senior management as well as the organization attorney and accountant. The closure team should make a list of legal and tax issues that need to be addressed and documented.
3. Asset Inventory
Develop a team to do an inventory of all corporate assets. The accuracy of this inventory is important as this information will be used to value the organization and is used to figure tax liability.
4. Notify Employees
Having a well thought out communication plan for employees helps them to feel part of the process and provides them with the necessary notice to prepare for the job transition. Provide them ample time to seek other employment and offer them incentives to stay through the transition.
5. Notify Customers
Customers and vendors should be notified when the decision has been made to close the business. Customers should be given a heads up so they can figure out coverage for the services or products they will no longer have access to. This communication should include a contact name and number for any questions the customers may have.
6. Develop a Business Closure Plan
It is critical to have a plan for closing the business and to come up with a timeline for all the necessary steps of the closure. This timeline should include all closure communications, tax filings, liquidation of assets as well as consolidating and closing the facility. The closure plan also includes management of cash flow through the closure process.
7. Transfer Contract Obligations
All contracts should be reviewed and notices and/or transfer of contract responsibilities should be made. This would include things like office rental, car rental, services agreements, etc. This may involve negotiating and getting approval on final terms of agreement.
8. Liquidate Assets
Assets need to be liquidated. This can be done in any number of ways and can vary greatly depending on the business. Having a press release go out to prospective buyers can be one way of communicating the liquidation.
9. Ending Operations
Think through the timing and process of ending the business operations because it can affect inventory, cash flow and the value of the business. Time of year, day of month and day of the week should all be considered.
10. Pay Off Outstanding Debt
Make sure all vendors have been paid in full and any other business related debt is taken care of. Records should be kept for seven years.
11. File Appropriate Tax Forms
It is important to make sure all legal and tax forms are completed and submitted. The IRS has a checklist for closing a business that offers all necessary forms and helpful information.
Making the decision to close a business is never an easy one and should be considered carefully. But, when the decision is finally made, good planning, and coupled with a team to help, can make the process easier and less stressful.