Starting a business is both exciting and rewarding. From naming your business, setting up the website, designing the store, to reaching your 1st million sales. It seems every step is a milestone. But not all businesses succeed and closing down a business is a reality, the failure rate varies. Some reports say 20% of businesses do not make it in the 1st year, others say 8 out of 10 businesses shut down in the first 2 years, and 50% of companies do not make it after 5 years. Yet despite these reports and statistics, we don’t talk enough about closing down the business. It seems these stage of the life of a business is something most entrepreneurs, managers, and executives would rather avoid and hope to fade away.
In this article, we will look at the hard truths of why businesses close and explore alternatives to closing down a business. Steps to officially shut down a business and how to gracefully move on after closing down the business.
Common Reasons Businesses Shut Down
Running a business is not an easy task and there are many reasons why it fails and closes down eventually. Some reasons are voluntary such as business owners deciding to simply retire and sell the business to a 3rd party. Some are involuntary such as insolvency, failure to comply with regulations (non-payment of taxes or permits), etc.
Here are common reasons why business owners shut down businesses.
- Poor or Non-existent Business Plan. Would you build your dream house without any blueprints? Will you hop into your car and travel to your dream destination without a roadmap? Of course not. You should treat the same when it comes to your business. A business plan lets you see if your business has a chance in making a profit, estimate how much you’ll need to raise money, defines your market, suppliers, customers, and competitors. A business plan contains a lot of details about your business without it you leave too many things to chance and eventually closing down a business
- Weak Sales and Low Profits. Competitors offering better prices and value, failure to capture the key market, overdependence on a single customer, etc. are only a few causes of weak sales performance. If management fails to increase Sales this may further translate to low profits. The inability to generate enough profits to pay employees, suppliers, creditors and to invest back into business by purchasing new equipment, hire more staff, etc. will lead business owners to shut down businesses.
- Lack of Capital and Resources. Producing goods and services require capital and resources (land, equipment, raw materials, skilled labor, etc.). Without these, businesses cannot sell products to customers, cannot invest into Research and Development, managers cannot expand to other markets, etc. which in the long run will lead to closing down the business
- Poor Management and Leadership. A ship without a Captain is dead in the water. A business without competent management is highly likely to fail and shut down business Management’s expertise, experience, and vision manifests in the business’ financial performance. A business under strong leadership can navigate through the landscape of changing customer taste, entry of new competitors, the rising cost of doing business, etc.
- Inefficient Supply Chain Management. Sourcing the right materials for a business’ goods and services not only involves getting the highest quality materials, sourcing from key suppliers, or buying it at the right price but also involves adapting to new technology. Adapting technology to streamline a business’s supply chain can lower transaction costs, shipping costs, etc. Eventually lowering a good or service’s cost base and maximizing profit. Failing to adopt technology, will not only affect the bottom line but a business’ competitiveness. In the long run, this will cause closing down the business.
- Abrupt and Unsustainable Expansion. For business owners, growth signals are signs of success. With growth, managers can generate more sales and profit, reduce risk, influence market price, etc. But growing too fast too soon can ironically cause business shut down. Over-hiring staff, decline in product quality, lapses in customer service, etc. are only some of the effects of rapid business growth.
- High Leverage. Zombie companies are businesses burdened with a large amount of debt and are still able to manage interest debt payments but are unable to pay the principal. However, these kinds of businesses do not have funds to invest and grow which makes them on shaky ground. From the outside, these companies seem like a well-run business and continue operating for years but eventually will shut down a business.
- A downturn in the Economy. During an economic slowdown, small businesses are hit the hardest compared to large companies. Weak sales, budget constraints, limited access to funding, inadequate financial preparations and not to mention the emotional stress can lead a business owner to shut down businesses. During the 2008-2010 financial crisis, the US Census Bureau reports 200,000 small businesses shut down.
- Changes in government policies. Federal and state regulations and policies are intended to protect consumers and guide businesses. An increase in the minimum wage and health care costs can burden small businesses. A rise in corporate tax rates, sales tax, tax rates for imported raw materials can affect businesses’ profits. But if businesses are not well-prepared to comply with these changes or there is too much regulation in the industry, it is likely business shuts down.
Alternatives To Closing Down A Business
Closing down a business is a very difficult decision, so all options available must be exhausted. Before closing the doors to your business, try asking yourself these simple questions.
- Does my business make me happy?
- Do I still have the passion to see it succeed?
- What risks am I ready to take?
- Do I have my partners’, investors’, and creditors’ support?
- How likely will the business turnaround? How long before it does?
If you still want to see your business to succeed and have weighed the risks, consider these 5 alternatives to closing down the business.
- Adopt a new business model. Business owners must identify what is working and isn’t in their current and original business model. Then management can adopt a new direction or strategy, such as selling via e-commerce instead of a brick and mortar store, offering different price points to suit customer budgets, etc. Consider updating or shifting business models versus a business shut down.
- Restructure the Business. Restructuring a business involves revamping and realigning the organizational and financial aspects. New investors and partners add equity to the business, renegotiating loans with the bank and other creditors, reorganize the workforce, streamlining processes are some of the steps to do to aside from a complete business shut down. With additional capital and new partners, restructuring the business can be a brand new start. This can be a better step other than closing down the business.
- Consider temporary closure. A temporary business shutdown is done to prevent any further losses or expenses and can last for weeks or months. During economic downturns, a pause in the business may be a better option than a fully closing down a business. When the economy rebounds and consumer confidence bounces back, depending on the industry, business owners who chose to temporarily close versus fully shutting down business has a slight head start.
- Merge with a competitor. In 2015, the world witnessed the $130bn mega-merger of two of the largest and oldest US chemical companies, Dow Chemical and DuPont Chemical. The merger was said to deliver $3bn in cost savings and another $1bn in growth synergies. Businesses and companies merge because it’s cost-effective, prompts growth, increase market share, obtain competitive advantages, etc. For these reasons alone merging is a good alternative to business shut down.
- Sell the business. If the business is not struggling financially, it can be sold as a going concern. The new owners can expect the business to operate for the next 12 months without any threat closure. If the business is not entirely profitable, a strong customer base, major contracts or license, unique systems, and processes are some key points that add value to the business.
What To Do When Closing Down The Business
After weighing your options and considering the alternatives, you have determined the best option is to shut down the business. Depending on the regulatory environment you are in, there may be additional and specific steps for a successful business shut down. But here are general steps to closing down a business.
- Notify Employees. Although these steps can be tough, notifying your employees is an essential part of the process. Depending on the number of employees and how long they have worked, remember business owners still have to pay termination and entitlement payments such as outstanding wages, accrued leave, compensation for lost wages, etc.
- Notify Customers. Along with informing employees, an essential step to closing down the business is to inform customers. You can post notices on the business website, social media accounts, and the storefront. Communicate the last day they can place orders as well as the course of action and status for any undelivered goods or services.
- Notify Vendors and Suppliers. Be upfront of your decision on closing down the business, cancel any pending deliveries or orders, subscriptions, settle any unpaid invoice, etc. Inform them on the last day of operations as soon as possible to avoid incurring any penalties or additional charges.
- Notify Creditors. Some businesses may not take on a large amount of debt but several do and use it as part of its financing strategy. So, what happens to debt when business owners shut down the business? Regardless of the amount of debt, management must pay any obligation in full. If the business is in financial difficulty, it is best to negotiate for less than full payment.
- Negotiate with Equipment Lessors. Businesses often enter into lease agreements for machinery and equipment. If you’re a restaurant owner who leased kitchen equipment, inform the Lessor and negotiate to return the leased equipment before the contract expires together with additional payments. Doing so will not only release you from the remaining obligations but also from incurring penalties and fees.
- Negotiate with Secured Creditors. Applying for a loan from a bank or financing institution is backed by collateral. If the debtor defaults on loan payments, the creditor can seize the collateral and use the proceeds as payment. If the proceeds are not enough to cover the debt, work out an agreement with the bank to lower any deficiency.
- Negotiate with Unsecured Creditors. Credit cards, unsecured lines of credit are common examples of unsecured debt. Inform the credit card company on the business shut down and discuss how to handle outstanding balances.
- Liquidate Business Assets. List all physical assets belonging to the businesses- furniture, machinery, equipment, real estate, vehicles, etc. – as well as money owed to the business – accounts receivable, security deposits, etc. Any copyrights, patents, trademarks, contracts, etc. owned by the business can also be sold to competitors or any interested buyer. Depending on the asset, some are easy to sell and some may take time to find buyers. You can hire professionals who specialize in business liquidations to speed up the process.
- How are Assets distributed when closing down a business?
Secured creditors and bondholders are first since their money is secured by collateral. Next in line are the unsecured creditors and the last are the shareholders or business owners.
- Settle Applicable Taxes. This step involves filling and paying necessary taxes such as business income tax, sales tax, payroll tax, etc. It is best to consult your local tax authority and follow proper procedures when closing down a business.
- Formalize the Business Shut Down. Failing to legally dissolve the business entity may make business owners liable for taxes and filings. So, cancel business licenses and permits, file a statement or certificate of dissolution, etc. Also, cancel the business name registered with the local registry.
Ways To Shut Down Business: Liquidation vs. Dissolution
Liquidation and Dissolution are often interchanged as both words indicate a business shut down. Here are the key distinctions of the two.
A Graceful Business Shut Down
You have done all the steps and fill up the necessary paperwork for closing down the business. You hang up the “CLOSED” sign on the door. What’s next? The stress and pain of closing down a business can be overwhelming so how to bow down and gracefully exit? How to bounce back?
Do a deep postmortem. “I didn’t fail the test, I just found 100 ways to do it wrong” -Benjamin Franklin. Closing down a business is a reality, it happens all around the world. Going through the process of shutting down a business, you may not have enough time to reflect on the closure. This is a good time to ask questions, what could have been done differently? What business lessons have I learned? What skills did I take with me after?
Take the High Road. Announcing that you are closing down the business and owning up to the mistakes and failures made is a bitter pill to swallow. But don’t bad mouth the competition who made you work harder or the supplier who did not give you discounts. Don’t trash the clients that were not easy to please or blame the staff who did not work additional hours. A graceful exit likely means a good welcome on your next entry.
Give yourself a break. Managing a business is not an easy feat despite how passionate you are about it. Surely, it took time away from your family, friends, loved ones, and even from yourself. After closing down the business, it is a good time to reconnect and recoup the time spent away from them. Being with loved ones after closing down a business can help you get back on your feet. These steps can make the process a little better or perhaps it will take a little bit more time. But take comfort in knowing you have done an honest and noble thing given the options available. From here you can dust yourself off and move forward.
Running a business is never easy. Sometimes you win, sometimes you lose. It’s a matter of learning the ropes and applying what you learn to stand back up again for another try. As long as you don’t give up and prepare for the worse, you will definitely be able to fight.
Here is a list of business plans to help you prepare for worst-case scenarios and take advantage of opportunities in your business:
This Financial Model Template in Excel provides an... read more
This simple DCF model in Excel allows you to value... read more
Financial model template for a high-level real est... read more
Highly versatile and user-friendly Excel model for... read more
This excel template is great for those wanting a p... read more
The right way to compute DSO DIO DPO - Using the c... read more