Should you close or sell your business?
Deciding to walk away from a business you built by selling or closing it can be difficult. But you may need to close your company because of your health, desire to retire, or your next venture’s calling. Several issues affect your decision-making when choosing between closing or selling a business. Keep reading to learn more about each option.
What does it mean to close or sell a business?
Closing or dissolving a company means shutting it down so the business stops operating permanently. Once your business is closed, the company will cease to exist as a legal entity.
Selling a business is the process of putting it up for sale for an individual or other company to buy. After the sale is finalized, the business will still exist and operate.
Closing a business
If you’re considering closing your business, it’s essential to look at common reasons for doing so, the process of dissolution, and potential consequences.
Reasons to close a business
Small business owners close their companies for many reasons.
- Economic conditions: Recessions or depressions may directly affect your business’s operations. If the economy is doing poorly and your business is losing money, you may be unable to find a qualified buyer.
- Negative industry changes: If there are any industry changes on the horizon that may make it more difficult to operate, such as new or stricter regulations, it may be best to dissolve your business because you may not be able to attract a buyer.
- Lack of resources: You need access to land, labor, and capital to produce your goods or services. If these resources are unavailable, you may have to close your business.
- Low profits: When you run a business, you have to spend money on inventory, production overhead, and general business expenses. If you spend too much money, you’ll have low profits and may not receive sufficient personal income. Instead of suffering through losses or low profits, you may choose to close the company.
- Poor management: You may have a great idea for a company but lack the skills to successfully manage and run it.
- Health concerns: If you or a family member falls ill, you may need to close your business.
- Specialized skill set: If your business is too dependent on your particular skill set, you may not be able to find a buyer who can successfully take over.
How to close your business
Closing your business is not as simple as closing the doors, shutting down your website, and walking away. You must take a few specific steps, and you may want to work with an attorney or certified public accountant (CPA) to ensure you handle all the legal requirements correctly.
1. Decide to close your business
The first step to closing your company is deciding to do so. If you’re operating as a sole proprietorship, you can decide on your own to dissolve. But if your business operates as a partnership or corporation, you will need to meet with your partners or board of directors. Your partnership agreement or articles of incorporation should detail how to dissolve the business and may require you to hold a formal vote. After agreeing to close the business, memorialize the decision with a written resolution.
2. Comply with employment and labor laws
If you have employees, tell them you’re closing the business as soon as possible and ensure they do not hear the news from anyone but you. If you have 100 or more employees, you may be required to give them at least 60 days’ notice, per the Worker Adjustment and Retraining Notification Act (WARN).
Once your business closes, pay your staff final wages and compensation, make federal tax deposits, and report your employment taxes. And make sure to provide a Form W-2 to each employee. You will need to furnish this form by the due date for your final Form 941 or 944.
If you paid any independent contractors at least $600 for services during the calendar year, you will also need to report those payments using Form 1099-NEC.
3. Collect outstanding accounts receivable
When you close your business, you’ll need cash for taxes and legal fees. But once you announce the dissolution, you’ll likely have difficulty collecting outstanding payments, so develop an aggressive collections strategy for unpaid accounts. You may offer discounts for immediate payments or call the account manager directly.
4. Alert customers and begin closing accounts
Once you’ve collected as many outstanding payments as possible, let your customers or clients know that you will be closing the business. This gives them time to make alternate arrangements if they still need your products or services.
5. File dissolution documents
If your business is incorporated or acts as a limited liability company (LLC), you will likely have to file dissolution documents with your state. Failure to do so may expose you to continued tax and filing requirements.
To find out your state’s requirements, contact the Secretary of State, Business Bureau, or Business Agency.
6. Cancel registrations, permits, and licenses
If you have local registrations, permits, or licenses, cancel them. This will help protect your finances and reputation.
7. Resolve tax obligations
File your final income and sales tax returns and make the required tax payments. Then, close your business accounts with the IRS and your state’s tax agency.
8. Pay outstanding debts
If your business has outstanding debts, pay them before closing your business. This includes paying anything owed to lenders and various suppliers and vendors who serve your company. Consider contacting your creditors to negotiate what you owe.
If you are having trouble repaying your debts, you can liquidate your business assets to gain access to cash.
9. Distribute assets and close bank accounts
After paying your employees, taxes, and debts, distribute any remaining assets to yourself and other partners or owners. Then, close all business bank accounts and cancel any business-related credit cards you have.
10. Maintain business records
You may be legally required to maintain tax records, employment files, and other documents after closing your business. It’s generally recommended to keep these records for three to seven years.
Consequences of closing a business
There are a few consequences of closing a business. The most obvious is that the company will no longer exist. If you ever wish to resume operations, you will need to form an entirely new business.
Additionally, if you cannot repay all your debts during the dissolution process, you may still be responsible for them after the business closes. This largely depends on the business structure and how much liability protection you have.
An often overlooked consequence of closing your business is that you will be walking away from its value. Even if the company is not profitable, a competitor or other potential buyer might find it valuable because they want access to your client lists, proprietary information, software, or inventory.
Selling a business
You may prefer to sell your business instead of closing it. Before you decide, look at common reasons for selling a company, the process involved, and potential consequences.
Reasons to sell a business
There are many reasons you may consider selling your company.
- Retirement: If you are nearing the point where you want to retire, you may consider selling your business to help fund your retirement. You will then be able to enjoy retirement while knowing that your company can continue to grow and thrive.
- Burnout: Business ownership is a heavy burden, and many owners face burnout because of the long hours required or declining revenue that decreases their morale. If you recognize that you are beginning to feel burned out, it may be a good time to put your business up for sale.
- Wanting to become an employee: Not everyone is cut out to be a small business owner. If you’ve realized that you prefer to work for someone else and receive a steady income and perks like paid time off, you may consider selling your company.
- New opportunities: If you’re starting to lose interest in this particular company or are ready to do something different, selling your business can help finance your next venture.
- Personal money needs: Sometimes, selling your business has nothing to do with the business itself. Instead, you may need additional funds to cover an emergency, travel, or pursue a new hobby. Selling your company allows you to convert your business’s value into cash you can use for personal reasons.
How to sell your business
Every sale will be slightly different, but you can follow some well-established steps to help ensure you sell your company at the price you want.
1. Organize your finances
Many people, including potential buyers, attorneys, accountants, third-party appraisers, and brokers, will review your business’s records throughout the selling process. To ensure everyone has the information they need, you will typically need at least three years of tax returns, balance sheets, income statements, and cash flow statements. To learn more about each financial statement, read “Understanding the Different Types of Financial Statements for Your Business.”
2. Determine your business’s value
If you want to know what your company is worth, you will need a business valuation. This will help you accurately determine the value of all property and real estate tied to your company, including intangible assets like brand presence, intellectual property, customer information, and future revenue projections.
In general, you can use these three methods to determine your business’s value:
- The income approach considers projected revenue while taking potential risks into account.
- The market approach compares your company to similar businesses that have recently sold.
- The assets approach subtracts your company’s total business liabilities from the value of its assets.
You can select one of these methods and perform the business valuation yourself or hire a third-party appraiser. An appraiser can provide a realistic estimate of your company’s value and even suggest a reasonable price for the business.
3. Hire a business broker
You can sell your company on your own, or you can hire a business broker to handle much of the process. They will typically help determine the business’s value, market the sale, find a qualified buyer, negotiate the deal, and manage the due diligence process.
4. List your business for sale
Once you’re ready to sell your company, you can list it on an online marketplace like BizBuySell to let potential buyers know the business is available.
5. Find prequalified buyers
Not every potential buyer you encounter will be qualified because they might be unable to secure the funds necessary to complete the purchase, be ready to finalize the deal or have the experience to run a business successfully. So it’s crucial that you find qualified potential buyers. If you’re unsure where to find qualified buyers, consider looking at C-suite executives with large net worths, industry peers, competitors, and private equity firms.
6. Negotiate a deal
Once you’ve found an interested buyer, you will need to negotiate the sale. This goes beyond the sales price and includes the terms of the sale, the time frame, and whether you will stay involved with the business during the transition.
After you’ve agreed to the terms of the sale, you or an attorney will draft a letter of intent (LOI). An LOI is a preliminary sales document that outlines the expectations of both parties. Although it’s not binding, it does serve as the basis for the final contract and signifies that the buyer can begin their due diligence.
7. Finalize legal documents and contracts
After the buyer completes their due diligence and is ready to complete the sale, you or an attorney will need to finalize a purchase agreement and other documents, such as a list of assets, noncompete agreements, guidelines for website and domain name usage, a bill of sale, and security agreements. Once everything is in order, both parties will sign the contracts to complete the sale. For an in-depth look at the process, read “How To Sell Your Business.”
Consequences of selling a business
As with closing a company, there are consequences to consider before selling your business. One of the biggest potential consequences is that you may have to sign a non-compete agreement. This will limit your ability to consult with similar companies or start a new business in the same industry for some time.
Additionally, the legal costs of selling a business can be expensive, and you might be subject to capital gains taxes after the sale. And if your company was profitable, you may be giving up a lucrative revenue stream.
Choosing between closing or selling a business
There are reasons to close or sell a business, and choosing between the options can be challenging. If you want to retain the company’s value, it may make the most sense to sell your business. But it can take time to find a qualified buyer for your business. If you want to leave the company as soon as possible, you may want to dissolve the company.
There are a few other factors to consider when deciding between closing or selling a business, including the following:
- Viability: If your business model is currently viable, you may be able to find a qualified buyer. A viable business model may make it easier for potential buyers to secure funding and help them feel confident that they can run the company successfully. However, if your business model is not viable, it may be in your best interest to close it.
- Profitability: Even if you’re currently operating at a loss, you may be able to find a buyer because a competitor may purchase the business to gain access to your client list, processes, or staff. It’s also possible that the buyer can secure more financing than you, which will help them rise above the problems you experienced as the owner. Or, the buyer may believe they can manage the company differently and turn it around.
- Business structure: If you run your business as a sole proprietorship or partnership, you can sell the assets but cannot sell the company itself. That’s because sole proprietorships and partnerships are not separate legal entities, so when the owners leave, the business closes.
Conclusion
Exit planning involves mapping out how and when you will leave your business, such as selling ownership or closing your company. It’s crucial for every small business owner to plan their exit early, but it’s a step that’s often overlooked. To learn more, read our article “A Guide to Exit Strategies.”