The hardest work involved in running a
business may be closing it, which is the
ultimate end point of the life cycle of a business: birth, growth, maturation and
decline. Owners who are not prepared for a
formal closing process — and even those
who are — will find the job daunting.
But, closing a business is a common
occurrence, whether it is by choice or circumstance, and there are professionals
who can simplify the myriad steps involved
based on extensive opportunities and
experience.
Nationally, about 75,000 businesses fail
each year, closing with unpaid debts —
which is approximately half the number
that opens each year. And of those 150,000
annual start-ups, approximately one-third
will close within two years of opening.
These figures suggest that every business
owner should be prepared for that
eventuality.
Smart Business spoke with Russ
Burbank, a partner with Burr Pilger Mayer,
to learn more about the formal business
closing process and the risks associated
with sidestepping it.
What risks do business owners who do not
follow the formal closure process face?
Businesses close for good reasons. They
can range from acquisition or owner retirement to consolidation or business failure. In
any case, the formal closure process has to
be completed. Otherwise, owners run risks
like incurring personal liability for taxes,
assessments, fines as well as loss of protection under state statutes against future
claims until a certification of dissolution is
issued by the Secretary of the State.
Are all business closures the same?
Not at all. The process varies, depending
on factors such as whether the company is
insolvent or solvent when it is closed, the
reason it closed, the complexity of the business and the level of cooperation among the
creditors. The more complex the company
and the more contentious the creditors, the
more likely it is that they will seek the strong
arm of the bankruptcy court to maintain an
orderly process.
How important is the role creditors play in
the closing process?
That depends somewhat on whether the
business is solvent or insolvent. When a business is solvent, the owners decide how and
when to close. In this case, the closure
process typically consists of an orderly wind
down of operations, settlement of all outstanding liabilities and a formal dissolution
of the business entity. But, it is different
when there is the possibility that creditors
may not be paid in full at closure because the
company is insolvent. In those cases, creditors ultimately decide how the business will
be closed, either in or out of court. The court
might involve Chapter 7 or Chapter 11 bankruptcy filings. Deciding out of court might
mean that an Assignment for Benefit of
Creditors (ABC) specialist will distribute the
proceeds from liquidation of the business to
creditors. Either way, the closing process
can be tedious, time-consuming and costly
when not done properly.
What steps exist when a business closes?
Here are just a few: Owners must terminate
and pay employees; issue or make arrangements for wage and withholding information
(W2s); provide information to subcontractors (1099s); notify vendors of ceased operations, request them to submit final invoices
and ask them to indicate final bills were paid;
notify tax authorities of the closure in accordance with state, federal and local procedures; cancel state and local permits, including business licenses, sellers permits and fictitious names; and deal with landlords regarding lease terminations. The list goes on.
The process is often made more complex
because owners let their employees go as
part of the closing process and are faced
with doing many of these tasks themselves.
That explains in part why professional
‘closers,’ such as attorneys, accountants and
turnaround specialists can be valuable
assets in the process.
Why hire a professional to help with a business closure?
It can be as difficult to close a business as it
is to start one. Depending on the complexity
of the organization, its number of locations
and the kinds of liabilities that must be terminated — such as employee pension plans,
tax accounts and insurance claims — a complete closure can take a year or more. So,
there is a point in the closure process when
the owners are better off turning it over to
professional ‘closers’ who do that kind of
work more economically and efficiently.
For one thing, professional ‘closers’ cut
business owners’ costs. The neutral third
parties to whom they hand over the closure
will typically be working on an as-needed
basis, rather than full time. That speeds up
the process and increases productivity.
Third-party professionals will focus their
attention on the closure details, sometimes
on an hourly paid basis, which may not be
true with the company’s management team
or employees who milk their final days or
may be more concerned with finding their
next job than they are with terminating their
soon-to-be ending position. Either way, they
are less productive and that costs the owners money that could be better used to pay
creditors or themselves.
RUSS BURBANK is a partner and Certified Turnaround Professional (CTP) with Burr Pilger Mayer’s Consulting Group. Reach him at
[email protected] or (415) 677-4530.