Last year, a fledgling dot-com venture launched by a local computer concern went out of business after its lifeline of investment dollars slowed to a trickle.
The owner, in his infinite wisdom, handled the situation by letting the last of his employees go, then turning off the lights, locking the door and disappearing from sight. Wages and bills were left unpaid, and messages left on the business’ still-functioning automated telephone system were not returned.
The only reason some creditors knew of the dot-com’s demise was because unfailingly responsible employees took it upon themselves to contact them after they’d been dismissed.
The idea of simply walking away from a business can be attractive to an owner, especially one with a failing company. But the reality is that closing a business in a manner that is less than considerate of employees, customers and creditors causes more problems than it solves.
Experts say unethical actions exacerbate legal and financial matters. Worse, they can create a public relations nightmare that haunts the perpetrator, making it difficult, if not impossible, to go into business again — particularly if his or her name is associated with the defunct enterprise.
George Prough, a professor of marketing at the University of Akron, utters an often-overlooked truth: People don’t forget when they’ve been burned.
“You have to look at the idea of lifetime value of relationships,” Prough says. “It’s easy, especially if a person stays in the community, to get a lousy reputation that’s going to last for a very long time.”
So just how does one go about “successfully losing a business,” as Prough calls it? According to Norma Rist, an Akron-based marketing and business strategy consultant, two telephone calls must be made immediately, regardless of the reasons for calling it quits. The first is to the company’s attorney; the second is to its certified public accountant.
John Guy of the Akron law firm Guy Lammert & Towne, says that call to the attorney is needed so the obligations accumulated by a business over the years can be addressed, from terminating vendors’ licenses and leases on rental properties, automobiles, office equipment, etc., to taking care of outstanding debts.
“First of all, you have to address the issues with your secured creditors,” he says.
In most cases, that means the banks from which money has been borrowed to maintain cash flow and finance equipment purchases and operations. Guy points out that banks require the owners of virtually all small businesses to personally guarantee their debts — a fact with which most entrepreneurs are all too familiar.
If liens on a business’s assets aren’t enough to pay its debts, “the bank is going to come knocking on the door of the individual who guaranteed it,” Guy says.
Sharing the first line on the to-pay list are the employees.
“You always give the employees the No. 1 priority as a practical matter because there are so many issues and so many governmental agencies that you’ll become involved with if you don’t,” he says.
Although secured creditors legally have first dibs on a business’s assets, they usually consent to the payment of wages and related withholding taxes.
“There are laws on the books that give the employees certain rights,” Guy says. “Unless they’re paid, they can complicate the lives of secured creditors.”
All federal, state and county and city tax returns also must be filed and the taxes paid.
“I’ve had people who thought, ‘Well, I shut my business down. I’m done,'” says Dave Smith, manager of taxation services for the certified public accounting and consulting firm Brockman, Coats, Gedelian & Co.
Another surprise is that final annual returns, W-2 forms, etc., normally due in January must be filed in relatively short order after the closing. And even after the final returns are filed, a limited liability company or corporation still technically exists until it is legally dissolved.
Smith says one client decided against such a move because he thought he might go back into business and wanted to avoid the cost and red tape of forming another corporation.
“Some people seem to move from business to business to business,” he says.
According to Guy, unsecured creditors are paid last.
“If you don’t have enough money to pay them in full, you need to at least pay them on a pro-rata basis whatever remaining proceeds you have,” Guy says.
He strongly recommends contacting creditors and letting them know exactly what arrangements are being made — filing for bankruptcy, for example, or auctioning off the business — instead of dodging phone calls and ignoring past-due and collection notices.
“Really, it’s a waste of time to try to hide or keep your creditors in the dark,” he says. “The best way to do it is be up-front and have your lawyer send a letter out to them.”
Prough suggests the owner in question compose a few key messages that explain why, when and how the business is closing its doors, then disseminate those to employees, customers, suppliers and other creditors, the media, etc. Employees in particular, he says, have a right to know the reason they’re losing their jobs. He stresses the importance of giving the same information to each group, some members of which are bound to compare notes. Conflicting stories will “tarnish the image from Day 1.”
“Honesty and integrity in information released to the community will help the owner in any future endeavors,” she says.
Rist says owners can take other actions to engender goodwill. She recommends they sit down and think of how they can help each group adversely affected by the closing. Employees, for example, will appreciate letters of reference and introductions to companies where they might find work, while customers will find referrals to a reputable competitor helpful.
“Everything doesn’t have a cost,” she says. “But it does require some thinking and planning and consideration.” How to reach: Norma Rist Consulting, (330) 865-5900; Guy Lammert & Towne, (330) 535-2151; Brockman, Coats, Gedelian & Co., (330) 864-6661