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@example.com or (415) 677-4530.