Let’s start by saying closing a business isn’t always a ‘failure.’ Now is an especially difficult time for all business owners, so don’t be hard on yourself! While a closure may be inevitable, there is a wrong way and a right way to close your business.
Sometimes you just have to throw in the towel for better opportunities down the road. Shutting down a business may also save the company’s future. There are many factors that can contribute to business closures, but there are steps for properly closing down. Understand how to close a business to make the best impression on your employees and community, and to preserve any chance of rebranding or opening in the future.
Closure Doesn’t Mean Failure
First, stop thinking of closing a business as failing. There are many reasons nowadays that a business may close its doors. Sometimes, closing up one business can be the start of a new, better business. With how drastically our lives have changed over the past year, it’s no surprise that there have seen shifts in consumer patterns.
Some businesses proved to be more essential than others during times of crisis. Overall, it made us all understand what we really needed (healthcare, groceries, etc.) and what we could stand to wait on (haircuts). All of this to say, if you need to close a business, it’s not always a bad thing. Our society has perpetuated the idea that closing or selling a business constitutes a failure. This is simply not true, so don’t listen to it! Sometimes it’s in your business’s best interest to close.
Now, for example, many businesses are closing temporarily to withstand the impacts of the pandemic. In this scenario, it’s your and employee’s best interest to close temporarily for a better chance of survival in the future. No matter the reason, you’ll need to know how to close a business to ensure it’s done in the best way possible. Now that we understand that closing isn’t a failure, let’s cover the steps for closing up a business – the right way.
How To Close a Business In Eight Steps
There’s a right way to close a business and a wrong way. If you close your business the wrong way, you may leave a bad taste in the mouths of your community and former employees. So it’s important to think things through and follow the steps. Although this is likely a stressful time, jumping the gun on announcements or skipping steps can add additional unnecessary stress. So, take your time (as much as you can), think it through, and stay positive. Let’s start with the first step, which makes all of the following steps so much easier.
Formulate an Exit Plan
First thing’s first – you have to develop a plan that includes all aspects of how to close a business. There are tactful ways to tell the community and any employees that the business is closing. Of course, if you have a smaller business, this process will be on a smaller scale.
Start by considering the end goal of your closure. If you’re planning it to be a temporary closure or to start a new business, make this clear to your employees, partners, lawyers, etc. If you’re part of a partnership or a limited liability company, you’ll have to first make sure your partners are on board.
Once you know everyone is on the same page, start developing your plan. Think about which advisors you’ll need to seek guidance from regarding the different aspects of closing.
Tell Your Employees
Be careful and empathetic when discussing the business closure with your employees. Remember, they’re learning that they too will soon be out of a job, so understand how scary this can be for them. Some business owners worry about being left without a workforce and wait until the last minute to notify employees, but this is far from an ideal plan. This type of closure usually isn’t received well within a community. Word gets around, and good luck finding quality employees for any future business endeavors.
So rather than that, keep an open line of communication with your employees. Well, as open as you can be. This is especially helpful if you need to collect any company property from them and finalizing any outstanding reimbursements.
Keep in mind that most states have regulations regarding when you need to pay an employee’s final paycheck. So make sure you’re in accordance with your state’s laws. Having everyone on the same page makes the next step much easier. You can fully work through how to close a business without worrying about word getting out.
Outstanding Receivables & Business Assets
This step may look different depending on the setup of your business and the industry you’re in. If, however, you do have outstanding receivables or business assets, let’s take a look at how to properly sell or collect.
First thing’s first, if you do have outstanding receivables (a.k.a. monies owed to your company for services), try and collect them before the previous steps. Sometimes customers will try and hold out for a business’s closure, or worse, assume since the business is closing anyways they don’t need to pay outstanding bills. However, this additional income can be a great help with closing costs – especially if financing is the reason for the closing.
To encourage payments, you can offer discounts at your discretion – sometimes discounts payoff with more payments. You can also reach out with different contact methods – email, calls, letters, etc. This along with selling any remaining business assets can greatly assist with closing and advisor costs.
Business assets can be anything from leftover office equipment or space to extra inventory. No matter what it is, you can sell it at a discounted price as you close. Again, getting some money for extra inventory is better than no money. How you decide to approach selling depends on the item. Once this step is complete, you can start making things more official with everyone’s favorite… paperwork.
Filing The Proper Paperwork
The next step of how to close a business is filing your articles of dissolution and other notices. Articles of dissolution are basically the opposite of the paperwork you filed to open your business – it’s letting the government know you’re closing.
Additional paperwork varies from state to state, so make sure you understand your state’s requirements are. This is when an advisor or lawyer can come in handy, as they’ll know exactly what to do. So if you’re able to, your quickest and safest bet is to hire someone familiar with how to close a business. If however, your business is small enough, you may be able to complete all of this paperwork without much headache.
- If you’re operating in multiple states, you’ll have to submit for each state.
- Think about everything – licenses, permits, registrations, etc.
- If you’re within a larger city, think about any local or city ordinances you have to comply with.
Now that we’ve covered how to tell the government you’re closing, let’s discuss how to tell your customers and community.
Telling Your Customers and Community
This is similar to the employee situation – you’ll want to handle it carefully. This is especially true if you’re providing a regular service for your customers. They might panic about who they’re supposed to go to. Consider these things when providing a closure timeline so you give your customers adequate time to find a new service. If necessary, you can explain the reason for closing to your customers – this may help their understanding and empathy.
There are many ways you can go about notifying customers and your community. You can choose one official announcement (like a newspaper article or press release) or a mixture of multiple notification methods. Posting on social media is a good way to notify your community all at once. In some states there are requirements for business closure notification, so check your state and local requirements to make sure you’re going about it in the right way.
If your business has open projects or jobs, outline the terms. Depending on the type of work and contracts you have in place, you’ll likely need to complete the open jobs. This is another thing that can depend on your circumstances for closing and your state. Overall, try your best not to leave anyone hanging.
Close Outstanding Debts and Accounts
Now we’re nearing the end of how to close a business. After you’ve collected any remaining assets left, it’s time to close out your accounts. This includes all recurring charges for your business for contractors, vendors, rentals, etc. Most of these will probably require a certain amount of time for your notice (30 days for example) and that the account is paid in full. If you have long-term contracts, review them before you start closing things out to ensure you’re not surprised with penalties or fees.
The business’s financial accounts that collect and send payments should be the last thing you close. You’ll have to make sure absolutely everything is done before closing these accounts or you’re in for a big mess.
Final Payrolls & Taxes
After everything is settled financially and you’re towards the end of closing, it’s time for the final payroll and final payroll taxes. Your final employer and payroll taxes will be collected after your final payroll run as usual. However, you’ll give the IRS notice of the “final” status. Here are instructions on how exactly to complete a final return straight from the IRS. Along with the abovementioned paperwork and articles of dissolution, your business will be ready to close. This brings us to our final step, distributing leftover assets.
Distribution Of Remaining Assets
Once you’re 110% sure everything is paid for, any outstanding taxes, fees, etc., you can start on the final step of closing your business. Any remaining business assets need to be properly distributed (whatever that means in your paperwork).
So, if you were part of a partnership or LLC., this would need to occur between all owners or partners. If this relies on an open business account, make sure not to close it until everything is settled. At the end of selling assets, closing accounts, and running your final payroll, there may not be any assets left but a debt instead. If this is the case, you can explore different options for payment.
Things can get messy – so keep in mind that a lawyer, although expensive, can greatly help to ensure everything is properly and fairly completed. After this, you’ve completed your last step for closing down your business.
Closed But Not Forgotten
In short, if you follow the steps for how to close a business and do it the right way, a closure can still end on a happy note. Just because you had to close a business doesn’t mean it was a failure. If after reading this and still don’t agree, at least read our article on how to motivate yourself after failure. If you won’t believe it wasn’t a failure, at least try to learn and grow from it. Then, you can come back even stronger than ever. After all, we’re all figuring out our new normal together.