How does a business know when it’s time to pack it in and close the doors?
Maybe industry changes – like the rise of online shopping and grocery delivery services – have siphoned customers from brick-and-mortar stores.
Maybe sales have slumped longer than they would in a typical seasonal ebb, or revenue consistently falls short of payroll.
According to S. Graham Simmons, a partner at law firm Norris McLaughlin P.A. in Allentown, the ABCs of knowing when to close a business should include a three-point approach:
< Talk to professionals – an accountant and an attorney – about your financial situation
< Come up with a plan
< Communicate with people – including your employees, your professional team, your vendors and your customers.
Simmons said depending upon how a business is set up – from a sole proprietor to an S Corporation or limited liability company (LLC) – protocols require publication in newspapers of the intention to go out of business, as well as satisfaction of state tax liabilities.
“It’s ‘hurry up and wait’ with a lot of paperwork,” Simmons said.
Simmons said firms with more than 100 employees fall under the federal Worker Adjustment and Retraining Notification Act (1988) or WARN Act, which requires giving employees 60 days notice of the intention to close.
In Pennsylvania there are no requirements for employee notification for companies with fewer than 100 employees, Simmons said.
After exhausting other routes to exiting a business, financial planning is a crucial element in readying a business for closure or liquidation.
Mike Wolfe, a valuation services partner for Trout Ebersole and Groff LLP in Lancaster said companies can get into trouble by not paying attention to losses once they begin.
Losses result in negative cash flow. At first, owners or stockholders may prop up the company with more cash, but if the underlying cause of the losses isn’t resolved, fresh capital is a band-aid rather than a solution.
“If they think the company isn’t going to make it, then you can’t function, and it may be worth more to close than to stay open,” Wolfe said.
Wolfe said once in liquidation mode, inventory, assets, equipment, machinery, vehicles and real estate are put up for sale.
“The idea is to get the most out of the remaining assets to pay down any debt,” Wolfe said.
Beyond hard assets, business owners shouldn’t forget about intellectual property, defined as patents, trademarks, copyrights and trade secrets.
“I’ve seen some companies do well in selling those kinds of things,” Wolfe said.
Customer lists, contracts and relationships also are valuable properties and should not be minimized when closing a firm.
“Of all the intangibles that would be the most valuable,” Wolfe said, adding: “It’s really advantageous for a buyer to do that. Customers are the hottest intangible to sell,” Wolfe said.