- Develop an exit strategy when shutting down your business
- Business owners have the options of closing, selling, liquidating and filing for bankruptcy
- Review all options to find out what works best for you
When disaster or economic recession strikes, small businesses may find themselves looking for a way out of their enterprise. While some common options include closing or selling the company, you’ll also have the options of liquidating or filing for bankruptcy. Find out what is involved in each process and which one is right for you.
Closing a company involves a formal process of ceasing business operations. It includes dissolving a corporation or LLC if you are operating under this business structure, canceling business names and any relevant documentation, concluding any remaining contracts, resolving debts, and selling off assets. Any funds left over at the end of this process are distributed among the company’s owners.
If the company’s finances are sound but you no longer wish to be involved in the business, a sale is a feasible option. Getting a business appraisal allows you to determine the value of both tangible assets (real estate, equipment, etc.) and intangible assets such as intellectual property and potential for growth.
You might sell to a family member, a team of competent managers, an interested third party or competitor, or even your employees. An attorney can help you craft a sales agreement that outlines all assets and liabilities that will be transferred.
You can sell their company outright or set up a gradual transfer of ownership. You also have the option of setting up a temporary lease agreement if you’re unable to run the company for an extended period.
A liquidation process usually occurs if a business has substantial debts and is struggling to pay them. It involves the liquidation of as many assets as possible through an auction, brokerage, or other means to come up with the necessary cash.
Creditors are often willing to negotiate a deal when a business is liquidated, even if they’ll only recoup a portion of what they’re owed. This allows them to collect some money while avoiding a protracted and expensive battle in court. You may not be held personally liable for debts held by a corporation or LLC, though creditors can still file a legal challenge seeking to hold you personally responsible for the money owed.
Filing for Chapter 7 bankruptcy is also a common strategy if a business needs to close and has a heavy debt burden. Creditors can choose to participate in the liquidation process to receive payment, and the proceedings also establish a payment plan on how much each creditor will receive. Secured creditors, or those who can collect collateral such as real estate secured by the debt, are typically paid before unsecured creditors, such as credit card companies.