If you’ve ever given any serious thought to exiting your business, now is the time to start. Exiting is a multi-step process that can take from weeks to years depending on the size of the organization and the reasons for exiting.
When it comes to planning, how you exit your business is just as important as how you start it. The goal is to maximize the value of your company before converting it to cash and minimize the amount of time consumed.
Getting out of business is a process. The length of time required to complete the process is directly related to the complexity of the business and the circumstances underlying this decision to get out of business. It can range from one week for a home-based sole proprietorship to several years for a corporation forced into involuntary bankruptcy. Disputes and litigation add another dimension to the timeframe.
The getting out of business process typically includes the following steps. You may want to incorporate them in your post-venture plan:
Reach Agreement and Obtain Authorization from Owners to Dissolve Your Business Entity. Agreement and authorization to dissolve a business must be established under some acceptable, governing set of rules, such as the bylaws or partnership agreement. It is best to settle disputes quickly and document any terms and conditions that apply.
Designate a Leader & Organize a Team. Authority and roles should be clarified. The owner may be the only team member for a home-based business. For a large entity, however, the team may consist of the executive management team and important functional managers whose expertise is not represented: finance, human resources, legal. This group should be as small as possible for efficiency and large enough to include the expertise required to cover the basic planning issues.
Engage Professionals & Consultants as Team Members. For most small businesses, this group consists of the firm’s legal counsel, CPA, and a business broker or valuation expert. Professional expertise and advice in these areas will contribute to a smooth process and improve the outcome. Perform a thorough review of business and identify problem areas. Establish and maintain a problem list to focus on. Determine the condition of the firm’s records. Review transactions. Problems extend the timeframe and cost money.
Prepare a List of Assets and Perform a Physical Inventory. The inventory is very important input to several activities. It is used to establish the value of the business, make decisions, and manage disposition of assets, and it becomes the basis for tax calculations and tax returns. Perform a valuation of the business. It is difficult to make prudent decisions without knowing the market value of the business and its assets.
Prepare a Detailed Plan and Assign Responsibilities.
Develop a Schedule for Implementation. A schedule provides the ability to measure progress, estimate completion of critical steps, and project the end of the process. The schedule is also extremely useful for managing cash flow during this uncertain time.
Release Announcements & Notices. This step is about timing and legal notice. At some point, interested parties must know what is happening: market, competitors, customers, vendors and suppliers, professional service providers, consultants, trade groups, employees, media, creditors, and contractors. The notice should designate an official point of contact for questions or inquiries.
Implement the Plan. This is where momentum and activity builds. Things happen very quickly. Without the planning steps, an important degree of control is lost. When that happens, net value is usually decreased in some substantial way.
Conclude or Transfer Contract Obligations. This process may require approval from contracting parties, and involve negotiation of final terms. Office, car, and equipment leases need to be reviewed, addressed, and terminated. The timing of termination dates for insurance contracts and benefit plans are very important to all involved.
Close Operations. The timing of this step is important. There is a time when manufacturing or production must cease, retail sales must end, and human resources are pared down. Each affect cash flow and net value dramatically. Security and maintenance services may be an important consideration from this point on.
Dispose of and Transfer Assets. This is an important tax event. Insurance coverage can be reduced or eliminated. Settle accounts payable and debt obligations.
Prepare Final Financial Statements & Tax Returns. Final financial statements for the business are important to establish the tax implications for assets, gains, and losses conveyed to the owners or other involved parties.
File Articles of Dissolution. State licensing departments require a formal filing to terminate the legal and tax status of the business. Examples are articles of dissolution, certificates of withdrawal, and cancellation certificates. This process also results in a review of tax liabilities and issuance of a tax clearance notice or certificate.
Prepare and Issue Special Filings, Notices, Informational Returns, and Taxes. To develop a checklist, retrace your steps taken during startup. Generally, some action is required with all federal and stage registration, taxing, and licensing agencies contacted to start the business. Final submittal of payroll, unemployment, industrial insurance, and other business tax returns must indicate that the business status is closed or changed.
Receive Tax Clearance Notice. File in financial records.
Close Bank Account.
Store Business Records. These records should be kept for at least seven years.
Planning and awareness are crucial. The process, timing of events, and tasks must be tailored to the type and complexity of the business. Each case is unique because reasons for dissolution differ, and problems that exist or develop are unique to the circumstance. The following is a checklist of items to consider as early in the process as possible. Most of these issues have some impact on the process of getting out of business:
Disputes and employee grievances
Employee benefit plans: incentive plans, benefits, pensions, deferred salary plans, stock options
Business equipment in employee possession – home offices, business cars, cellular telephones
Employment contracts and severance arrangements
Finance and Accounting
Condition and completeness of records
Prepaid accounts: insurance, advertising, utilities
Valuation of assets: intellectual property, work in progress, software, project files, R&D
Financial planning: capital gains on asset disposition or sale of business
Bank and investment account(s)
Loans from financial institutions or individual investors
List of creditors
Liens and security interests
Accounts payable and commissions owed
Outstanding tax claims, audit processes, or IRS action
Cash flow and expenses related to getting out of business
Business tax planning
Tax liabilities: local and state business taxes, payroll, industrial insurance, property, corporate income tax
Stock option conversions
Warranties/Guarantees: product, service, contract
Contacts and agreements: assignment, completion, non-compete, confidentiality, nondisclosure, franchise
Contingent legal problems: litigation, disputes, judgments
Strategic alliance agreements and obligations
Labor union agreements
Inventory: material, products, work in progress
Physical inventory records
Asset records and list
Purchase orders outstanding
Shipments in transit
Modifications to secure plant and buildings
Storage of assets and equipment
OSHA or EPA filings
Condition and completeness of company records: charter documents, minutes, stock records
Documents of title, mortgages, deeds, security agreements
Pensions, deferred compensation plans, benefits
Professional support. CPA, attorney, PR & advertising, marketing, internet host, publisher
Registrations, permits, licenses
Storage location of corporate records
Continuation of board of directors
Termination of business licenses and tax account
Dissolution of business entity
Ownership of intellectual property: trademarks, patents, trade secrets
Applications in progress: intellectual property, licenses
Stockholders or equity investors
Key person insurance
Marketing & Public Relations
Sales representatives agreements
Proposals in process of preparation
Professional, trade, and telephone directory listings
Public notice of change
Tradeshow and convention commitments
Samples, price lists, and marketing materials in the field
Resources. Look for guidance and information from the following resources:
Small Business Development Centers
Business Brokers and Professional Business Consultants
Public Library, Business Section. Books and publications on the topic of buying and selling businesses
State Departments of Licensing or Commerce
Business Owners and managers who have experienced the dissolution process
In conclusion, the process for getting out of business successfully requires the same amount of planning as going into business. While the process should be easier, it is likely to be less enjoyable and more stressful. The best advice for business owners is to think about the future during the early stages of getting into business. Exert managerial influence to ensure that complications and problems which could affect dissolution and net value do not develop into roadblocks. When the time for getting out of business comes, engage the invaluable expertise you will need, and prepare a plan.
By Michael J. Franz