How to Decide When to Close a Business After Temporary Shutdown
Experts weigh in with tips for reopening after pandemic closure
If you are one of the many small businesses still closed several months after COVID-19 restrictions began, you’re probably facing a wrenching decision about how—or even whether—to reopen.
There are lots of factors to take into consideration when choosing the next steps for your business. Are there changes you can make to better serve the market upon reopening, or would it make sense to merge your company with another similar business or competitor? If a financially devastating shutdown has prompted you to close or sell your business, there are steps to take to make sure you cover all the bases.
Making the Best Decision for Your Business
“What I would like every business owner to do, particularly if they're looking to sell or acquire, is to go to their local Small Business Development Center or use our SCORE volunteers, and sit down with one of those consultants,” Roderick Johnson, lender relations specialist with the Small Business Administration (SBA), told The Balance by phone.
An independent set of eyes can be helpful when going through the merits of merging with another company, or seeing what shifts are necessary to sustain a business. Johnson said that a SWOT analysis, short for an assessment of strengths, weaknesses, opportunities, and threats, is key for business owners deciding their next steps.
It’s important to understand the terms and conditions of small business loans and grants you may be eligible for, and how they apply if you make changes to the business.
“I would say you really have to take a close look on what's going on in your region, in your industry, and what are the pivots that have occurred and are you able to keep up with those pivots?” Judy Mahan, economic development director for Cal Poly Center for Innovation & Entrepreneurship, said in a call with The Balance.
Reopening might not make sense for a restaurant located in an urban center where no one’s going back to the office, Mahan advised. However, in a touristy area that’s remained pretty busy, the decision to reopen a restaurant might be more realistic.
Reopening Your Small Business With Changes
Ask yourself how you can redesign your business to serve the current market, and what you can do differently using the skills and assets you’ve accumulated over the years.
“It's no different than pre-COVID. You look at what's going on in the market. Where is the demand? Can you meet that demand?” Mahan said. “Test out different types of new services that you're wanting to implement, and if there’s traction, great. But at the end of the day, you have to treat it like any other time that you want to launch the business. What's going on in your market right now?”
Mahan added that she’s seen businesses this year branch out into manufacturing hand sanitizers, gyms putting equipment outdoors to serve clients, and restaurants selling their sauces and items with longer shelf lives to the public. Johnson at the SBA gave the example of a limousine company that began offering delivery services when its previous airport pickup operation struggled.
Merging Your Business With Another
Another choice to consider is merging your business with another similar business or competitor.
Beyond the question of profitability, when considering a merger or acquisition, it’s important to look at the two companies and decide if the cultures mesh and if the businesses are complementary.
When looking to merge with or acquire another operation, conduct a business valuation to figure out how much the other business is worth. There are multiple ways to value a company; if you’re doing it on your own, be prepared to undertake considerable research, or you can hire a business appraiser.
Next, make a sales agreement for the acquisition, as this will allow for the purchase of assets or stock of a corporation. Make sure you have an attorney review the document. All inventory, and the names of the businesses and owners, should be listed in the sale.
Make sure to include all assets and liabilities, along with background specifics, details on how the business will be run before closing, and how much access each company will have to financial data. Record all adjustments, broker fees, and any other relevant information.
Transferring business ownership will depend on the terms of your agreement; it’s highly recommended to enlist an attorney’s help during this process. Make sure to check your state’s laws regarding how to register the changes. Depending on merger details, you could be required to legally terminate the old company and open a new one with new business bank accounts, tax IDs, licenses, and permits.
Closing or Selling Your Business
If you’ve come to the decision to close or sell your business after its temporary shutdown, the SBA outlines the following steps:
- Come to a decision. The decision to close can be made on your own if you’re a sole proprietor but co-owners must agree in a partnership. Adhere to your articles of organization, and record the decision with a written agreement.
- File dissolution papers—if you don’t legally dissolve an LLC or corporation with the state, you could face continued taxes and filing requirements.
- Cancel any relevant paperwork, such as registrations, permits, licenses, business, and trade names.
- Follow employment and labor laws, and adhere to the Worker Adjustment and Retraining Notification Act (WARN) if you have to let employees go.
- Settle all financial commitments. You must file a final tax return; the type of return and necessary forms will vary depending on what type of business it is. Alert federal and state tax agencies of the change, and cancel your Employer Identification Number (EIN).
- Hold on to your records. Most recommendations advise maintaining records for as long as three to seven years. You may be legally obligated to keep tax and employment records, among other files.
Johnson from the SBA acknowledged that “it may be painful after you do that SWOT analysis to see that you just may need to wind down the business. And hopefully you can wind it down and pay off all your vendors and then be able to start clean after COVID-19.”
If you decide to sell your business, the steps are similar to those required when merging businesses, as discussed above.
Before marketing the company, do a self-evaluation or use a business appraiser to determine your business’s monetary value. Next, draw up a sales agreement and have an attorney review it.
Ownership rights can be transferred in a few different ways. Selling the business in full with an outright sale allows for immediate transfer of ownership and payment. A gradual sale is a more flexible option where incremental payments are made according to a longer-term agreement between buyer and seller. A lease agreement is a temporary transfer of business ownership according to conditions and payments set forth in a contract.
“Generally with privately held businesses, once they start winding down and liquidating the assets and hopefully beginning to pay down, or off, the debt to the secured creditors, the owners need to keep in mind they did sign a personal guarantee,” Johnson said. “So whatever the business assets can't cover, then the bank is going to be looking to invoke the personal guarantee to be able to get repaid.”
It could be a good idea to consult with a lawyer regarding additional rules that may be specific to your business.
The Bottom Line
Deciding the future of a small business upon reopening after a pause in operation can be a difficult choice to make. Sitting down with a qualified business consultant to conduct a SWOT analysis and get an outside perspective can help with figuring out your next steps.
Take a good look at your business to see where you can pivot your service or product, or evaluate making changes to better meet the needs of the current market. Is there another business, or a competitor it would make sense to merge with? If you decide to close or sell your business, follow government guidelines to make sure you’ve satisfied all necessary requirements.