Sunday, December 7, 2003

Shutting down a business is tricky

You can't just close the doors

By Caroline Lynch
The Courier-Journal

In 1988, when April Scott opened her balloon company, she thought it would be around forever. She didn't even keep a resume.

"When I first opened my business I never thought I would be doing anything but that," Scott said of April's Inc., The Balloon Co. "Never ever."

But in June 2002, after 14 years of success that included conducting seminars at national conferences, writing for an international magazine and serving hundreds of clients in the Louisville area, Scott closed her business.

Michael Ashcraft, director of the Greater Louisville Small Business Development Center, said new business owners rarely consider that their businesses might close. "Everybody thinks they're going to be a huge success."

Many don't make it as long as Scott. A commonly held belief says 90 percent of small businesses fail in the first year. Ashcraft estimates the numbers are lower - maybe 40 percent or 50 percent fail in the first three years.

Some wind down because their owners want to do something new, while other owners are forced out financially or have to move, Ashcraft said. Illness or death mean the end for other businesses.

"Anyone starting a new venture needs to go into it knowing that failure is a very real possibility," said Mark Crane, executive director of Greater Louisville's Enterprise Corp., who works with fast-growth companies.

Knowing how and when to close a business can mean the difference between dealing with a setback or going bankrupt. Many owners are embarrassed or upset about shutting down.

"You have to make sure you don't burn bridges," Ashcraft said, "because your reputation is the most powerful thing your small business has."

Scott made her decision in February 2002. Business had fallen off after Sept.11, and Valentine's Day was the kicker.

"In this business, when you barely break even on Valentine's Day, you aren't in business," she said.

Scott decided she'd close her business in June 2002. Most businesses need at least two or three months, if not longer, to shut down, Ashcraft said. Owners, assuming they can choose their end dates, should make a checklist and then pick a date that will allow them time to get everything taken care of.

"A lot of people think, 'I'll just shut the doors, what will they do?' But there can be ramifications," he said.

After deciding to close, owners should first look at their liabilities and whether they can pay them.

Lease terms are almost always negotiable, said Rick Ashton, with Grubb & Ellis, who advises tenants and landlords in commercial real estate deals. "It would be a good step to go to their landlord and say, 'I researched this and I know what my rights are. Is there anyway you could help me out, maybe decrease payments?'" he said. "It can't hurt to ask."

Stephen Lukinovich, a partner with Chilton & Medley accountants, warned that some business owners pay their creditors, but forget about taxes. The owner could be forced to satisfy tax liabilities out of his personal funds.

"There's a whole host of thorny little issues," said Jim Martin, a lawyer with Ogden, Newell & Welch.

Many businesses need to be dissolved formally, he said. Those businesses - partnerships and corporations - should notify their creditors by letter or notice in the newspaper to limit the length of their liability.

Scott doesn't regret closing her business. Now she works at a nursing home, where old clients still track her down looking for balloon and gift arrangements.

Her advice to other owners closing their business is simple:

"Don't be ashamed, don't be angry, don't be bitter. If you have had a good attitude with your business and you keep that integrity, there are more people that will help you than hurt you or harm you."

How to close a small business

Shutting down a business isn't as simple as you might think. Tips on how to proceed:

1. Timing is everything. Knowing when to close a business can mean the difference between dealing with a setback and filing for bankruptcy. Set up checkpoints to look over the company's progress and make sure it isn't headed for trouble. An owner who decides to close a business should set a date that allows enough time to finish the entire process.

2. Don't put taxes on the back burner. Final taxes must be paid. Make sure to find out what taxes your business must pay and when. An accountant may help.

3. Don't be afraid to negotiate. Small-business owners need to work out arrangements to pay employees, banks and other creditors. Some loans, leases and payments can be negotiated.

4. Be aware of legal requirements. Just because a business shuts doesn't mean it goes away. Owners should be sure to dissolve their business properly. A lawyer may be helpful.

5. Don't burn bridges. Don't lie. Sometimes a reputation is all a small-business owner can lean on. Don't sabotage it.

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