Surviving Small Business Failure and Preparing for Future Success

Many small businesses struggle to survive, and unfortunately, some fail. When a small business fails, it can be a difficult and emotional experience for the owner. However, taking specific steps to properly close the business and address any outstanding financial issues is essential, as doing so can pave the way for future business success. Ignoring these issues can lead to serious consequences, such as legal action, damaged credit, and personal financial ruin.

Steps to Take to Close Your Business Properly

Follow these six essential steps to properly close your business and prepare for future endeavors with confidence and financial peace of mind.

1. Collect All Outstanding Receivables: Before you announce that you are closing the business, concentrate your efforts in attempting to collect as much as possible from your customers. Consider offering discounts for full payments. If your receivables are significant, consider engaging a collections agency.  Review your balance sheet for any other receivables that you may need to attempt to collect.
2. Settle All Outstanding Debts: One of the first steps to take in closing a business is to make sure that all outstanding debts are paid. This can include loans from banks or other financial institutions, as well as bills from vendors or suppliers. The business owner should identify all outstanding loans and bills that need to be paid and prioritize them based on their importance, then contact each creditor to discuss repayment options and negotiate a payment plan if necessary.

If the business has employees, the owner must ensure that all outstanding payroll taxes and wages are paid in full, including any unpaid wages or overtime, accrued paid time off and other employee benefits (if applicable), and all related payroll taxes such as Social Security and Medicare. The business owner should calculate the amount owed and make sure that all payments are made in a timely manner. Failing to pay outstanding debts can result in legal action being taken against the business owner or even lead to personal bankruptcy.

3. Cancel Unnecessary Contracts and Leases: After notifying customers, employees, and creditors of the closure, the next crucial step in closing a business is to cancel any contracts, leases, and agreements that are no longer needed. This includes terminating any vendor contracts and leases on equipment or property that are no longer necessary. Consider any remaining contractual obligations with your customers and return any deposits or payments for goods or services not delivered or rendered. Doing so can help minimize the financial impact of closing the business by reducing ongoing expenses and eliminating unnecessary financial obligations.

It’s important to note that canceling contracts and leases can be complicated and may require legal guidance to ensure that the business owner is following the proper procedures and avoiding any potential legal liabilities. As such, the business owner should consult with their attorney or CPA to ensure they follow the correct procedures and avoid potential legal liabilities.

4. Dispose of Business Assets: Properly dispose of any assets the business may still have, including equipment, vehicles, or other assets, to pay off outstanding debts. This can effectively recover some of the investment and reduce the financial burden of closing the business. For example, holding a liquidation sale, where all inventory is marked down and sold to customers, can be a way to sell off inventory and recover some of the investment quickly. Another option is to sell inventory online through a third-party marketplace or the business’s website. This can be a way to reach a larger audience and sell items at a higher price. In some cases, donating or disposing of inventory may be more cost-effective than selling it and could result in a tax benefit.

Regardless of how the inventory is handled, the business owner must keep accurate records of all sales or disposals. This can help with tax reporting and provide an accurate picture of the business’s financial situation at the time of closing.

5. Address Remaining Tax Liabilities: One of the most important considerations for small business owners during the process of closing their business is how to handle any remaining tax liabilities. Failing to pay taxes can lead to significant penalties and interest charges from the IRS and other taxing entities, making closing a business even more financially challenging. In addition to income taxes, file final employment-related tax returns (federal and state). Final sales tax forms and funds due should be submitted up to the closeout date. Some counties also require rendition reports in certain situations. Consider any other taxing entities in your area that may require a final report up to closeout date.

The IRS offers several options for businesses that cannot pay their taxes in full, including installment agreements, offers in compromise, and hardship status. It’s important to consult with a tax professional to determine the best course of action for your specific situation.

6. Protect Personal Credit and Financial Standing: Besides handling outstanding debts and tax liabilities, small business owners closing their businesses must also take steps to protect their credit and financial standing. Personal guarantees on business debts can be a major source of financial risk for business owners. If the business has outstanding debts for which the owner has provided a personal guarantee, it’s important to pay them off in full as soon as possible.

Business owners should also take steps to close any personal accounts used for business purposes, such as credit cards or lines of credit. By closing these accounts, business owners can help to avoid any potential liability for future charges that these accounts may incur. If applicable, consider the need to dissolve your corporation, LLC or partnership and consult with your business attorney.

Preparing for the Future

Although closing a business can be a harrowing experience, it can also be a valuable learning opportunity for future business endeavors. Therefore, it is essential to reflect on why the business failed and take steps to prevent the same outcome in the future. Do not forget about the good experiences lived and the contacts and relationships made along the way.  Keep an inventory of both the successes and failures to take forward to your next project.

Prevent future failures by thoroughly analyzing the previous business’s financial and operational performance, identifying any mistakes made, and areas for improvement. Seek advice and guidance from experienced professionals who can provide valuable insights and guidance, and help avoid common mistakes, increasing the chances of success in the future.

Closing a business is a difficult experience, no matter the circumstances, but you don’t have to do it alone. Contact your CRI advisor to learn more about how our team of experienced CPAs can provide you with the guidance and support you need to navigate a business closure. And when the time is right, we’re ready and equipped to take proactive measures to prepare you for your future business endeavors and pave the way for your success. Whether you are planning to start a new business or seek a fresh start, we are here to guide you through every step of the process.