Closing your small business down.
Simply closing your business is not a decision to be taken lightly but it may be the only option if you are a sole trader, the business revolves solely around you, and the products or services you supply cannot be replicated by someone else. Closing the business down means you’re not able to get a financial advantage from the goodwill you have built up over your time in the business.
If you do decide to close your business down or liquidate it, it’s not quite as simple as closing the front door and walking away. You have legal obligations to employees, customers, and suppliers that need to be managed to extract as much value from the business as you can.
Firstly, you need to decide when you will close your business. If you’re in a highly seasonal business, it may be valuable to have one last ‘hurrah’ or big season before you close the doors. It doesn’t make sense to continue to operate in the low season and incur unnecessary costs. Alternatively, the timing may be influenced by commitments you have to others. Ask your solicitor/lawyer to check any contracts you may have, especially the lease agreement on your premises. Find out when they expire and if there are any penalties for early termination. This may help you decide when to close your business.
Then you need to work out when you will tell people and think about how they are likely to react.
- Customers may put off buying decisions until your closing down sale or start seeking an alternative amongst your competitors.
- Debtors/Accounts Receivable may take longer to pay in the hope you may not chase them for payment once you have closed.
- Suppliers may put you at the bottom of their priority list meaning you may have less stock to sell.
- Competitors may start actively poaching your customers and may look to buy any plant & equipment you’re selling at the cheapest possible price.
- Employees may lose motivation, productivity may decline, more ‘sickies’ may be likely as they look for other work and they may leave you at their earliest opportunity.
Remember once you have told one person, it is likely that the news will spread quickly. It pays to be well prepared for how people will react to the news that you’re closing.
Given you are still looking to extract as much value as possible from the business, it’s important to do as much as you can to sell all the business assets you have left, including inventory, machinery, equipment, motor vehicles etc. Put together a comprehensive plan for the sales considering who is most likely to buy these assets and what is the best way to advertise them. Purchasers may be customers, suppliers, or even competitors. Depending on who the likely purchaser is, you may choose to sell them by auction, by advertising in local or industry publications, or even via internet using online sales sites.
Remember there may be some tax implications to selling your business assets, so it’s important to get financial advice from your accountant prior to setting up the sales.
While you’re looking for the best price possible, you may need to weigh up the choice of accepting a lower price than you were looking for or to pay the holding costs until you can get the price you want. Sometimes cash in the hand now is better than the cost and inconvenience of having to store these assets for an indefinite period.
As you receive the money from the sale of assets, you will need to pay out all your outstanding liabilities:
- Trade Creditors (Suppliers)
- Employee entitlements such as wages, superannuation, long service leave, annual leave, etc
- Taxes such as GST, PAYG, Payroll, Income, Capital Gains etc.
- Loans, vehicle leases etc.
- Anyone else you owe money to.
Consider too if you may have any contingent liabilities such as warranty claims on your goods and services, outstanding litigation, penalty clauses on contracts you will no longer fulfil and so on. You may wish to put some money aside for any of these claims.
Finally, there will be a number of administrative things/business records to be tidied up.
- Make sure all services, such as telephone, electricity etc have been disconnected.
- Cancel insurance policies that are no longer needed.
- Return any equipment owned by others such as EFTPOS terminals.
- Deregistration of your ABN (Australian Business Number) and business name with the Australian Business Register.
- Submit your final tax return and any outstanding BAS (Business Activity Statements) and payout any tax obligations to the ATO(Australian Taxation Office)
- If your business structure is a company, think about winding up your company with ASIC (Australian Securities & Investment Commission).
- If necessary, close business bank accounts you no longer need, cancelling any regular payments made to or from that account.
Your lawyer and accountant will be invaluable as you go through this process. Engage them early about what needs to be done to ensure you don’t miss anything, and to ensure that you maximise the value you have created in the business and minimise the costs to exit. Remember, it may be ‘the end game’ for the business but it’s the beginning of the rest of your life.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice. The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation. © Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.