Why Going Out of Business is a Terrible Idea.

Far too many small business owners confuse their enterprise with themselves, thinking, “I AM the business.”

While that belief may motivate the owners to get through the long days while building a business, it may also prevent them from recognizing the value of said business independent of their own, continuous work.  So, when owners consider ending their careers, their business is often be terminated as well–even if that means a fire sale of any tangible assets and laying off trained, experienced employees.

Why Sell instead of Closing?

What if believing your business is your alter ego prevents you from earning a great deal of money with little additional effort?  What if, instead of simply shutting down, you cashed in on your business’ success one last time, selling the business as a going concern?

To demonstrate the merit of this concept, let’s consider two scenarios:  in one, you are the owner of a capital intensive enterprise, and in the other, you are the owner of a service business.

Store, Manufacturer, Restaurant, etc.

In general, people usually understand that as owner of a capital intensive business or one with a fixed customer service location, you will have a pay-off at the end when you liquidate machines, fixtures, and maybe real estate acquired by the business over it’s life.  What you may fail to recognize is that someone else may be willing to pay even more for the reputation, customer lists, and trade name, location, experience of trained employees, results of past marketing efforts, and established relationships (i.e., “goodwill”) that the business has earned over the years rather than have build a similar business from scratch.

To illustrate my point, ask yourself how much it would have been worth to you to have started your business in the same location doing the same kind of work as someone else who had successfully run a similar operation there before you.  Further, ask yourself whether a new owner would have to work as hard you did to start a business like yours in the same location or market after you close your successful operations.

If a subsequent business will be much easier to start because your similar, successful business has just closed there, then your business probably has a valuable reputation it could transfer to a successor business and get you paid in the process.

Professional Services, Repair or Installation Services, etc.

But what if you truly ARE the business, for example, if your business performs services instead of selling or making goods?  Well, there’s value there too.

You should ask yourself:  Would it would hurt your business for your competitors to know detailed information about and have access to your customers, suppliers, or subcontractor relationships?  Do you have a particularly efficient or effective way of performing your service that your customers appreciate and that others would like to learn?  Have you advertised or do you receive client referrals from word of mouth or because they “recognize the name” of your business (even if it’s your own personal name)?  Do you get a lot of business through your website or because people look up your phone number?

If any of the above statements are true, your business likewise may have substantial value because of your hard work long after you are gone.  And that may be true even if you are the only person who currently works in your business and even customers think of you, personally, when they want your service done.

So, how do you cash in?

First off, you should determine whether you would prefer to sell internally to an existing or future key employee or whether you would prefer to list the business for sale to outsiders.  To help with these decisions, you should contact an attorney and your CPA, and also a business broker, if you decide to sell to an outsider–preferably, a couple of years before you want to exit the business.

If selling internally, your CPA may be able to help you determine the current value of your going concern or to refer you to a valuation expert.  The attorney will consult with you to help get your operations in order and work with your CPA plan the ownership transition from you to your employee the most effectively and while minimizing taxes on the deal.

If selling to an outsider, the broker and CPA may even be able to help get your profitability higher in anticipation of sale.  The attorney will help get your operations in order.  Once a buyer is identified, your attorney can help negotiate the transaction and help ensure the sales and any finance documents reflect your understanding of the arrangements between you.

Furthermore, planning ahead a few years can help maximize the value of your deal in another way, as well.  Even after you close the sale, it is fairly common for an outside buyer to want you to remain in the business for a year or so to train him or her in operations and/or to ensure a smooth transition in your customer’s minds from you to the buyer.  So, obviously, if you want to exit immediately and the buyer wants you to stay in the business for a time, you will receive a lower price in the sale, assuming you are able to sell at all.

Conclusion

This post is clearly a 30,000 foot view of the process of selling your business, but many people believe a sale will be far more difficult and time consuming than simply closing down.  And that’s usually not true.

Either way, you owe it to yourself to speak to your advisors about whether selling your business is right for you before just shutting it down.  Especially in this market where qualified, well-capitalized buyers far outnumber sellers, there could be a final check or even series of payments made to you after closing in return for the fairly minimal effort and expense involved.

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