Business owners often invest all their time and energy into starting a business but fail to consider how they will eventually exit the business. How you exit your business is just as important as how you start it. It requires thoughtful planning, and may take weeks to years, depending on the size of the organization, the reasons for exiting, and whether any disputes have arisen.
The process of exiting a business generally involves the following steps:
1. Reach Agreement and Obtain Authorization from Owners to Dissolve and/or Transfer Your Business Entity. Agreement and authorization to dissolve or transfer a business must be established under some acceptable, governing set of rules, such as the bylaws or partnership agreement. It is best to settle disputes quickly and document any terms and conditions that apply.
2. Designate a Leader and Organize a Team. Authority and roles should be clarified. The owner may be the only team member for a home-based business. For a large entity, however, the team may consist of the executive management team and important functional managers whose expertise is not represented: finance, human resources, legal. This group should be as small as possible for efficiency and large enough to include the expertise required to cover the basic planning issues.
3. Engage Professionals and Consultants as Team Members. For most small businesses, this group consists of an attorney, CPA, and a business broker or valuation expert. Professional expertise and advice in these areas will contribute to a smooth process and improve the outcome. These professionals should perform a thorough review of business and identify problem areas. Areas to be reviewed include: human resources, finance and accounting, legal, operations, facilities, administration, owner responsibilities, marketing and public relations, and the company website.
4. Prepare a List of Assets and Perform a Physical Inventory. The inventory is very important input to several activities. It is used to establish the value of the business, make decisions, and manage disposition of assets, and it becomes the basis for tax calculations and tax returns. Perform a valuation of the business. It is difficult to make prudent decisions without knowing the market value of the business and its assets.
5. Prepare a Detailed Plan and Assign Responsibilities. Everyone involved needs to know what must be accomplished and what their role is in executing the plan.
6. Develop a Schedule for Implementation. A schedule provides the ability to measure progress, estimate completion of critical steps, and project the end of the process. The schedule is also extremely useful for managing cash flow during this uncertain time.
7. Release Announcements and Notices. This step is about timing and legal notice. At some point, interested parties must know what is happening: the market, competitors, customers, vendors and suppliers, professional service providers, consultants, trade groups, employees, media, creditors, and contractors. The notice should designate an official point of contact for questions or inquiries.
8. Implement the Plan. This is where momentum and activity builds. Things happen very quickly. Without the planning steps, an important degree of control is lost. When that happens, net value is usually decreased in some substantial way.
9. Conclude or Transfer Contract Obligations. This process may require approval from contracting parties, and involve negotiation of final terms. Office, car, and equipment leases need to be reviewed, addressed, and terminated. The timing of termination dates for insurance contracts and benefit plans are very important to all involved.
10. Close or Transfer Operations. The timing of this step is important. There is a time when manufacturing or production must cease, retail sales must end, and human resources are pared down, or responsibility for each of these functions is transferred. Each affect cash flow and net value dramatically. Security and maintenance services may be an important consideration from this point on.
11. Dispose of and Transfer Assets. This is an important tax event. Insurance coverage can be reduced or eliminated. Settle accounts payable and debt obligations.
12. Prepare Final Financial Statements and Tax Returns. Final financial statements for the business are important to establish the tax implications for assets, gains, and losses conveyed to the owners or other involved parties.
13. File Articles of Dissolution. State licensing departments require a formal filing to terminate the legal and tax status of the business. Examples are articles of dissolution, certificates of withdrawal, and cancellation certificates. This process also results in a review of tax liabilities and issuance of a tax clearance notice or certificate.
14. Prepare and Issue Special Filings, Notices, Informational Returns, and Taxes. To develop a checklist, retrace your steps taken during startup. Generally, some action is required with all federal and stage registration, taxing, and licensing agencies contacted to start the business. Final submittal of payroll, unemployment, industrial insurance, and other business tax returns must indicate that the business status is closed or changed.
15. Receive Tax Clearance Notice. File in financial records.
16. Close Bank Account.
17. Store Business Records. These records should be kept for at least seven years.
The exact process of getting out of the business, the timing of events, and the tasks to be completed, will vary depending on the type and complexity of the business. The reasons for leaving the business will be different from owner to owner, so the circumstances of each individual situation will necessarily be unique. Planning, and consulting professionals with the right expertise, are therefore crucial to a successful exit.