Business Exit Plans

Under ordinary circumstances, you would spend several months closing down a business. Unfortunately, the COVID-19 pandemic has made sure these are not ordinary times. As a result, circumstances may have dictated you close your business much faster than normal. While many business owners have done so and let the chips fall where they may, doing so could lead to a number of unexpected financial and legal problems that could last many years, making an already bad situation that much worse. If you are needing to close down your business, work closely with your CPA to make sure you complete the following steps.

Collect Your Outstanding Accounts Receivable

Preferably, you should do this before notifying customers you are going out of business. Though you probably won't be able to collect everything owed to you, try to get as much as possible.

Sell Off Your Inventory

Whether it's a going out of business sale or taking a tax write-off by donating it to charity, sell off your inventory. Since there are many new rules regarding how to take a personal deduction thanks to the CARES Act, seek out the advice of your CPA during this process.

Notify Your Creditors

Once you decide to close your business, don't procrastinate about notifying your creditors. From your suppliers and service providers to your lenders and utility companies, giving creditors quick notification will be important, since this can help limit the amount of time each creditor will have to seek payment on your debt.

Notify Your Customers

After you have notified your creditors, do the same with your customers. Since you don't know what the future holds, you always want to leave on good terms with your customers. To do so, notify them as soon as possible, and also try to live up to any previous contractual obligations. This should include returning any payments you have received for goods or services that were not delivered or rendered.

Terminate Your Lease

In most commercial leases, tenants are required to give landlords at least a 30-day notice, so you should always do this if possible. Depending on your individual situation, your landlord may give you a break and defer your final lease payment.

Notify and Pay Employees

While this may be the toughest thing you do from an emotional standpoint, you owe it to your employees to give them notice and pay them as soon as you can. Most likely, you will need at least one employee to work with you until the last day. If so, give them a bonus to reward them for their hard work and loyalty. Give all employees their final paychecks on their last day, and make sure the paychecks include the value of accrued vacation time. If you obtained a PPP Loan during the pandemic, special rules may apply, so talk this over with your CPA.

Liquidate Your Business Assets

Once you are closed, liquidate your company's assets quickly and in a manner that lets you recoup as much money as is reasonably possible. Once you do, you can begin settling debts with your creditors. Once you pay off a bill in full, always get a letter from your creditor verifying this, just in case questions arise later on.

Make Your Last State and Federal Payroll Deposits

Due to the pandemic, you can defer 50% of your employer portion of Social Security payroll taxes until 2022. To ensure you don't make any mistakes in doing so, put this in the hands of a trusted CPA.

Submit Sales Tax Forms

Along with your payroll deposits, submit your last sales tax forms and any funds due up to your closeout date. While doing so, remember to also cancel any credit cards and subscriptions associated with your business, and also close your company's bank account and other accounts as well.

Bulk Sales Laws

In some states, business owners must comply with bulk sales laws. Should you sell your inventory, these laws may require that you notify creditors within a specific timeframe, and that you publish a notice about the closing of your business in the newspaper.

Cancel Permits and Licenses

From your business license and seller's permit to your assumed business name, make sure you cancel any and all local and state permits and licenses.

File Your Tax Returns

This is where you will need to rely on the expertise of your CPA. Along with filing your final employment-related tax returns, which will be IRS Forms 940, 941, and your state tax withholding and wage reporting forms, file your final income tax return and check the box indicating it is your last return. If you sold any business assets, IRS Form 4797 or 8594 may also need to be filed.

Distribute Remaining Assets

If any assets remain, distribute these as required to you and other owners of the business.

Leave Contact Information

Prior to closing for good, always leave contact information with your employees, business contacts, and colleagues, just in case they need to get in touch with you later on.

Dissolve Your Business

As your last step, dissolve your business. Whether it was an LLC, corporation, or partnership, file the required forms that include a "certificate of dissolution."

Filing for Bankruptcy

In most cases, small business owners like yourself can close down their business without having to file for bankruptcy. However, if your debt load is very large or your creditors are determined to get every penny owed to them, bankruptcy may need to be seriously considered. If so, it is important to remember that filing for bankruptcy will be the first step in your closing down process, with the other steps mentioned here following later on.

Since closing down your business will be such a stressful time in your life, it may be hard for you to concentrate on each and every small detail. Rather than make a mistake along the way that could only exacerbate your financial and legal difficulties, consult with your CPA from start to finish when closing your business.

Are you thinking of selling your small business? Whether you’re selling it to raise cash for something else, because you want to get out of the business world or because it’s the right time to sell due its overwhelming success, it pays to consider the tax ramifications. Handling tax issues correctly when selling your small business will save you money and keep you secure from any potential problems with the tax man.

Negotiate Sales of Assets Independently

If you run the kind of business that has assets, it’s best if you negotiate the sale of assets separately. There are seven classes of assets that the IRS identifies for tax purposes. Some asset sales count as capital gains tax, while others, like inventory, are taxed as ordinary income. The seven asset classes can be found in the instructions for Form 8594. Since determining the asset class can be complicated, it’s best to let your CPA this part of your filing. Just be sure to consult with your CPA ahead of time so you know what kind of taxes you might incur based on the type of asset sale. You may just find that it pays better to retain certain assets or to let others go that you had planned to keep.

Buy Out Partners First

If you have a business partner, selling the business as a partners will be much more complicated than if either one of you sells as a full owner. If you buy out your partner beforehand (or let them buy you out), you’ll extricate yourself from their tax filing. That way, if your ex-partner comes under scrutiny from the IRS for any reason, any time in the future, you won’t be pulled into the situation.

Consider Reinvesting

If you’ve already consulted with your CPA and it looks like you’re going to take a big hit by selling, consider reinvesting. There are ways to shift your interest by investing in one of the hundreds of Opportunity Zones scattered across the U.S. A Qualified Opportunity Zone (QOZ) is an area that has been identified by the government as economically distressed. Those who invest in these areas are entitled to preferential tax treatment. The way it might work is if you reinvest the gains from the sale of your small business within 180 days. It’s a tax deferral, not tax avoidance. You would need to recognize the gain by December, 31, 2026, or sooner if you sell the new asset prior to that date. Your CPA can provide you with details on this option.

Consider Donations

If you’re in a position where you don’t need the profits but you do need the deductions, consider donations of some of your business assets. As long as you get receipts, you can take valuable deductions on donated items like:

• Company vehicles
• Large-format printers
• Office furniture
• Trade equipment
• Building materials

Non-profits, trade schools and community action centers can all use these kinds of donated items to further their mission. It might be better for you, tax-wise, to donate rather than pay taxes on the sale of these assets.

Be Prepared For Depreciation Recapture

Your CPA likely amortized certain purchases or calculated for depreciation on certain assets. But when you sell your small business, you’ll be liable for depreciation recapture, which will be taxed as ordinary income. The gain is taxed according to the table of depreciation that your CPA used, and is affected by how much you bought it for, how much depreciation you already claimed and how much you sold it for.

Consider an Installment Sale

If you find yourself in a tough position where you can’t afford the tax bill associated with the sale of your small business, consider an installment sale. An installment sale spreads out your profit from the sale over time, which also spreads out your tax liability. It gives your buyer more time to pay, gives you more time to organize your sale and allows you some breathing room as far as paying the tax man. Keep in mind that an installment sale can only be done if the sale results in a profit; not a loss. Also, payments for business assets are not eligible for installment sale treatment. Your CPA will help if you decide to do an installment sale.

Don’t Try To Do It Alone

The final tax advice when selling your small business is, don’t try to do it alone. Whatever you did when you bought the business or built it from the ground up, you need help now. Whether you bootstrapped the whole thing, or bought the business with cryptocurrency off of a website, that strategy won’t work now that you’re planning to sell. You absolutely need the help of a CPA to sell your business. You need to protect yourself financially, protect the transaction from fraud, and protect yourself and your family from issues with the IRS. Your CPA will be there to help you verify the authenticity of your buyer, review various methods that could help you reduce your tax liability and even help you decide what to do with the funds once they’re received from the buyer. If you have shares of stock involved, it’s even more important to involve your CPA in your decision to sell as early as you can. It’s possible that you may also need to enlist the services of a corporate attorney, but you’ll definitely need a CPA at a minimum.

Selling your small business can be the start of something new, the end of a long journey or the culmination of a dream. Don’t let taxes sully the experience for you. Work closely with your CPA to review all the tax implications of your sale so that you’re in the best position to move on to the next phase of your life.

When you started your business, you probably didn’t think about its end. The first few months, years, or decades, your focus was likely growing your sales, developing new products or services, and building your reputation in the community. But, at some point, you may start wondering if it’s time to sell.

Walking away from a business into which your poured your time and energy can be a tough call. Paying attention to these signs, and bringing the right professionals onboard to help with the sale, can ensure a smooth ending.

Signs it’s Time To Sell

Are you snapping back at customers? Having to drag yourself out of bed in the morning, reluctant to go to work? While owning a small business isn’t necessarily “fun,” you should find it rewarding and emotionally fulfilling. A lack of engagement will communicate itself to your clients, and could harm your business.

Conversely, your business could be doing quite well. Sales are booming, employees are satisfied, and clients give you rave reviews. If you think that your business’ valuation (see below) would give you a healthy profit, it might be time to sell. It’s much better to go out on a high note than to be forced to sell a failing business.

That said, if sales and performance have been slipping, and your heart just isn’t in it anymore, you might want to exit before things get worse. If a sale would recoup your initial investment, or prevent a bankruptcy or other adverse credit event, it could be time to exit. Be honest with yourself about its long-term prospects and whether or not a downturn is temporary or permanent.

Other factors, such as being close to retirement age or health concerns, could indicate that it might be time to exit. Unless you have a partner, relative, or employee who has indicated their willingness to take over, your options are to either shutter your doors, or sell. Even if you just shut the business down, you’ll have responsibilities.

For whatever reasons you decide it’s time to sell, you can’t just turn off the lights and lock the doors. There will be legal and financial processes that you must follow.

You’ve Decided to Sell, Now What?

The first order of selling a business is to get organized. A valuation specialist, buyers, and banks, will need detailed information about your business’ operations and financials.

Bring in Your Accountant

Talk to your accountant about preparing audited financial statements prior to starting the sale process. They may suggest an audit of accounts receivable if you have a large balance that would be included in the sale. It could be necessary to perform a detailed inventory of finished products and their components.

Use a Business Valuation Specialist

To appropriately value your business, bring in an outside advisor. Your accountant may offer this service, but if not, they can likely recommend a business valuation specialist. This expert will look at items such as:

• The value of inventory on hand
• The value of fixed assets such as buildings and equipment
• The amount of accounts receivable and payable
• Your company’s standing in the community and industry
• The value of any patents or intellectual property

As well as items related to your business’ history, such as sales growth (or decline). This is by no means a comprehensive list, and will vary significantly depending on if you operate in a goods-based or services-based field. The report they prepare will be given to any potential interested buyers, a bank who may finance a purchase loan, or other stakeholders (such as in a divorce).

Involve a Lawyer

Much of the work that a lawyer performed when you first opened must now be unwound. A partnership should be dissolved, you must deal with business registration and licenses, closing bank accounts and credit cards, and more. Failing to take care of any of these tasks could lead to fine and penalties.

For example, if the state thinks that your business still exists and you do not file taxes, they could fine you. Your lawyer and accountant will likely work together to ensure you’ve met all legal and tax-related requirements.

You should also have a lawyer draw up any sales or dissolution agreement. This document will contain the terms of the sale, payment or financing information if the buyer will continue making payments to you, and the legal obligations of both parties.

It is important to involve a professional in this process, as inaccurate or incomplete documents could open you to liability from the business’s ongoing obligations. As well, if you are financing the buyer’s purchase, you will need enforceable rights should they default.

Selling a business is an important decision, and if you decide to take the step you will need to hire the right professionals to help. A good business valuation specialist could get you more for the sale than you expected, a lawyer will protect your assets, and having an accountant prepare and sign off on your financials could reassure a lender. When you make the decision to sell, take your time to get it right.

Going into business with a partner can be a great way to spread risk, to draw on each other’s skill sets, and to combine resources to grow your business. But, at some point, the partnership may not be serving either you or the business well. It might be time to dissolve it.

Dissolving a partnership is a delicate affair. It should be done in a respectful but efficient manner, and in a way that won’t hurt the surviving business. 

Signs that it’s Time to Dissolve a Partnership

If you’re unsure if it’s time to end your partnership, you may be picking up on some of these signs.

The first would be a mismatch between partners. A lack of fit can take the form of different business goals or vision for the business’ future. It could also be more serious, such as a clash over ethics or work ethic. If you’re noticing signs that the fit may not be there, and attempts to address them with your partner have failed, it could be time to split.

Another sign is if your partner acts in ways which damage the company’s reputation. If they make promises that they don’t or can’t keep, particularly over-promising to a customer, that’s an issue. If you catch them in an outright lie, or their behavior in their private life is intruding into work, again it could be time to move on.

It’s essential to address both of these issues quickly and take swift action before a partner does too much damage to the business. You don’t want to lose customers or have to rebuild your public reputation.

Do you find communication or accountability to be lacking? Your partner could have mentally checked out. If you’re putting in a lot of hours and they’ve forgotten the alarm code, their heart may no longer be in the business. A disaffected partner can hurt you as much as an unethical one.

If they did over-promise to a customer, did you two discuss it and did they accept responsibility? Can they take the blame, and do their best to fix the problem. Or were they full of excuses? Often your gut will tell you that they’re no longer an asset.

Hopefully, you can broach the subject of splitting up respectfully and with tact. They may even be relieved to be offered an exit strategy.  Make sure you talk to them when you’re calm, and try to avoid name-calling and emotional accusations. Once you know that it’s time to end the relationship you want to exit as smoothly as possible.

Making a Plan for your Business’s Future

Unless it’s a situation where the partner must go now, you’ll have some time to plan.

Before your partner packs up their desk, make a list of duties they’ve been handling. Try to get a good grasp on their responsibilities and what they’ve been contributing to the business. Then decide which of those items you can manage yourself, which can be done by other employees, or if you’ll need to hire someone.

If you want business to continue as usual, and are worried about your former partner poaching clients, you can specify a non-compete in your agreement. Or you can agree to divide those clients in half. What you’ll have to take into account depends on your business. In a service business, clients may be critical to keeping it running. In an inventory-heavy business, you may have to buy out your partner’s half of the assets.

Before splitting up the business, have a very clear picture of what it will cost you and how it could set you back financially for a while. Once you have a grasp on what will be involved, make a detailed plan.

Your plan should include a timeline, with deadlines, of when milestones must be done. Include tasks along the timeline and indicate who will perform them – plan for attorney fees, independent evaluation fees, accounting fees, and more. There will also be forms to file with the state and other authorities.

As much as you may want your partner gone, be realistic about this timeline. You will have to perform all the tasks of dissolving the partnership while continuing to run the business. And you might not be able to count on your former partner continuing to help or contribute.

Alternately, the future may involve selling the business and splitting the proceeds.  In some cases, this could be the simpler solution and would leave you free to build an entirely new enterprise.

How to Legally Dissolve a Partnership

When you formed the partnership, you likely had to file for an LLC or S-Corp. Depending on where you’re located, you might have filed state entity documents or applied for business licenses. If you’re not buying out your partner, you’ll have to take the following steps.

Pay all of the business’ debts and distribute all its assets between you in an agreed-upon manner. File a form with the state to dissolve your legal business standing and notify all customers, suppliers, and creditors. The state’s website for the Secretary of State will have the information you need.

There may be a period during which they can come forward and lay claim to the business’ assets for unpaid debt, during which you’re required to keep accounts. If you had employees, pay them all in full and make sure that you’ve filed all applicable payroll taxes. Talk with your accountant about filing any partial-year business taxes.

Remember that ignorance of the law is no excuse in the eyes of law, i.e., you can’t claim you didn’t know you had to pay taxes before closing your business to avoid tax penalties. Given the complicated steps involved, you might need to bring in experts.

When to Bring in the Experts

In a buyout situation, someone will need to evaluate your assets. Whether your assets include company cars, a building, or intellectual property, your partner will want to be compensated for their half of them. For smaller businesses, your accountant may be able to do this for you using your existing list of capital assets. Larger, more complex organizations will likely need to bring in an appraisal expert.

If you didn’t have a partnership agreement drawn up when you first went into business, you might have to seek legal counsel or mediation.  If you end up in court, it can become expensive. Informal partnerships may be easy to start but can be more difficult to end.

Legal liability, tax issues, and lawsuits can all be the result of an improperly ended partnership. Take the time to do it right to protect you, and your business, in the future.

What is an exit strategy?

As this definition explains: an exit strategy is a method by which entrepreneurs and investors, especially those that have invested large sums of money in startup companies, transfer ownership of their business to a third party, or by which they recoup money invested in the business. Common exit strategies include being acquired by another company, the sale of equity, or a management or employee buyout.

In truth, creating an exit strategy is not a sign of a lack of confidence and can actually help strengthen your chances for success. An exit strategy looks at the signs of a business failure, including the point of no return, which can help you avoid closing your doors too soon and knowing exactly when to stop throwing good money after bad. If you get an offer for your business, an exit strategy can help you determine its worth.

Exit Strategy

In addition, as Small Business notes, if your business doesn’t work out, you can’t just close the doors and walk away. You’ll have personal and legal responsibilities to take care of that will be much easier to take care of if you know what they are in advance. An exit strategy is a plan that helps you go through the procedures necessary for shutting down a business. This includes a list of the government agencies you’ll need to contact, papers you’ll need to file, fees you’ll need to pay and other things you’ll need to take care of as you shut your doors and afterward.

Who needs an exit strategy?

As this report also observes, anyone seeking venture capital funding or angel investment, must have a clear exit strategy planned in advance.

Even if you’re a small company, it’s a good idea to plan ahead and to actually have an idea of how you will transfer ownership of the business down the line, sell the business, or make a return on your investment.

Types of exit strategies

This list should give you an idea of common types of exit strategies, as explained by BPlan:

• Acquisition

The acquisition is often known as a “merger and acquisition.” This is because, when a company decides to sell itself to another company, the buyer will often incorporate or merge the services of that company into their own product or service offerings.

• Initial Public Offering (IPO)

This exit strategy is not suited to most small businesses, primarily because it means convincing both investors and Wall Street analysts that stock in your business will be worth something to the general public.

• Management buyout

If you’ve built a business whose legacy you want to see continued long after you’re gone, you may want to consider turning to your employees. That’s right—not only will they have a good idea of how things are run already, but they will have intimate knowledge regarding company culture, corporate goals, and a pre-existing determination to make it work.

• Family succession

On that note, if your family has been brought up with an intimate knowledge and understanding of your business, they may well be the best people to pass things on to.

• Liquidation

For small businesses, liquidation is a common exit strategy. It’s one of the fastest ways to close a business and may sometimes be the only option in cases where the operation of the business is dependent solely upon one individual, where family members are not interested in or capable of taking over, and where bankruptcy is close at hand.

The Best Exit Strategy

Finally, as The Balance notes, the best exit strategy is the one that best fits your business and your personal goals. Decide first what you want to walk away with. If it's just money, an exit strategy such as selling on the open market or to another business may be the best pick. If your legacy and seeing the small business you built continue are important to you, then family succession or selling to employees might be best for you.

It cannot be over-emphasized how important it is to get started on your exit strategy sooner rather than later.

The foregoing information does not constitute advice of any sort what so ever. Consult with your own legal and tax professionals before making any move. The impact of your exit strategy is strategic.