Every business owner dreams of selling their business for top dollar before quietly sailing off to retirement. Unfortunately, not every business can be sold. A number of factors plays into a business’s ability to successfully close the deal after going on the market, and to put it frankly, a large percentage of businesses don’t have the components to close the deal.
That leaves the lingering question, “What do you do with a business that can’t be sold?”
If a business can’t be sold, or the owner doesn’t want to put the time and energy into turning it around, then there are technically two options to “exit.” That being said, at Exit Consulting Group, we only advise one of them, leaving the second option as a last resort or “nuclear option.”
For an owner who wants to close the business without selling or converting to an annuity, the best option boils down to liquidation. In this case, we typically see an operational business that is either starting to lose money or making minimal profits. They either don’t have debt or a small amount that can be covered through selling off assets.
The main factors are when a business owner is too integrated into the operations and too essential to the business. When they are ready to be done and retire, the business isn’t marketable without them at the helm.
Here we sell off all the assets of the business, including real estate. Before formally closing the business, we need to pay off any remaining debts and taxes on the sale of the supplies and any property. In the process of closing the business, there will be a series of often-overlooked steps, such as audits on workers’ compensation, general liability, and payroll. Once all the accounts are closed, debts settled, and assets sold off, the owner can walk away.
Behold the aforementioned “nuclear option.” Before diving too far into the specifics, it’s important to note that I am not a lawyer. Despite working with business owners to employ every avenue to avoid this option, at ECG we have helped business owners navigate bankruptcy as a last resort.
Because bankruptcy lands you in shark-infested waters with the IRS just waiting to attack, we bring in experienced bankruptcy attorneys to help navigate you to shore. Know that when you go swimming with sharks, you will be bitten. The question is not if they will, but whether or not the bite will be fatal.
Our goal is to minimize the damage.
So when does the nuclear option make sense? We’ve all seen dozens of businesses go bankrupt again and again. In fact, Radio Shack is going bankrupt for the second time in two years.
A company pursuing this option has a mounting pile of debt that they will never be able to payoff.
To give a brief glimpse, and generalized view, into an overly complicated and legalistic situation, there are three different types of bankruptcy: Chapter 7, 11 and 13. Chapter 7 and 13 bankruptcies are the two main ones.
In a Chapter 7 bankruptcy, the business liquidates (sells) their assets to pay off debts. In a Chapter 13 bankruptcy, you undergo court mandated credit counseling and create a repayment plan.
A bankruptcy virtually devastates your financial abilities moving forward. To start, your credit is devastated for seven years. Owners undergoing a Chapter 7 must sell off all of their business assets to pay debtors. Most instances allow owners to keep personal items, but oftentimes the bankruptcy swallows up cars.
Sometimes individuals going through this process try to salvage some of their assets or create a cash landing pad by selling property or equipment under the table. That falls into strict violation of the bankruptcy, landing the owner in personal legal trouble with the IRS.
Navigating Your Exit Options
Obviously, these two options are not the ideal exit. Unfortunately, for some businesses, they become the only options when business starts to falter or an owner attempts to sail a sinking ship for too long.
At Exit Consulting Group, we work with businesses to identify and achieve the best exit strategy. The earlier you start planning your exit, the better outcome we can achieve.
Even if the business might be in a slump now, we have resources to help right the ship, making it a profitable asset to take to market down the road. The key is having the time to do to that.