Closing your business
This simply involves closing the doors, selling off all the assets of the business, paying off all business debts and creditors. Whatever remains goes to the owners. This option is generally used when the business is not profitable and cannot continue to trade or the owner does not wish to sell it.
If the business is a successful one then the owner will obtain far better value from the business by selling it off to a new owner so that he is able to obtain not just the value of the assets less the liabilities, but also value of the goodwill, which is probably the highest value in the whole price of the business.
Time to close
In due course, most business owners reach a stage in their business life where they consider it is time to exit from their business.
There are many reasons for this. Some include the following:
- Moving out of the area.
- Time to retire.
- Time for a change in direction.
- An offer received for the business – too good to refuse.
- The business becoming hard going.
- More time for family is required.
- Things not going to well – time to sell.
- Time for other members of family to carry the business on.
- The loss of key managers and staff means it will become too hard to continue the business alone.
- The business is in a good position financially and therefore by selling immediately should attract the best value.
The conclusion is that there are many reasons for exiting. Note that exiting does not necessarily mean that your business has been unsuccessful although.
You have to appreciate that business is simply business – it is not what living is all about. If you don’t balance your life between business, family and personal free time – you will be the loser.
Close, sell or merge
There are 6 ways to exit from your business.
These are as follows:
- Close the business. Here the business is closed, with assets sold and all bills paid. Closing can be due to any number of reasons, as outlined above.
- Sell the business. Here the business is sold as a going concern – that is, it is sold while still operating and a new owner can step in and carry it on as usual.
- Pass it on. Here the business is passed on to other family members or associates who will continue the operation.
- Merge with others. There may be good reasons to join up your business with someone else. It could result in a reduced workload for you and increased profitability for you and the other party.
- Bankruptcy. Here the business is not profitable and unable to pay its debts. It is therefore forced to file for bankruptcy. A bankruptcy will only apply to businesses, not companies.
- Liquidation. Here the business is run under a company and is unable to continue because of its debts. Also, it may not be able to continue because of management disagreements – it may be determined that the best way to resolve the situation is to liquidate or close up the company.
Business facing insolvency
If you are not be able to pay your tax on time because of temporary financial difficulties, you can see IRD about instalment arrangements. However, if your financial difficulties are more serious IRD may need to consider other methods of payment or relief.
When a person in business or in partnership (with unlimited liability) is unable to pay their debts when they become due, they are said to be insolvent. As soon as someone is unable to pay their debts they are technically insolvent, even if they have more assets than liabilities. Unless they correct the situation that insolvency will move on to either bankruptcy or liquidation, depending on whether it is a company or not.
There are no hard and fast rules when working out whether a business is insolvent or not. In simple terms, insolvency is when you don’t have the cash to pay your bills when they fall due. As soon as you suspect that your business is insolvent you have to immediately take action to try and resolve the situation, which could mean either collecting money owing to the business, arranging a loan, or selling some assets.
Bankruptcy only applies to individuals in business
Bankruptcy is a process, laid down by law, which deals with debts a person cannot pay. It is a term used for the formal procedure for individuals who are declared by the court as insolvent (i.e. they do not have sufficient funds to pay their debts).
Bankruptcy only applies to people, either as individuals not in business, or individuals in business as sole traders or partnerships. Bankruptcy does not apply to companies, as a company is a legal entity (or a legal person) in the eyes of the law, so when they cannot pay their debts, they go into a process known as liquidation.
A person can become bankrupt even if they are in business as a sole trader, or in a partnership, or some other structure other than a company, because the law does not look on these structures as separate entities in the eyes of the law. Therefore, the liability for paying those debts remains with the individual who owns the business.
Time to exit
In due course, most business owners reach the stage in their business life where they consider exiting from their business.
The reasons are varied.
Some include the following:
- It’s time to have a change in direction.
- Moving out of the area.
- It’s time for retirement.
- It’s time for other family members to take over the business.
- Things haven’t been going well and you want to sell out.
- You’ve received an offer for your business too good to refuse.
- You want to cash in your life’s work and put resources into other things.
- You, or a family member, have been ill and you want to make a change.
- Your marriage or family situation has altered (e.g. divorce).
- You’re finding the business hard going because of the competition.
- You have lost key managers and staff and are not prepared to look for replacements.
- Your business is at its peak and therefore, with the current high value, it’s time to sell and get the best return.
- Your business has failed and you need to put it into liquidation or bankruptcy.
- You want to do other things with your life as you see old age approaching.
- You want to take that overseas cruise or world trip before it’s too late.
- You want to pass some value from your hard work on to your children, or to a good cause.
- You may feel that you are simply burnt out and too tired to carry on, so it’s time to have a break.
Why businesses fail
Unfortunately, not every business will succeed. In fact, the majority of businesses will fail and will not be operating after a few years. The statistics are dour because they point to a failure rate of over 70% for new businesses within the first 3 – 5 years. The reasons why businesses fail are many.
Some reasons are:
- Lack of business and financial knowledge.
- Poor management.
- Failure to plan.
- Lack of understanding of the principles of costing and pricing.
- Failure to monitor the cash situation.
- Running with too much debt.
- Failing to control growth.
- Poor record keeping.
- Incorrect financial reporting.
- Lack of productivity from employees.
- Excessive competition.
- Failure to produce periodic financial statements.
- Failure to stay with the vision as contained in the business plan.
- Loss of enthusiasm and desire to succeed.
- Failure to listen to professional advice.