3 Questions: Where to Start If You Are Closing Your Business
Just closing the door isn’t enough all the time.
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For some reason, my cases on a weekly basis come in bundles. This week, we had a lot of consultations regarding closing up a business. I never wish this upon anyone, but sometimes we have to shut down a business to start a new chapter in our lives. Here are three questions you should ask yourself about how you may want to go about shutting your business down.
1. Should I just walk away?
From a legal perspective, walking away from a business can have consequences. Most companies should have bylaws or an operating agreement that discusses what should be done if the business needs to dissolve itself. The bylaws or operating agreement discusses what creditors get paid first, then capital contributions, and then shareholder (corporation) or membership (limited liability company) interests. You must also consider chapter 607 and chapter 608 of the Florida Statutes. They have specific provisions on the effect of shutting down your business and your obligations to creditors.
There are so many business models and so many different sizes of businesses that whether you should walk away depends largely on: (1) how many other owners are involved in your business; and (2) what are your obligations to suppliers and landlords. For co-owners, there is always one person that thinks the business is worth a lot of money and another that thinks it is not worth anything.
As to third parties/creditors, you need to check your contracts to see if you are personally liable. One of the major issues we see is that you walk away from a business where you have a lease and the landlord comes after you personally for the entire rent.
In other words, walking away can leave you stuck with the business unless you prepare and take care of all your financial obligations.
2. Should I sell the business?
In my opinion, this is the best way to get out of a business assuming there is a market for your business. There are some businesses that are simply not ripe for the market. For example, if you are in a personal service industry where you are the business, you will have a tough time selling your business. In my small law firm, most of my clients know me, trust me, have my cellular phone, and my email. So my business would be tough to sell.
A real estate agent or a business coach would have similar problems. However, if you are in the business of selling widgets or, sometimes, in the food industry, there may be a market for your business because the customers are after a product rather than a person.
If you can sell your business, make sure the buyer assumes all of your liabilities. More importantly, make sure your creditors, suppliers, and/or landlords release you from liability. I recently litigated a case where my client owned a deli 10 years ago, but he was not released from the lease, and the fourth purchaser of the business defaulted. The landlord sued my client ten years later because he was never released from the lease.
3. Is Bankruptcy an option?
It was a tough week in the bankruptcy world. What famous bankruptcy judge passed away recently? He was out of the Middle District of Florida, which covers most of the Tampa Bay region. Bonus question: How did he get to America? That is an amazing story.
There are exceptions for particular industries, but generally a business can file for bankruptcy under Chapter 7 or Chapter 11 of the Bankruptcy Code. A Chapter 7 is a liquidation of the business assets. A Chapter 7 will liquidate all of the business assets, pay off the creditors to the extent possible, and then the business would be shut down.
If you want to save your small business, a Chapter 11 will attempt to make payment plans and allow you stay in business if you can meet the reorganization terms. Your business will propose a plan that separates creditors into an order of priority.
Some priorities are based on federal law and some are based on what the business proposes as its own priorities. You must consider mortgages and commercial landlord liens as well. Oftentimes you can even get additional financing during the bankruptcy to keep the business going. However, a Chapter 11 can require a significant expenditure of legal and other fees, so it is best to explore this option before your business on its last legs.
However, if you simply want to close up shop, you have creditors, and you want to discharge those debts, a Chapter 7 is the better idea to discuss with your attorney. Please note that a Chapter 7 will not discharge your personal guarantees or obligations.
As always, it is my pleasure to give you three questions to consider in your situation. Perhaps a business coach, an accountant, or some other profession could respond with THREE answers to help save a business that is in financial distress. That is, unfortunately, beyond the legal corner’s scope of non-legal weekly legal input.