Crash Course in ... Closing a business down

You're fighting to survive in the recession, but starting to wonder if the end is in sight for your business. What next?

by Alexander Garrett
Last Updated: 31 Aug 2010

Look ahead. Make sure you're aware of the medium to long-term picture, says Martin Austin, a director of business adviser Tenon. 'You need to know your long-term liabilities, such as leases or hire-purchase deals, and the timing of realisation of assets, to understand how the business is financed.'

Get expert help - fast. 'It's never premature to call in professional help,' says Malcolm Cohen, restructuring partner at accountants BDO Stoy Hayward. 'Advisers will at the very least be able to give you the comfort that you are doing the right things.'

Explore the options. Find out if the business could be sold to a trade buyer or a private equity team, or whether there's a management team that would be interested in buying. Restructuring and recovery specialists may be able to help you find a buyer. Alternative ways out could be to increase borrowing or re-capitalise the business.

Look out for red alerts. Three specific triggers mean you must contact a licensed insolvency practitioner, says Austin. 'The first is if you are unable to pay debts when they fall due; the second is if the company's liabilities are greater than its assets; the third is if you have not paid a CCJ or statutory demand from a creditor within 21 days.'

Consider emergency measures. If you know a big contract is around the corner that could save the business, consider where you might raise bridging finance till it comes through. A last-ditch measure is to obtain a loan by giving personal guarantees secured on your home or other assets, but you sacrifice your limited liability in doing so.

Play a straight bat. Make sure all your dealings are above board. 'Once you think there is a problem of solvency, you must treat all on a fair and equal basis,' says Cohen. 'And if you sell assets to yourself or your wife, this will be scrutinised at a later date. If, on the other hand, you are genuinely raising cash, that is the right thing to do.'

Know when the game's up. 'It's no crime to close a business down, but reckless trading can be a crime,' says Nick O'Reilly, president of R3, the association of business recovery professionals. 'If you've followed advice from an insolvency practitioner at the right time, that affords you some protection.'

Tell the world. Knowing how to communicate the news to all your stakeholders is one of the hardest aspects of going out of business. Telling suppliers or customers too early that you're in financial trouble could push the firm over the brink. But if you don't give anybody - including your employees - any warning, they may justifiably be bitter. The insolvency practitioner will advise on timing, but it may be better if you deliver it.

Do say: 'By taking positive action at the earliest time, we have the best chance of recovering part or all of the business.'

Don't say: 'We can't go out of business. I'm not even thinking about it.'

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