This is not the first or last time you will hear: COVID-19 changed everything. It has specifically impacted business owners who are trying to figure out how their businesses will survive disruptions of the past few years. With such uncertainty it was difficult to see past the most immediate problems. Now, it is time to think about the issues that were put on the back burner. Business succession may be one of the most critical issues and some options may include:
- Sell the business.
- Choose a successor to transition the business.
- File for bankruptcy.
- Close the business.
Making the best decision is not straightforward, and the answer may be different than prior to the pandemic. Business owners should conduct a careful analysis of the situation before moving forward. For example, company leaders should know the answers to questions like these:
- How well was the business able to manage cash flow during the pandemic? Maintaining adequate cash flow during such challenging times is a good indication of the company’s financial health.
- Will pandemic loans or grants be fully or partially forgiven?
- Were supply chain issues resolved? How? For instance, were there new suppliers?
- How were sales/margins affected, and are they likely to recover/continue to grow/continue to decline?
- Has the company changed its vision and mission? If so, how?
- Do you understand the company’s fixed and one-time expenses? For example, is the company paying rent for idle office space, and if so, how can that expense be mitigated?
- Has any key talent been lost? How difficult was it/will it be to replace it?
- Has the business had to respond to other disruptions, such as natural disasters?
- Are the company’s leaders preparing to retire? What are their timelines?
- Is there a next generation of leaders prepared to take the reins, or will the business have to look outside the company for a solution?
- How has the business’ valuation been affected? The answer will depend, in part, on how the industry/service area was impacted by the pandemic and whether the business was able to expand to an area other than its core business (e.g., a leather handbag manufacturer added a vegan handbag line).
Once this analysis is complete, it is time to make some decisions.
Sell the Business
If selling the business is the best solution, consult a professional to do a business valuation. The valuation process will use either the income approach (review projected revenue and accounts for potential risks), the market approach (a comparison of the value of other similar businesses that have recently sold) or the assets approach (subtract the business’ total liabilities from its total assets). Keep in mind that the value of the business may be lower than it was before the pandemic because business valuations are based on historical data.
Once a buyer is located, there needs to be a sales agreement. Professional advice is necessary to be sure the agreement is adequate and comprehensive.
Successor to Transition the Business
If ownership of the business is being transferred to another person or entity, the transaction can be structured as an outright sale, a gradual sale or a lease agreement. There are tax consequences for each of these options. The business type and whether the transition is to another family member may also impact how the sale is structured.
Keep in mind that there are other strategies that fall under this option, including employee stock ownership plans and employee buyouts.
Business owners may choose to file for bankruptcy, or they may simply close their doors.
If bankruptcy is the option that is chosen, the business owners should consult a professional to be sure they understand the implications of their choices, including the type of bankruptcy and types of debt that are and are not discharged. Every business is different and has its own unique factors that need to be evaluated.
Close the Business
Closing a business comes with its own set of issues. If the business is owned by a sole proprietor, the process is relatively simple. However, if the business is organized as any type of partnership or corporation, the process must follow the process set out in the company’s articles of organization. In addition, to formally close, the business will need to take these actions:
- File dissolution documents with the state.
- Cancel the EIN, registrations, permits, licenses, etc.
- Follow federal and state employment and labor laws.
- Have a plan for liquidating assets.
- Understand and comply with any laws, rules or regulations for completing work in progress.
- Be familiar with which records must be legally maintained and for how long.
Your decisions may have long-term implications. It is important to consult with qualified legal and financial advice before proceeding.