Should You Close Your Small Business?
If you’re currently grappling with the prospect of closing your small business, you’re not alone. As the Covid-19 pandemic continues to weigh heavily on the world economy, a record number of small business owners are either considering or have already closed their doors.
It’s an incredibly tough call to make but knowing when to exit your business can help shield you from unnecessary personal struggles or business debts. Alternatively, taking stock of your business situation might reveal an unexpected strategy for reorganizing or starting over.
In the end, only you know if you have the emotional and financial resources to keep your business going—but the following questions and considerations can serve as a starting point.
1. Honestly Assess Your Finances
If your business has been operating on a slim margin (or at a loss) these past months, you’ve likely been keeping an extremely close eye on your books. Even so—once you’ve reached a decision point with your business—you’ll want to carefully (re)assess your revenue, cash flow, expenses, and potential future income. This will help you pinpoint what your business needs and whether it can ride out the remainder of this crisis.
What are your current expenses?
Analyzing your business’s financial situation begins with taking a look at your current and future expenses. You’ll want to decide which expenses are essential, and which can be dropped, reduced, or postponed.
For example, if commercial rent is one of your largest expenses, you might review your lease and reach out to your landlord. Your landlord may be willing to reduce your payments, postpone your payments, or renegotiate the terms of your lease. If your landlord won’t budge, however, this may be a deciding factor in whether you can remain in your business location (without somehow increasing your revenue).
Payroll is typically another big expense. If you’ve already reduced your staff but are still having difficulty making payroll, you might need to scale down further, go into hibernation mode (discussed in the next section), or consider the possibility of closing your business for good.
You might also have the option to temporarily reduce your operating expenses by deferring your federal tax payments. The IRS’s Covid-19 Business Tax Relief Tool can quickly tell you whether your business qualifies for any tax assistance.
If you don’t have a bookkeeper, using a cash flow tool like QuickBooks can help you evaluate your future income and expenses over the next 30, 60, and 90 days and determine if your business has the ability to stay afloat.
What is your cash burn rate?
If you’ve been operating at a loss for a few months, you’ll want to look closely at your cash burn rate. Cash burn rate (or simply burn rate) is a measure of how quickly your company is spending its cash reserves. The length of time that you can continue to spend cash at your current burn rate (assuming your revenue and burn rate remain the same) is your cash runway.
You can find your burn rate and cash runway with a couple of fairly simple formulas (below), or by using this free burn rate calculator.
Burn Rate = (Starting Balance – Ending Balance) / Number of Months
Cash Runway = Cash Reserves / Burn Rate
If your business is spending much more than it is earning for an extended period of time, you’ll likely deplete your business’s financial resources. One option is to define a financial threshold that you don’t want to cross. If your business reaches or nears that critical point, then you’ll know it’s time to either close up shop or put your business in “hibernation mode” (both discussed in separate sections below).
How much of your money are you putting into the business?
Countless business owners float their businesses through difficult times by using their savings or credit cards. While not desirable, this situation is sometimes unavoidable. However, you’ll need to consider carefully if funneling personal funds into your business will put your financial future in jeopardy. Making sound financial decisions now will make it easier to start your next venture.
Here are a few general tips:
- Before taking on a business loan, make sure you’ll be able to repay it if your revenue takes longer than expected to rebound.
- Don’t deplete your personal or retirement savings or take on high-interest credit card debt.
- Keep in mind that restarting your business, later on, will require capital, and recovering some of your investment now (if possible) might help you achieve that goal.
While your answers to the above questions can help you to determine whether your business is still financially sustainable, they’re just a starting point. Meeting with an accountant or business adviser can give you a more well-rounded picture of your business’s financial viability.
2. Decide Whether “Hibernation Mode” Is a Viable Option
Rather than completely closing down, you might be able to put your small business into suspended animation for the remainder of the pandemic (often called “hibernation mode”). If your business was healthy before this crisis and you’re still devoted to your mission, hitting the pause button can allow you to cut expenses, take stock, and plan for a strong comeback once demand returns.
- Maintain your business operations at a minimal level if possible
Business types that can function (at least partially) online may have an easier time going into hibernation mode than those that rely entirely on in-person interactions. That said, maintaining one or two core business functions—if this is feasible—can help to keep your company’s name out there. If you can no longer afford rent at your primary business location, consider whether you can offer any of your products or services from your home office or online.
- Limit your website’s functionality.
If your business has a website—and particularly if you sell products or services online—there are a few best practices you’ll want to follow to minimize search impacts when pausing your operations for a significant length of time. Google recommends limiting your website’s functionality (by disabling your shopping cart, for example) rather than disabling your website entirely. You might also display a banner or pop-up window that informs your customers of your business’s status and future plans.
- Continue to submit any required business filings.
If your business is structured as an LLC or corporation, you’ll need to file your company’s annual report and pay any applicable fees to keep your company ‘active.’ This will allow you to hold onto your business name—and also save you the time and expense of legally reinstating your business when you’re ready to reopen.
- Do what you can to preserve relationships.
Even if your operations are completely shutting down for several months, think about how you can maintain connections with your key business contacts, employees, and customers. Continue to engage with your customers through social media, and search for ways to serve your community. While community involvement might not lead to a tangible profit, it will help to preserve your business’s place in your customers’ hearts and minds.
3. Research Voluntarily Dissolving Your Business
If you’ve exhausted your financial resources, scaling down isn’t feasible, or you’re simply ready to pursue a different business path, it may be time to consider voluntarily dissolving your business.
Keep in mind, however, that if you dissolve your business, your business name may eventually become available for other companies to use—after an initial waiting period. The time frame varies by state, so make sure to do your research before opting for voluntary dissolution.
There are also a few legal and financial steps you’ll need to take to properly exit your business. As with all things, communication is imperative. Discuss all avenues and eventualities with your business partners and keep your staff and customers as informed as possible.
Lastly, remember that deciding to close your business does not reflect poorly on you or your skills at doing business, especially in light of the current crisis. Closing your business could be only one chapter of your journey. You can take the lessons you’ve learned and apply them to your next business venture when the time is right
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.