When exiting your business, there are several choices that can be made — sell the business to a third party, sell to employees or family, or wind it down. Selling to a third party is the most desirable outcome, with less risk financially and less risk of the business failing. However, it is often difficult to find a buyer for the business; with fewer than 40 per cent of listed businesses selling, you would need to have a very attractive business to find a buyer. We have explored this topic in previous articles.
Selling to family or employees is fraught with risk. You will likely have to finance most of the purchase price and the working capital, plus you don’t really know if they have the business acumen to run a successful business. On that note, the federal government recently announced a new Employee Ownership Trust Program (EOT). It is something to explore if selling to employees. Usually, a transition period over a few years is the least risky approach. I often recommend a gradual buy-in approach.
If there are no suitable employees or family members, you are likely left with no option other than winding down the business. You can’t just walk away from it. Unfortunately, it is easier to get into the plumbing and HVAC businesses than getting out of it.
If your work involves new construction or major retrofit projects, it becomes even more difficult.
Dipping into savings
As we wind down our business, we have to maintain a relatively high level of overhead and have little sales to support the overhead. As a result, most of the ongoing overhead is covered by previous profits that are already in the business. That means you are going to erode your retirement fund. On projects with holdback, you must ensure you collect your holdback. Warranties are also a major issue. If your customer knows you are shutting the business down, they are more likely to want to hold back funds in case of warranty issues. You will have to carry that financing and ensure you do any warranty repairs.
One option for getting paid out on holdbacks or where extended warranties are involved is to get your bonding company to issue a bond to cover the holdback or the warranty period. Insurance policies can also be used to cover warranties. If you can’t get a bond, get a letter of credit from your financial institution in order to have holdback released. While the client may not be legally entitled to hold monies back, it can be expensive and time-consuming to use the courts. Do read your contracts to see what rights you have.
Service work and small projects are easier to handle in a winddown. Less money in each project and shorter timelines help a great deal. You also need to look at exposures you may have in other areas. Are you liable for any severance pay? You need to take legal advice on this to ensure you meet federal and provincial standards. Laying off long-term employees can be very expensive. There are many instances where employees receive severance packages equal to 12 to 18 months of remuneration.
What about your rented premises? When is your lease going to expire? Have you done modifications that have to be reversed under the lease terms? Do you have the right to sublease? When do you start selling your equipment, vehicles and surplus inventory? When do you tell anyone that you are closing down the business?
I have already mentioned some of the issues with customers and here is one more – they won’t award you any future work if they know you are not going to be around to provide the warranty. Once your employees find out, they are more likely to go and seek a job elsewhere and in this market, that is easy. Your supplies may also cut back on credit terms or preferred pricing and rebates. You are definitely going to need to retain some key employees to help wrap things up. A promised bonus at the end of the day will help retain them while further eating into your retained earnings.
Eventually it will be time to quit. All the money has been taken out of the company and it now becomes a shell. Should you decide to deregister it, you will need to get a lawyer to do this and make sure you get a quote as it is not cheap. I recommend that my clients stop filing annual reports. In British Columbia, if you don’t file annual reports for three years, your company will automatically be struck off. It’s simpler to file a simple corporate tax return with no activity for those three years.
Closing down accounts
To wrap up your business, ensure that you have met all your trust responsibilities. Don’t leave the Canada Revenue Agency out in the cold, they don’t like it! Close down all your CRA accounts, payroll, GST/HST and corporate taxes. Remember to keep your records for six years in case CRA comes looking.
Also, shut down any provincial tax accounts. Clear everything that has a personal responsibility and close all supplier accounts and get any personal guarantees to suppliers or other parties cancelled. Cancel all credit cards that were used for the business to ensure that no purchases are made by former employees or others who might have accessed the card numbers. Also, close all contracts and leases, don’t forget to cancel cell phones and annual subscriptions. If you have software on a lease program, cancel it but back up your data first.
Finally, we have closed down the operations and have some money in the bank. Usually, the company invests that money and pays a high tax rate as you won’t qualify for the small business tax rate any longer. This is a topic for discussion with your accountant as each province has different rates. If you are going to be involved in another business, maybe you decide to become a one-person part-time business. If so, run that through the corporation.
This entire process is very emotional. You have likely spent many years making the business part of your everyday life and now you are walking away from it. It is tough and you need to have good support both professionally and personally. Stay strong and practical.