Small Business Check-Up: Time to Close Your Business?

If your company is struggling, find out whether it might be smart to close the doors and move on.

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In these tough economic times, you may be wondering if it's time to shutter your business's doors permanently. Although the decision to close your business ultimately is a personal one, the questions below may give you some guidance as to whether that decision is right for you.

1. Are the fundamental assumptions underlying your business still valid?

Every business is based on certain fundamental assumptions. An auto repair shop assumes that drivers will need to get their cars fixed and maintained. An ice cream shop assumes that people will want a sweet icy treat in warm weather. A tax preparer assumes that people are willing to shell out a few bucks to avoid the pain of doing their own taxes.

Now look at your own business: What are the fundamental assumptions underlying your business? What are you depending on your customers wanting or doing? In this economic climate, are those assumptions still valid? Even in tough economic times, everyone still needs to eat. But most people won't want to pay four dollars for a cupcake (unless your bakery is located in Beverly Hills). If the fundamental assumptions underlying your business are no longer valid, closing your business might be the right option for you.

If you still believe your underlying assumptions are tried and true and you want to fight to keep your business alive, you'll find help on turning your business around in Nolo's article Saving a Money-Losing Business.

2. Are there business costs you can cut?

It may seem obvious, but if your business is having trouble paying its bills, the first thing you should do is reduce your costs. But how? The largest expense for a business is often its payroll. Before you take the drastic step of laying off staff, consider other ways you can reduce payroll costs, such as cutting employee benefits or shortening your work week. (For more tips on reducing payroll costs, see Nolo's article Avoiding Layoffs.) But sometimes layoffs are unavoidable, particularly if the alternative is closing your business altogether. (For tips on managing layoffs, see Nolo's article on How to Keep Your Business Alive After Layoffs.)

Other ways you can save include cutting energy costs, reducing business travel, asking your vendors for discounts, renegotiating your lease and other ongoing business contracts, and subletting space. (For help on bringing your costs down, see Nolo's articles Reduce Energy Costs for Your Small Business and How Small Businesses Can Hoard Their Cash.)

After cutting your costs to the bone, is your business still in the red? Then it might be time to close your business. To find out what you need to do, see Nolo's article on Closing Your Business.

3. Do clients owe you money?

In addition to cutting your costs, you should also double your efforts to collect any money owed to you. Some of your overdue clients probably want to pay their bills but likely have some reason for not doing so; others simply don't want to pay up. Concentrate on collecting from your clients who want to pay. (For tips on collecting from your clients, see Nolo's article on Collecting Business Debts.)

If your collections efforts are unsuccessful, or if they yield far less than you need to run your business profitably, it may be time to close your business. Read Nolo's article on closing a business to find out how to limit your liability, and see Nolo's Checklist for Closing Your Business: 20 Things You Need to Do.

If you think your business might have some value, perhaps to a competitor, consider selling it. See Nolo's article Selling Your Business: Eight Steps.

4. Can you wait out the economic downturn?

If you still believe in your business and think you can turn a profit once the economy rebounds, instead of shutting down your business for good, you could put it into hibernation. To go into hibernation, you would basically reduce your business to its core by cutting all excess costs and suspending part of your business operations.

As an example, let's take the bakery with the $4 cupcake. To hibernate, the owners of the bakery could terminate their lease on their commercial kitchen and storefront, move their baking operations into their homes, eliminate non-cupcake items from their menu, and take special orders over the Internet and over the phone. When the economy recovers -- and people's appetites for pricey desserts revive -- the bakery could return to its full operations.

Hibernation would be an option only if you have other sources of income -- either your spouse works or you find a temporary job on the side. For more information on hibernating your business, see Nolo's article Is It Time to Hibernate or Sell Your Struggling Business?

More Information

For more information on managing your small business in tough economic times, see Save Your Small Business; 10 Crucial Strategies to Survive Hard Times or Close Down and Move On, by Bethany Laurence and Ralph Warner (Nolo).

Updated by: Jinah Ahn

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