Notify Customers and Wrap Up Contracts When You Go Out of Business

An important part of ending any business consists of wrapping up customer relationships in a way that won't ruin your business reputation or end friendships.

First, give your customers notice that you are going out of business. If your business is big enough, you can send out a press release to newspapers to notify your customers that your business is closing. You can cite economic downturn, rising costs, or competitive realities as the explanation for closing, or just that you are moving on to new ventures. If your business is on the small end, when you publish your statement in a local newspaper that you are closing your business, consider thanking your customers for their support.

Next, examine all of your contractual commitments to see what is outstanding. Your goal should be either to fulfill them or negotiate a termination. That way your business ends cleanly, with no danger of being sued for unfulfilled contracts.

If you can complete your contractual commitments, do it—it's the best way to avoid future hassles. Fill any last orders if you can. For example, a furniture reupholsterer might sensibly plan to complete all the jobs in his shop, while not taking any new ones.

If you can't fulfill an obligation, let the customer know and return any deposits or payments for goods not delivered or services not rendered.

If you've signed a long-term contract for ongoing performance of work or delivery of goods that you simply can't complete, check first to see whether the contract has a cancellation provision. If it's reasonable (for instance, you have to pay an early termination fee, or "liquidated damages," of $300 to cancel a $15,000 contract), exercise it.

If the cancellation provision calls for too much cash, or there is no cancellation provision, call the other party, explain that you are going out of business, and ask whether they would like to end the contract. This will often be possible, especially if you can suggest another quality provider willing to complete the work for the same price. If the other party asks for a payment in exchange for a written termination agreement, don't pay much. Instead, consider having a lawyer call the other party to negotiate. When you do arrive at an agreement to end the contract, get it in writing.

EXAMPLE: Talia and Aaron run Blue Egg Web Design, which designs and builds websites for local small businesses. In January, Blue Egg signs a contract to build a small e-commerce website for a local sporting goods store. The contract states that Blue Egg will deliver a completed website by August for $15,000. In February, Blue Egg's main client goes out of business, and Aaron and Talia decide to close down. They tell the sporting goods store they won't be able to complete the contract. Their contract calls for a refund of any payments made to Blue Egg for work not performed but doesn't say anything about what happens if Blue Egg doesn't complete the contract. Fortunately, Aaron and Talia know the principals of an excellent Web design firm, who sign a contract with the sporting goods store. The sporting good store releases Blue Egg from the contract after Blue Egg returns the sporting good store's first payment.

If you can't complete a project and have spent the deposit or first payment, be proactive in communicating and negotiating with the customer. This can go a long away toward avoiding bad feelings and maybe a lawsuit. If the contract was for a great deal of money, contact a business lawyer for help.

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