Is It Time to Hibernate or Sell Your Struggling Business?

Closing your business -- even if it's temporary -- by either selling it or hibernating it, may be the best option right now.

Not every business can survive tough times like the ones that have battered the world lately. It isn't because you didn't work hard enough or didn't have a great idea -- sometimes, circumstances make it necessary to close down your current business and go on to other ventures, either temporarily or permanently. If you've decided that it's time for you to move on, here are two strategies to consider.

Selling the Business

Even in good economic times, it can be tough to sell a profitable small business. (See Buying or Selling a Business: An Overview.) When times are tough and a business begins losing money, arranging even a bargain-basement sale is usually impossible. But as with anything, there are exceptions. A business with a great reputation, market position, or excellent location might be salable even when profits have disappeared.

The key to selling anything, including a business, is that to provide value to the buyer that the buyer can't get in another, cheaper way. It's probably next to impossible to sell a copy shop or Thai restaurant that's losing money. Assuming anyone wanted to enter a highly competitive business where an existing enterprise was doing so poorly, it would probably be cheaper to start from scratch.

But businesses that have well-established local brands and have been historically profitable retain at least some value, even when they're not currently making money. Take, for example, a well-established plumbing supply company that suffered significant losses when the recession dried up new construction. It might be salable based on the value of its brand and the loyalty of its customers. This would be even more likely if a competitor saw buying it as a chance to corner the local plumbing supply market, gaining significant pricing power.

If you do decide to sell, make sure you continue to cut expenses right up until the closing. Remember, a deal to sell your business isn't final until the ink on the signatures is dry and the money is in the bank, things that can often take several months. In the meantime, it's crucial to limit your losses by cutting expenses hard and fast to avoid losing as much money as you reap from the sale.

The Complete Guide to Selling a Business, by Fred Steingold (Nolo). It's a good step-by-step guide that will help you decide whether it makes more sense to approach likely purchasers yourself or hire a business broker to do it for you. It also takes you through a typical sales contract clause by clause, identifying the key issues you'll need to negotiate.

Putting Your Business into Hibernation

A less drastic alternative than selling is to suspend business operations for a while. Some money-losing businesses that are likely to have bright prospects can sensibly be put in hibernation for a period of time, waiting for the economic climate to improve. The idea is to cut costs to the bone and keep the business functioning at a minimal level, while concentrating your entrepreneurial energy elsewhere.

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