Is It Time to Hibernate or Sell Your Struggling Business?

Know if your business can be saved by downsizing or if it’s time to sell. Or try a third alternative: business hibernation.

By , Attorney | Updated by Editors of Nolo

Many business owners faced the difficult choice to sell or hibernate their business during the COVID-19 pandemic. The pandemic aside, many small business owners eventually face this sort of tough decision.

Whether there's been an economic downturn or you're ready for your next chapter, learn here about important considerations when deciding the fate of your business.

Selling vs. Hibernating Your Business

The decision to sell or hibernate your business lies in the outlook for potential profits and in your and your associates' personal investment in the venture. If you're ready to end your association with the business to enjoy retirement, start a new business, or rejoin the workforce, then selling your business could be the best option.

But if you don't want to close the doors just yet and your sales have hit what looks like a temporary lag, there's a less permanent solution. Hibernating a business can be a great alternative for people who:

  • want to keep their business alive while looking for other ways to earn money, and
  • plan to return their efforts to their business if and when it makes sense financially.

For instance, suppose a gym opened in 2016 and experienced good profits before the pandemic hit but is having trouble getting customers to come back. The owner might want to hibernate the business until customers feel safe returning to the gym. In the meantime, the owner could close their physical location and switch to offering their own personal trainer services in the park.

Selling and Hibernating: The Role of Your Business Structure

We take you through the ins and outs of selling and hibernating a business below. As you read and think about whether to sell or hibernate, consider how your business's structure factors in. For instance:

  • If you're a sole proprietor, then you can make the decision on your own.
  • If you're a corporation, you might need approval to sell from the board of directors or your shareholders.

In a partnership or limited liability company, you'll usually need every partner's or member's consent to sell the entire business.

What Business Hibernation Means

Hibernating your business means that your business still legally exists, but its operations have either completely or mostly ended for the time being. You and your co-owners should strip your company to its bare bones. You should only have enough money coming in to cover the most basic expenses.

If you choose to hibernate your business, you'll want to cut costs wherever you can to stay afloat. Focus on the expenses and operations that are absolutely necessary. For some businesses, that means limiting yourself to one or two clients or projects per year to help you break even.

Hibernating vs. Downsizing Your Business

As you start to cut expenses, you might realize that your business doesn't need to fully hibernate to survive. Instead, maybe you can downsize and restructure your business to make more money. The key to downsizing a business is to categorize costs to find ways to save money.

Essential Costs

Essential costs are any costs that are necessary to keep your business legal and operational. These costs include paying any fees to the Secretary of State's office so your business can remain in good standing as well as any licensing or membership fees that are required by your industry.

If you have employees, payroll software is usually essential. The penalty for cutting corners on payroll software is a risk of liability—both criminal and civil. Struggling with your payroll duties can also cost you lots of time. It's a big responsibility for most business owners to learn and maintain appropriate payroll services, but it's also an essential one.

Nonessential Costs

Nonessential costs are costs that aren't necessary to your business. Often you can reimagine and reduce nonessential costs, or even cut them out completely, depending on your business functions. Business owners can often reduce or eliminate the following nonessential costs.

Rent

In many industries, employees can work from home instead of making the trip to the office every day. Alternatively, you can trade in your office building for a part-time or shared workspace to reduce rent. And, if you're in retail, a physical storefront can be turned into a virtual one.

For example, a clothing store can switch to selling goods online through their own website or through a third-party like Amazon or Etsy. The shop owner will need to pay a small fee for the web hosting or product listings, but this fee will be a drastic reduction from their rent.

Staffing

Perhaps the most difficult choice and change to a business is reducing the roles of staff. There are two options to cut costs when it comes to staffing.

The more straightforward option is to reduce the number of staff. Weigh the costs and benefits to keeping each team member. For example, if your coffee shop has seen fewer customers throughout the week, it might make more sense to keep two baristas on staff rather than three.

The other option is to switch some employees from full time to part time or to take on an independent contractor (if the nature of the work allows you to) rather than continue with an employee. Part-time employees usually don't require benefits, and independent contractors are often less expensive to hire.

Customer Relationship Management Software

If you're hibernating your business, then cutting out customer relationship management (CRM) software makes sense. But if you're downsizing, you'll likely still benefit from keeping your CRM platform.

If you need it, keep this software, but to save money consider a free option or downgrade to a less expensive plan in your current subscription. When downsizing, you probably won't need all of the higher-tier features, so revisit which features are most important. For example, you might not need a plan that offers unlimited data storage and advanced customization.

Accounting

You can reduce accounting costs in various ways. For instance, if your business uses an accountant year-round, you can save money by switching to accounting software and hiring an accountant during tax season to tie up loose ends.

If your business already uses accounting software, you might be able to find free accounting software or take advantage of accounting services that are built into your CRM platform.

Other Software

There are plenty of software tools that make managing your business more convenient. But when you're trying to reduce costs, these software options might be the best ones to cut early, especially when free versions are available.

From time and project management to sales and marketing, take the time to compare pricing and research ways to make the free offerings work for your business.

How to Hibernate Your Business

If you decide to put your business into hibernation, you should take these steps:

1. Cut costs. Eliminate any expenses that aren't essential to the legal operation of your business.

2. Plan for business staff. Since you're hibernating your business, you'll probably no longer need people to perform their usual duties. You might be forced to lay off some or all of your employees. Alternatively, you can furlough employees, which requires them to take some time off during the hibernation. By furloughing employees, you avoid layoffs. But make sure you're not violating the Fair Labor Standards Act by furloughing an exempt employee.

3. Finish existing contracts. Factor in any responsibilities for existing contracts when timing your business's hibernation. You can either continue these contracts or assign your responsibilities under the contract to another company, if the contract allows it.

4. Notify customers. Let your customers know that your business is taking a break but that you expect your business to return. For example, you can say that your business is closing temporarily but you hope to reopen next spring.

How to Sell Your Business

If you've decided against hibernation or downsizing and are ready to sell your business, then it's time to start the winding down process. You'll want to work with an attorney throughout the sale process to ensure the sale is successful and finalized. Here are some key steps to selling your business.

1. Determine your business's value. Make sure you have your finances in order so you can clearly demonstrate your assets, liabilities, and profit projections. You can work with a valuation expert or self-evaluate your business to determine an appropriate listing price.

2. Broker the sale. Determine whether you want to use a broker to help you secure a buyer. A good broker can identify serious buyers, reach a favorable price and deal, and handle the legal and tax complexities associated with the sale. A broker's fee is usually a percentage of the sale. You can also sell your company online. Selling your business online has one big advantage: You have access to a whole network of potential buyers that wouldn't be available in the physical world.

Here are a few ways to sell your business online:

  • online marketplaces (like Flippa and Empire Flippers)
  • social media sites (like LinkedIn and Facebook), and
  • online business brokers.

3. Prepare and sign the sales agreement. To officially sell your business, you'll need to prepare and sign a sales agreement. The agreement should cover the purchase price and terms of payment. It should also address what's included in the sale—for example, is all the kitchen equipment included in the sale of a restaurant? The agreement should further specify how the transfer of ownership will take place (gradual or outright), and what conditions each side must meet. Have an attorney draft or look over your sales agreement to protect your business interests.

4. Notify your employees. It's usually best to tell employees right after the sale is finalized. During the transition period, you should answer their questions and introduce employees to the new owner, if possible.

5. Review existing contracts. Review any existing contracts to make sure the change in ownership won't affect these agreements. In any case, you'll want to inform the other party to any contract of the change in ownership—the contract might even require the notification.

6. Notify your customers. Once you finalize the sale, you should have a period to notify all past and existing customers of the sale. For example, you might send a notice through email or letter and post an announcement on your website or storefront. You can also post a notice in the newspaper or in your company newsletter. Give your customers a way to contact the new owners and update them on any changes they can expect from this ownership transfer. You may also need to notify your county or state of your intention to sell your business assets. For example, in California if you are selling inventory of a retail, wholesale, or manufacturing business (in a "bulk sale"), you'll need to record the notice with the county recorder, publish a notice of the sale in the local newspaper, and notify the county tax collector 12 days before the sale.

7. Figure out taxes on the sale. You'll need to determine how much you owe in taxes from the sale. You can ask a CPA to help you figure out how much you owe and what forms you need to file. You'll probably need to complete IRS Form 8594, Asset Acquisition Statement and file it with your final tax return.

The requirements to hibernate or sell your business can also vary from state to state, so be sure to check your state statutes and revenue and tax codes—or lean on your lawyer for the relevant information. You should also look back at your bylaws or operating agreement, if you have one, for any instructions on selling your business.

Consider a Business Attorney

Selling or hibernating your business is a big decision. Although the information in this article should help, if you're seriously considering selling your business, it's a good idea to consult an attorney on whether it's time to sell and for help closing the deal.

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