How to Dissolve a Business Guide

Disclaimer: This guide reflects my own personal experiences and opinions and is not a substitute for guidance from your attorney, accountant, nor does it take into special obligations to government institutions, employees, suppliers, shareholders and others.

Introduction:

I recently dissolved one of my businesses. It wasn't the first business I dissolved and it probably won't be last. This is the life of a serial entrepreneur and investor. I wanted to share some of the steps I have found to guide entrepreneurs through the process.

An entrepreneur's first business is likened to their baby. The business personifies the entrepreneur, they think about it morning, noon and night. The only paths forward are to thrive. Simple survival is not in the cards and closing the business is not an option. First time entrepreneurs develop illusions of grandeur, getting the business to an IPO, selling for hundreds of millions, being recognized as a thought leader on TED, etc. Any critiques from customers, prospective investors, family, friends and others feel like a personal insult. However, entrepreneurs that decide to proceed after their first business find that it becomes easier (not easy) to separate the business from your own identity and develop valuable processes to help future businesses succeed.

According to data from the Bureau of Labor Statistics,?approximately 20 percent of small businesses fail within the first year. By the end of the second year, 30 percent of businesses will have failed. By the end of the fifth year, about half?will have failed. And by the end of the decade, only 30 percent of businesses will remain — a 70 percent failure rate.

I personally don't like the word failure when it comes to dissolving startups. My philosophy is that if the entrepreneurs have learned lessons that they can use, impart the knowledge to others, and obviously not repeat any mistakes made, then it is not a failure.

Before making the Decision to Dissolve your Business

It probably goes without saying that before dissolving a business the leaders in the business need to ensure that they have effectively analyzed the business model, see if pivots can be made, determine if there are opportunities to sell the business to other companies, sell to employees, etc. Frequently, there are ways even during chaotic times (like COVID) that business model changes can be made to help a business thrive even in the face of perceived insurmountable odds. My book, Restart-The Small Business Guide to Thriving During Chaos, might be able to help you if your business is in this situation.

The Steps in Dissolving a Business

If you, and your shareholders (if applicable), have reached the point where you have decided to dissolve the business there are two guiding principles that I use.

Guiding Principles in Dissolving a Business

• Respect - We need to respect the rule of law, obligations to employees, commitments made to customers, payables due to suppliers, debts to banks and other loan holders, etc.
• Reward - We need to consider those that have invested time, money and other resources in our business, such as shareholders.

Dissolution Guide (Steps in Priority Order)

Step 1) Master Plan Development - Agree on a dissolution date with your executive team, voting shareholders and develop your plan with your financial and legal advisors. Consider the government, employees, customers, suppliers and shareholders. Develop your plan much like a project plan. Receive a commitment from all that the plan will remain confidential and no unofficial communications will be made to anyone else.

Step 2) Communicate to Employees & Non-Voting Shareholders - This part is very tricky. Communicate to your employees and non-voting shareholders. This should be done immediately and simultaneously. If word leaks from one group to another the other group the results can be catastrophic. Explain why the business is dissolving and the plan including impacts on employee jobs and associated payments. Ensure that you have an individual or organization that is available to answer questions after dissolution.

Step 3) Communicate to Customers - There could be opportunities to have other individuals or companies to deliver your products and services on an on-going. Think through all of the possible options. Communicate to your customers how you will support them before, during and if possible after the dissolution process.

Step 4) Communicate to Suppliers - Communicate to your suppliers how you will compensate them for products and services. If you don't have the financial resources to pay suppliers with current financial terms (e.g. Net 30), see if you can get extensions or negotiate the amount owed. Provide the appropriate contact information for the person that can be reached after dissolution.

Step 5) Informing Government Institutions - Prepare and file the appropriate documentation with local, state and federal institutions to notify the date of dissolution. Provide the appropriate contact information for the person or organization that can be reached after dissolution.

Step 6) Making Payments - These steps are operating under the presumption that your company has the financial resources to make these payments.

Making Payments in Priority Order.

* Please note that local, state or federal laws might dictate differentiate methods or priorities. Also, note that the impacted parties (such as employees, suppliers and shareholders will naturally want to be considered a priority).

1st) Pay Federal, State and Local Taxes - Your first obligation is to pay your taxes plain and simple. Retain available money to pay these taxes BEFORE distributing money to others. We don't need to go down the path of the implications of not paying your taxes.

2nd) Compensate Employees - Your business would not have been possible without your compensation. Compensating employees for salaries, wages is first and foremost. If enough funds are available for severance packages then obviously those should be provided as well.

3rd) Support Customers - Delivering products, services and continuing to provide as much support as possible through any obligations made is critical. It is not only the right thing to do but sustaining these relationships could provide on-going cash flow to "Respect" and "Reward" others.

4th) Pay Financial Institutions - As with other priorities on this list there could be loan terms that force debts owed to financial institutions or others to be a priority.

5th) Pay Suppliers - Suppliers have provided you products and services with the understanding that they will be compensated.

6th) Payments to Non-Executive Shareholders - Investors, whether it be with their time or money, should enter agreements to support businesses with "eyes wide open" and shareholder agreements should have been implemented. It is rare when shareholders will receive back what they feel they deserve when a business dissolves but some payment demonstrates appreciation for time and money.

7th) Payments to Executive Shareholders - Executives steer the ship of companies. When the companies do well financially they should be well-compensated. In turn, when companies face financial challenges or dissolve, they should be compensated last. They should be the last ones to abandon the ship.

This guide is not perfect and it will not fit every situation but I hope it will inform and help as a guide for those dissolving a company.

Sincerely,

Dave Gee

Author, Teacher, Lifelong Learner

* This article reflects my own personal experiences and opinions and is not a substitute for guidance from your attorney, accountant, nor does it take into special obligations to government institutions, employees, suppliers, shareholders and others.