When it All Goes Wrong
by Bruce Tannas
We have just past a year of the COVID-19 pandemic, which in addition to being a health crisis, has also become a crisis for small businesses in Canada. Recently, the Canadian Federation of Independent Business (CFIB) reported that “one in six small businesses is considering closing their doors permanently”. That could mean as many as 239,000 businesses could disappear in Canada because of the global pandemic. Beyond the statistics are the individual stories of business owners who are struggling with how to exit their business when it all goes wrong.
If that sounds like you, this article may be a good starting point. First, I’ll say that I’ve been through a business failure of my own. I was forced to close my tourism business during the 2009 recession, so some of this article comes from my personal learnings. The rest comes from my experience working with entrepreneurs as a business coach and a small business lender. Hopefully, this article will help as you start thinking about how to exit from your business with the least amount of damage to you, your family, and your employees.
1) Manage Your State of Mind
I won’t sugar coat it. If you are considering exiting your business because of this downturn, you likely have many worries including family, debts and staff. Having said that, the first issue you need to tackle is your own state of mind. Chances are, you are stressed to the max worried about what’s going to happen. A big part of the stress you’re feeling is likely because of your indecision and a lack of a plan. If you want to save your business, you need to make the decision, find help and make a survival plan. If you need to close your business, you need to make the decision, find help and start planning. If you don’t make a decision and a plan, at some point your creditors will likely decide for you and the outcome may be worse for you and all involved.
It’s hard to make good decisions when you’re stressed out. You need to talk about how you’re feeling and what you’re thinking about with someone. It may be hard to discuss your stress with your immediate family members because they are worried, and you may not want to worry them further. If that is the case, find someone you trust and who has good judgement to share your fears and doubts with. Also, it is important to continue with good habits like exercise and limit your intake of drugs and alcohol. If you feel yourself slipping into depression, have suicidal thoughts, or have no one to talk to about your stress, consider accessing the free mental health services in your area. (In Alberta call Health Link at 811 for a referral)
Ultimately, you will need the support and understanding of your family. So you will also need to communicate you intentions to them both for their wellbeing as well as yours. Who you should talk to, when you should talk to them and how much to say are all judgement calls. In some cases it may be better to wait until you have the start of a plan. In other cases, family members may be a source of comfort, help and stability as you make key decisions about what path to take.
2) Evaluate Your Current Situation
You need to have an objective look at your current financial position both personally and in your business. That way you can make decisions based on facts and not your emotions.
You need to have a sense of what assets and liabilities you have in both aspects of your life. An accountant or business coach can be helpful in preparing and analyzing your business balance sheet and cash flow. This will help you and your advisors have an objective look at the situation and the likelihood of your business surviving if you continue to operate it.
On a personal level, you need to pay attention to both your personal balance sheet and personal cash flow. Chances are, if you’re in financial trouble with your business you may have borrowed money to assist the business through personal lines of credit and/or credit cards. In addition to normal personal liabilities, you also need to be aware of the personal obligations that will be triggered upon closing the business such as personal guarantees on business loans, tax obligations and business credit cards (small business credit card debt is considered personal debt by creditors). On the other side of the equation, you need to look at your assets including cash, savings, RRSPs, TFSAs, vehicles and home equity. At this point, what is your net worth (assets minus liabilities)? This is a good exercise because it will help you decide if you have the means to dig your business out or if you’re just going to dig yourself in deeper if you continue on.
You may have stopped paying yourself or are paying yourself only a bare minimum. You need to find a way to address paying yourself through government programs, a survival job, and/or support from a spouse or family members to stabilize the income situation at home. A longer-term solution will come later, but it is important to find some income (not borrowed) to help keep you and your family going in the short-term.
3) Make a Decision and a Plan
Once you have the facts of your current situation, it’s time to make and commit to a decision about your future.
If you are planning to continue with your business, get some help putting together a business recovery plan. Some options for the plan could include new debt financing, refinancing existing debt, finding a new investor, or selling assets and/or inventory to raise cash. Ask a business coach to help you put one together or, if you can’t afford a formal coach, consider finding a retired business-person to help you put a plan together.
If you’re planning to wind down the business, it’s time to look into your options and make a plan that mitigates the damage to you, your staff and your family.
4) Mitigating the Damage of Closing Your Business
There are some things you should consider both in your business and personally before your close your business that will help mitigate the damage.
From a business perspective, there will be a lot of creditors to satisfy upon closure of the business. Some of those creditors will not be satisfied from the remains of your business. You need to understand that some creditors take precedence and need to be paid first. First, you need to pay your staff – not only from a moral perspective but legally they stand pretty high on the scale. Next, you need to pay your payroll taxes, outstanding GST/HST, and corporate tax as the tax department can recover that from you personally (even if your business is a corporation, the directors are personally liable for taxes owed). Finally, you should pay your advisors (accountant and lawyer), as you will need them going forward to help you close off your business. If there is any money left over it will go to your secured creditors, landlord and then unsecured creditors.
From a personal perspective, there are a few things you can do to mitigate the damage to your personal finances. First, you should not pay business debts or personal debts from RRSP money. There will be unscrupulous bill collectors that suggest you do. Don’t do it. RRSP money is protected from creditors (except contributions in the past year in a bankruptcy situation). You should satisfy personal obligations out of savings including TFSAs, as this is not protected. If you need to take money out of your RRSP to live, take only small amounts at a time so that creditors can’t seize the money (taking money from RRSPs is not recommended but may be necessary).
It is likely that some of the business obligations will become yours as the closure will cause creditors to collect personally-guaranteed business loans, lines of credit, leases and business credit cards from you. These obligations will likely become due all at the same time. You should consider getting help to negotiate the repayment of your debts via a lawyer and have them draw up a quit claim for your creditors if you have a substantial amount of cash/assets. If you don’t have much to offer creditors, you should consider accessing the assistance of a reputable bankruptcy trustee to do a consumer proposal or bankruptcy. An alternative to this in Alberta, is Money Mentors which is part of the federally legislated orderly payment of debts program.
Another thing you should do is move all your personal or joint accounts away from the bank(s) that you have any business obligations with (e.g. business accounts, business loans, personal guarantees from your business loans) as these banks will likely freeze your accounts and seize any money that is in them.
5) What Comes Next?
Once you’ve stabilized your short-term situation, make a plan, communicate it to your family, and engaged some of the mitigation strategies needed to move forward with your plan to close. This may be hard, but remember you are not your business and there will be life afterwards. Things may not be great for a few months, but in some ways it will be less stressful than when you hadn’t made a decision or plan.
One final thing you need to start to think about is what you want to do after your business is closed. There is life after a business closure and knowing what you want to do will help you get through the tough times ahead. Do you want to work for someone else for a while, go into consulting, or start a new business at some point? Some of the most successful entrepreneurs had a business failure in their past, so there is hope for you if you choose to go into business again in the future. Whatever you choose to pursue, the experience of owning your own business will help you succeed in the future.
Connect4Commerce offers entrepreneurs and small business owners across the country a convenient and comprehensive place to connect, exchange goods and services, and advance their businesses. Be sure to check out further articles in our Business News blog for additional business tips and resources. Also, find professionals on our site that can help you with your business and we can help you to sell excess inventory and equipment to help you raise cash.