Closing Part of Your Business

When a setback forces you to cut back your operations, make sure you have a team of advisers to help you craft a plan to reorganize

by Karen E. Klein

We recently found out that a crucial contract of our small business has not been renewed, and we will have to shut down a branch of our company. I need to come up with projections on when to start eliminating people and how. I also need some resources to assist me in the legal aspects. I want to do everything fairly and responsibly. —J.L.B., Sugar Land, Tex.

If you want to be responsible, it's important that you get a corporate attorney and probably a few other professionals together to help walk you through this situation. "It would be wise to round up a team of advisers immediately to formulate specific plans," says Glenn Liebman, a forensic accountant at Klein Liebman & Gresen, based in Woodbury, N.Y. There are a number of serious legal, personnel, and marketing missteps you could make over the next few months that could negatively affect your company's future. Avoiding them and navigating the shutdown safely will take considerable expertise. If your company doesn't have an attorney or accountant, this is a good time to develop those relationships.

Tie Up Loose Ends

Start by carefully reviewing the contract that has not been renewed. Meet with your former customer and go over the specific cancellation terms in the contract. Even if you've already done so, take this opportunity to ask again why they have decided not to renew and whether there is anything your firm could do to help them reconsider. Don't be pushy or angry, but do let this customer know that you'd appreciate their thoughtful consideration, and that you'd like to learn from any mistakes you made if they'd be willing to point them out.

Assuming that you had a legally binding, written contract, it will govern your actions, Liebman says. "The contract may call for advance notice [of cancellation] needing to be provided; such time frames may be 30, 60, 90, or even 180 days in advance. If this is the case, your customer cannot just back out of the contract in an instant," he notes.

Once you and your former customer agree on the terms of the cancellation, you should identify a time frame for the branch closing and come up with a plan for the employees who work there. Will you be able to absorb them into other parts of the company, or will you be forced to terminate them? How will you decide who stays and who goes? Once you have a plan, start informing your employees. Make sure you give them sufficient advance notice, and talk to your attorney about workers' compensation or labor law issues if you do make some layoffs.

If this situation means that you'll need to close a physical location, you'll need to review your lease and contact your landlord as soon as possible. If you have signed a long-term lease, you may be able to sublet your space or negotiate with your landlord to terminate the lease early. "These matters may take weeks or even months to resolve," Liebman says, so start thinking about it now.

How to Communicate the News

Even before you talk to your employees or your landlord, you'll want to come up with a plan for how to announce the branch closing to your clients, creditors, suppliers, and industry colleagues, as well as your local business community. You can be honest and up front about the closure without disclosing all the details of the canceled contract, so how much you say about that will be up to you and your former customer if you decide to consult them about your announcement. Be aware, however, that even if you aren't forthcoming about the cancellation, it's likely that your competitors will find out anyway—particularly if you're operating in a tight-knit industry. In that situation, you might decide that it's better for all the information to come from your company headquarters rather than letting the rumor mill hold sway.

Talk to a corporate communications firm about how to be positive in your public-relations statements and emphasize that you are making the necessary adjustments so that your company will continue to exist and even grow. Don't let uncertainty cost you additional revenues or provoke more contract cancellations while you're in this transition. You can use this as a time to cut some expenses such as your insurance coverage and tax liability, both of which may now be significantly reduced. Notify any public agencies that have granted you permits, licenses, or other certifications that you will not renew documents for the business branch that is closing.

In terms of taxes, the Internal Revenue Service provides advice for closing or selling a business on its Web site as well as a business closing checklist. Publishing company Nolo has a Web site that offers free legal information and do-it-yourself document templates. From the home page, click "business resources" and look up what it has to say about selling or closing a business.

Karen E. Klein is a business journalist who covers small-business issues for several national publications. She writes her Smart Answers column twice a week.