The U.S., like most countries, is facing a lot of macroeconomic challenges. This has stifled small business owners’ ability to manage liabilities, meet financial targets, and ultimately keep their businesses afloat.
Statistics show that bankruptcy filings rose by 12%, an increase from 33,210 in September of 2022 to 37,327 in 2023. Unfavorable financial climates like this could be overwhelming for small business owners, and many who are unable to cope would, at some point, consider closing their businesses.
There are many reasons why businesses fail, but it's never easy to watch a business you've devoted your time, energy, and resources struggle. However, there comes a time when you must decide on the best way to exit your business. The big question now becomes, "should I close shop, or should I sell my business?". We say: sell your business.
In this article, we'll discuss why selling your business is more beneficial to you and your business than simply shutting down operations.
Why You Should Sell Your Business Instead of Closing It
Most entrepreneurs see their business as something to be proud of, and when things start to go downhill, their knee-jerk reaction is to throw in the towel and close shop. However, if you compare the advantages between selling and closing your business, you might be more inclined to sell. Reasons to settle for selling your business rather than closing it include:
Potential for financial gain
When your business becomes insolvent, choosing to sell your business as a whole would often result in higher returns on investment than declaring bankruptcy and liquidating your assets individually. Also, established companies with a good brand reputation, existing customer base, and growth potential can attract buyers with experience in turning around distressed businesses.
Financing for future endeavors
Selling your business could offer you the capital to pursue a new career path or start a new business. The profit you make from selling your business can also help facilitate your retirement, giving you a sense of accomplishment. The potential financial returns and security you get from selling your business can help you achieve your next big adventure.
Transfer of responsibility
By selling your company, you can ensure that the business and legacy you worked hard to build continue to thrive under new ownership. The process of transitioning and transferring controls to the new ownership affords you time to slowly part ways with your company, giving you a sense of closure.
Selling your business includes many tax considerations. Selling liquidated assets is treated as ordinary income, attracting a top federal tax rate of about 28%. In comparison, the profit you make from selling your entire business is taxed as long-term capital gains at a top federal tax rate between 15-20%.
In addition, when you opt for seller financing, you spread out capital gains tax over the years as you receive payment. You can also qualify for tax deductions related to depreciation and amortization. We still advise you to seek the counsel of a tax professional to understand the tax implications specific to the sale of your business.
What Factors Should You Consider Before Closing or Selling a Business?
When deciding between closing and selling your business, several factors must be considered. Here are four essential elements to evaluate before deciding to sell or close your business:
Your company's financial health is integral when choosing to sell or close. Analyze your financial statements, profitability, and cash flow over the years. You should also get a business valuation done to know the true worth of your business and what price to set. Getting the help of a professional business valuator would be beneficial as they consider several factors to provide a fair estimate.
If your business is still profitable and has growth potential, selling your business may be your best bet. While it’s possible to sell a struggling business, closing shop or liquidating a company may be the only option, depending on a business owner’s unique circumstances.
Evaluate your geographic region's current market condition and industry trends to determine the feasibility of selling your business. If your business belongs to a continuously declining and saturated market, closing might be the safest option. On the other hand, if market conditions tend to bounce back, there is forecasted demand, and emerging opportunities to capitalize on, selling your business may be more advantageous. Understanding how external factors affect your business's future could give you leverage when selling your business.
Timing is also essential when it comes to selling a business. Selling during a period of growth in the industry could attract higher sale prices while selling during a period of decline can result in lower prices. Missing out on the right timing could cost you thousands, if not tens of thousands, of your resources.
Your personal goals and immediate objectives are also important factors to consider when deciding to close or sell. If you plan to exit the business as quickly as possible to recover some of your investment, closing might be more suitable. But if you want to pursue new opportunities or finance your retirement plans, selling your business for a fair price should be your priority.
The urgency of your exit can also determine which strategy to opt for. If you're pressed for time, liquidation is a faster process as it involves the sale of individual assets rather than finding an eligible buyer for the entire business. But if you're willing to wait and prefer a potential higher return on investment, selling is your best bet.
Feel free to read our guide on how to sell a failing business, which will help you better navigate your business sale.
What is the difference between selling and closing down a business?
Selling your company means transferring ownership to a suitable buyer for a reasonable fee, while closing down your business means winding up operations and liquidating assets, which results in a lower return on investment. While selling a business can be more complicated as a result of legal processes and negotiations, it's more beneficial than the quicker process of closing.
When should you walk away from a small business?
When the financial health of your business is in jeopardy, or the demand for your product and service has fallen beyond recovery, walking away from the business may be a good idea.
What are the disadvantages of closing down a business?
Some of the disadvantages of closing down a business include:
- Company assets will be sold
- Employees will become redundant
- Reduced return on investment
- Business owners will have to pay personal guarantees
- Missed opportunities like selling your business, integrating with another company, and even pivoting a fresh business initiative.
What are the advantages of selling a failing business?
Some of the advantages of selling a failing business include;
- Tax benefits
- Creates stability for your employees and team
- Free up time and funds for new initiatives
- Ensure proper transfer of ownership
The Bottom Line: Sell, Don't Close
One thing is sure: exiting your business is never easy, and deciding whether to sell or close operations can be a dilemma without proper information and consideration. But as we've discussed, choosing to sell over closure might be the best option for you as it comes with advantages, such as tax benefits, higher returns on investment, employee stability, and proper transfer of ownership.
Consider factors such as your business's financial health, market conditions, personal goals, and timeframe before deciding whether to sell or hold. Also, potential buyers do their due diligence, so make sure your house is in order by addressing legal issues, updating financial records, and records of debtors and creditors.
Again, selling your business can be overwhelming, which means getting all the help you can. That's where we come in. We can help sell your business, find the right buyer, and maximize your business advert's exposure to thousands of buyers. Alternatively, if you require brokerage services, you can use our service, SellerMart, to connect with a reputable broker.