Although it is unfortunate, failure is a common part of the business cycle. However, recent figures from the UK government paint a gloomy picture, highlighting that registered insolvencies rose by 10% in Q3 2023 compared to the same quarter in 2022.
But what is insolvency? When a business becomes insolvent, it means that it can no longer cover its debts and outgoings. Essentially, its liabilities outweigh its assets. Once this happens, you go bankrupt. There are many reasons for business failure, but sometimes they are out of your control.
There are options you can take if you’re concerned about insolvency: administration, liquidation, a CVA (company voluntary agreement) - but this topic is beyond the scope of this article.
What this article will cover is another option: selling your business. You may be thinking “but I want to close my business and walk away”. While you certainly can do this, there are many advantages of selling your business instead of closing shop.
So, let’s dive into them.
Why You Should Sell Your Business Instead of Closing It
If your business is failing, there are many options you can take to exit the business. It’s up to you to decide which option suits your personal goals. While winding down the business may be a business owner’s only option, some businesses are still valuable enough to sell. Here are some advantages of selling a business instead of closing it:
Recoup your investments
Closing a business means you’ll lose a lot of your investment and assets, but there’s a possibility you can recoup this investment by selling it to an experienced buyer. The value of assets in a liquidation sale are often much lower than the value of a going concern, especially if the business has potential to improve and grow.
This is particularly true for businesses that have failed due to reasons outside of their control, and not because a business owner ran it poorly. If you can explain your reason for failure and provide an accurate valuation that highlights your business’s potential, then you could make a favourable deal with a buyer.
A buyer can save your business
Your business may be more valuable to someone else than you think. Despite it failing, an experienced buyer or investor could turn it around. In some cases, an insolvent business doesn’t mean the entire business is underperforming. Part of the business can still be viable, and buyers interested in insolvent businesses know this.
Likewise, selling your business to a strategic buyer means your employees can preserve their jobs, and customers, suppliers, and landlords can continue their commercial arrangements with the new buyer.
Simplify your exit process
Selling a business does require a lot of thought, preparation, and paperwork, but not as much as winding it down. When you sell a business, you are transferring ownership to someone new, and they will take responsibility of the business once the deal is closed.
When you liquidate a business, you need to deal with complex issues of winding down every aspect of the business. Whether it's selling off assets, paying off debts, or seizing all operations, the process can be extremely time-consuming and complex. On top of this, multiple individuals need to be involved: stakeholders, employees, legal teams, creditors, accountants.
In most cases, selling a business offers a more streamlined process, and only requires a qualified buyer, an accountant or broker, and yourself.
Move onto a new goal with money in your pocket
Depending on a business’s circumstance, selling it can offer the business owner more freedom to move onto a new venture. Because you transfer ownership to someone else, you can efficiently transition out of the business, recoup some investment, and redirect your focus to a new goal.
On the other hand, closing it down means you’ll spend a significant amount of time dealing with legal and logistical processes. Settling debts, selling off assets, letting go of employees, and cutting ties with suppliers is a prolonged process that can be avoided if you sell the business to a qualified buyer.
What Factors Should You Consider Before Closing or Selling a Business?
Deciding to sell your business or close it down will depend on your unique situation. Either way, there are some important considerations to keep in mind before you take the leap:
Financial health of your business
Business owners should always keep track of their financial documents, cash flow, and profitability, especially during challenging times.
If your business has been profitable historically but is experiencing a sharp financial decline because of factors outside of your control, selling it to a potential buyer could be your best option. However, if you’ve consistently struggled for a long period of time, winding down and liquidating your assets could be a safer option.
Is your business in a stable and innovative market? Despite its underperformance, being part of a resilient industry could be a saving grace when selling your business. There may be opportunities a buyer can capitalise on or forecasted industry growth in a few years.
However, if your struggling business is part of a saturated and consistently declining industry, it may be a smarter move to exit the market.
Potential for recovery
Would your business bounce back with additional resources, new management, or a restructure? If your answer is yes, then selling your business might be a better option. If the opposite is true, then winding down your business might be the best move.
Your personal aspirations during this challenging time are very important, and often understated. Running a struggling business can have a significant impact on your mental and physical health. If it is becoming too much and you need a quick solution, you should close it down.
Alternatively, if you’re confident your business can survive under the right expertise and you’re looking to fund a different venture, selling your business for a reasonable price could help you achieve this goal.
If you’d like more guidance on selling a failing business, you can read our dedicated guide on what to expect from the process. Also, you should always be aware of the tax implications when selling a business.
What is the difference between selling and closing down a business?
The main difference between selling or closing down a business is that selling it transfers ownership to another party. The new owner will take on the operations, existing employees, and operations. Closing down means a business owner will liquidate all assets, settle debts, and cease trading.
When should you walk away from a small business?
Here are some signs that reflect when it’s time to walk away from a small business:
- Lack of passion or motivation.
- Significant impact on mental and physical well-being.
- There is no clear path to recovery.
- Debts keep piling up.
- There is no buyer interest in the business.
- Finances are unsustainable.
What are the disadvantages of closing down a business?
Although winding down your business may be your only option, there are disadvantages:
- It can be emotionally challenging.
- It will have an impact on your employees and suppliers.
- You could experience significant financial losses.
- You may still be responsible for settling debts and liabilities.
- It could lead to reputational damage.
What are the advantages of selling a failing business?
While not every failing business will be of interest to a buyer, it is still possible to sell a struggling business. The advantages that come with this include:
- You could minimise your losses and recoup some of your initial investment.
- There’s potential for a turnaround if the right buyer acquires it.
- You can maintain relationships with your stakeholders and save your employees from being let go.
- Depending on your deal structure, your liabilities will become the responsibility of the new owner.
The Bottom Line: Sell, Don’t Close
Choosing to sell your business instead of closing it will depend on your own aspirations, the recovery potential of your business, and your industry’s condition. But in many cases, selling a business offers far more benefits than closing shop.
If you think selling your business is the best option, you can advertise your business for sale with us. We want to ensure your business is exposed to strategic buyers who are looking for struggling businesses. On BusinessesForSale.com, you have the option to list your business under a ‘distressed’ or ‘quick sale’ category, which means buyers actively seeking underperforming businesses will find your business for sale listing.
Selling a struggling business on your own can be a challenging journey, and you may be looking for help from a business broker. If this is the case, we can also connect you to a reliable business broker experienced in insolvency.
We understand that this is an emotional and overwhelming journey, so feel free to reach out to us at any time if you need support.