How to know when it's time to shut your small business forever

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Many businesses experience peaks and troughs, and according to the Small Business Association of Australia, 20%-40% of companies across most industries are in trouble because of 24 months of upheavals spawned by COVID-19.

When times are tough, how can you tell whether you're going through a cyclical trough or a terminal decline?

Anne Nalder, founder and CEO of the Small Business Association, says recognising a terminal decline varies depending on the business.

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"Like in life, business goes up and down. Yet one of the biggest mistakes is being too urgent to close a small business rather than looking to see if it can be restructured. After all, a big business won't shut down just because it hits a speed bump."

Cash flow and profits

All small business owners aim to have decent cash flow and make a profit, so it might be time to pull up stumps if neither is happening.

"If there is insufficient cash flow to meet the demands of the daily running of the business, or you can't pay your creditors even if they agree to payment terms and the market has dried up, it might be time to call it quits," says Nalder.

According to Credit Watch, the number of court actions against businesses "looks to be emerging from its slumber". Compared with the three months to January 2021, the number of court cases is up 58%.

Despite these statistics, Nalder says it is difficult to tell if more small businesses are in trouble as most owners try to keep the doors open.

"Generally, small business owners don't close shop if the going gets tough, but rather try to work through the downturn. However, if the business has too much debt that can't be repaid even with a loan injection, it might be time to close."

Even big global brands such as Kodak, Blockbuster and Nokia suffered when demand dried up.

That said, after two years of COVID tribulations, it appears that some Australian SMEs are closing their doors not because the market for their products and services is down.

Rather, there aren't enough staff to go around, while supply chain issues are also cruelling operations. Even successful businesses are reducing their hours due to staff and stock shortages.

According to the Australian Bureau of Statistics, nearly a quarter (22%) of employing companies have employees currently unavailable due to factors related to COVID-19, and almost half (47%) of all businesses are experiencing supply chain disruptions. Moreover, small businesses were more likely to be significantly impacted by supply chain disruptions (36%).

"It is complicated to gauge what is taking place now," says Nalder. "It's a mixed bag. There is much inconsistency with mandates that include close contact tracing. Loans are difficult to get due to messy balance sheets, and there are still plenty of staff working from home."

Unlike offloading an investment property to free up debt or improve a personal financial position, selling a small business unless it is unique or has prospects or a healthy balance sheet is challenging.

"Selling a business depends on its location, the type of business it is and if it has potential. That said, it is not a healthy selling market in many parts of Australia right now for business owners," says Nalder.

Craig Lowth, a licensed business broker from Wilsons in Newcastle, says that an owner must seek advice before attempting to sell a struggling business.

"Before selling, you need to get expert advice as quickly as you possibly can and identify the cause of the issue, whether it's the margins, faltering demand or whatever. It might be that the business is not viable, and you must stop it as quickly as possible to stop the bleed.

"As soon as you can, get some tough advice, whether it's from an independent accountant, business adviser or an insolvency expert. It might cost you $300 for a meeting, but you'll get frank advice.

"You don't want someone who will sugar-coat the truth. A one-off meeting with an external consultant can be far better than a familiar face looking at the same information with the same rose-coloured glasses."

Nalder recommends that owners considering closure evaluate the business and why they wish to quit.

"If shutting down is the logical course of action, be sure to seek professional legal advice. If it is not closed correctly, the business owner is still legally liable. Also, failure to obtain the right advice can result in the loss of the family home if there is a secured mortgage tied to the business."

Finally, Nalder urges business owners to consider bankruptcy as the absolute last resort. "There are better ways with less pain to get out of a business."

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Anthony O'Brien is a small business and personal finance writer with 20-plus years' experience in the communication industry.

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