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A worker walks past discount signs on a sports retail store in central London December 12, 2008. (TOBY MELVILLE/REUTERS)
A worker walks past discount signs on a sports retail store in central London December 12, 2008. (TOBY MELVILLE/REUTERS)

OUT OF BUSINESS

‘It’s time to close’ is the toughest decision Add to ...

When Chrissy Maduri decided to open Gaucho Gourmet Market on Toronto’s trendy College Street in August, 2009, she had every reason to be optimistic.

The high-end grocer specialized in the sausages that had made her family business a success for almost four decades at the St. Lawrence Market. Gaucho also sold cheeses and prepared foods.

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“The store was something I wanted so badly and for such a long time,” says Ms. Maduri, 29, who has degrees in culinary studies and sports management. “I was emotionally attached to it. Even today, I still miss my store.”

Gaucho shut its doors in April, 2011, due to poor sales. The decision to close a business is never an easy one. Aside from financial reality, there can be issues related to pride and letting down key stakeholders. And there is no one-size-fits-all approach to making the decision, nor in the process of closing it down.

For Ms. Maduri, the clientele needed to make Gaucho a financial success simply did not materialize. Despite doing her due diligence on the location, the store’s presence on a street best known for its bars and restaurants seemed to lack the gourmands Ms. Maduri desperately needed.

In January, 2011, Ms. Maduri, who co-owned the incorporated business with her mother and brother, made the difficult decision. “I confess, I would have kept going,” she says. “But it was my brother, who is more cut-throat, who finally said ‘we have to stop.’ Looking at the numbers, he knew we needed to close the doors.”

David Wood, a lecturer at the University of Western Ontario’s Richard Ivey School of Business, recognizes that closing a business is an emotional process but he encourages owners to remove that element from the decision, as Ms. Maduri’s brother did.

“Engage an adviser to walk you through the process,” Mr. Wood says. “What most people underestimate is the amount of time it takes to close a business. If you are planning to sell or wind up your business, it could take at least two years.”

During that time, owners will not only be looking for a buyer, they should ensure that suppliers, customers and other stakeholders are aware of the coming changes, they should invest time in valuing assets, and they should keep existing commitments and obligations. They also need to consider any residual value the company might have, such as customer lists.

For those looking to sell instead of close, the two competing priorities are likely to be maximizing value and ensuring continuation, Mr. Wood says. He suggests owners should not overlook the current management team or other family members as possible buyers.

“This option will probably satisfy the need for continuation of the business,” Mr. Wood explains. “It could be a longer process, as these individuals may not have the capital immediately available, so an earn-out structure may be needed. But it could be an easier sales process, as an accountant or lawyer could structure the deal.”

Mr. Wood took a different approach with his own family business. He is the former president of W.C. Wood Co., once one of the largest manufacturers of freezers in North America. The company was sold to a private equity firm and later to appliance-giant Whirlpool.

If the business doesn’t have any value, it comes down to closing.

“It’s really important that you keep your eye on the ball and get out before you are personally liable,” warns Bruce Darlington, partner at Davis LLP, who is based in the Toronto bankruptcy, insolvency and restructuring group.

For businesses that are set up as a sole proprietorship, the owner will be personally liable for all outstanding debts. For businesses set up as a corporation, the owners will be personally liable for government debts, such as outstanding retail sales tax and payroll taxes, and any other obligations for which they issued a personal guarantee. The key to not being personally liable is simple – ensure the assets of the business are larger than the liabilities.

If business owners think they can just walk away and leave, Mr. Darlington points out that creditors, landlords, collection agencies and anyone else who’s owed money won’t likely allow for an easy escape. Provided that a business owner’s debts are paid off and other obligations are fulfilled, her or she could simply walk away.

If there are debts a business owner cannot pay, the better route is to file for either personal or corporate bankruptcy under the Bankruptcy and Insolvency Act. Mr. Darlington estimates a retainer for a trustee-in-bankruptcy could range from $15,000 to $50,000. From there, the trustee notifies the creditors and arranges for a creditors’ meeting to discuss the current state of affairs and the strategy moving forward.

Business owners can also issue a proposal under the act that would require creditors to decide what percentage of debts owing they would be willing to accept as payment. Under this option, the business owner could choose to continue running the business, or close the business down with the debt obligations settled.

“The best thing a business owner can do is seek professional advice,” says Benny Mendlowitz, founder of Toronto-based Mendlowitz and Associates, a chartered accountant and trustee in bankruptcy. “If the money isn’t there to meet your business obligations, you want to ensure you get on the right track and things don’t get out of control.”

If a business owner has debt obligations with the Canada Revenue Agency (CRA), for example, the CRA can directly contact clients for payment options. The clients are no longer obligated to pay the business, but instead, they pay the government on behalf of the business.

“You should be sitting down to organize your business and plan your finances before the wolves are at the door,” Mr. Mendlowitz says. “Don’t wait for the economy to take a downturn or for your credit rating to fall. You want to know how you can stop the bleeding, whether there’s something that can be salvaged, and how you can stop losing the money you have before it happens.”

In Ms. Maduri’s case, she did lose money and tried to recoup her losses when she shut Gaucho’s doors. In the four months it took to close, she listed Gaucho’s assets online and quickly found a buyer who was opening a similar business in Picton, Ont. She was able to sell some of the remaining assets to a liquidator and inventory was sold at a low price to ensure there would be minimal waste. Ms. Maduri gave her three employees working notice and negotiated with suppliers to reduce the amount Gaucho owed under existing contracts.

While Ms. Maduri lost money, she didn’t lose the kitchen sink and she didn’t lose faith in her entrepreneurial abilities. In May 2012, she opened a new business with two partners at the same location as Gaucho – and actually made use of the kitchen sink. The new venture is a better fit with the established businesses in the neighbourhood.

She has opened a Wild Wing franchise. “Besides the standard fare Wild Wing offers, we also have a Gaucho menu, offering the fare Gaucho was known for, such as empanadas, chorizos and the classic Gaucho steak sandwich,” Ms. Maduri says.

And she has offered jobs to former employees.

Her Wild Wing location, she says, has been a success, having benefited from the recent EuroCup and the Olympics. Ms. Maduri’s edge this time is differentiation – giving sports fans a pub that offers televised sports with sound, and a wide-ranging menu.

Closing down a business might be tough, but it doesn’t have to mean the end.

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