When is the right time to wind down a solvent business?

The trading conditions for owner-managed businesses in the UK over the past four to five years have been amongst the most challenging ever seen.

From the UK’s decision to leave the European Union, the Covid pandemic followed by soaring inflation, increased costs, a cost-of-living crisis and a stuttering economy, business owners have found it tough.

Many business owners will have seen trading conditions fail to return to pre-pandemic levels. Some industry sectors, notably retail and hospitality, have found it particularly hard, and that has a knock-on effect with numerous suppliers sharing that pain. 

What can a business owner do if growth is not there and the business is contracting? What are the trigger points that might indicate that it is time to call it a day and wind down the business? And what exit strategies are available to a solvent business where a trade sale might not be an option?  

Trigger points of business closure

It is rarely an obvious or easy decision to decide that it is time to call it a day and wind down a business. It is also a process that cannot happen overnight, sometimes taking months if not longer.  

Whilst some business owners will instinctively know when the time is right to close up shop, for others it is often a slow realisation accompanied by several trigger points. These might include: 

• Falling sales. A temporary blip in sales is unlikely to be a significant worry, but when sales continue to fall and with little or no sign of their return, that should be a call to action. 

• Lease renewals. Landlords rarely seek the 20 or 25-year lease that was commonplace just a few years ago but will look for a 5 or possibly 10-year commitment. Is that a commitment you wish to make? Is it a commitment the business can afford? 

• Personal guarantees. Is your landlord or are your other creditors asking for personal guarantees, and are you reluctant to provide them? 

Things to consider when closing a limited company

Winding down a business is not as straightforward as walking out the door and leaving a key with the landlord. It can take many months and sometimes longer. Business owners will need to consider the following: 

• Existing contracts. A business owner will need to consider any existing contracts it might have in place to supply goods or services. Most business owners will not want to leave long-standing clients or customers in the lurch, but exiting those contracts may trigger penalties. It is often sensible to work towards a timeline to wind the business down when those contracts are up for renewal. 

• Redundancies. Most businesses will at some point in their history have had to make individuals redundant. It is never an easy thing to do. Business owners need to ask whether there is enough cash in the business to meet immediate and future redundancies. 

• Lease break clauses. Where a long lease remains, check for break clauses and the requirements to trigger any break. 

• Lease dilapidations. Exiting a lease may trigger dilapidation obligations, meaning the occupier must return the building to the condition in which it was first occupied. For some businesses that may have occupied a building for many years, and often decades, that can represent a significant expense. Does the business have the reserves to meet that obligation? 

Finally, consider trading conditions. If trading is largely seasonal, it will make sense to see out that seasonal spike providing the funds needed to meet outstanding financial obligations. 

Use a restructuring specialist to close your business

Running a business is for many individuals deeply personal, with a commitment made over years if not decades recognising that a business is struggling is challenging and never easy.  

Ideally a business will have a pre-agreed exit strategy in place, but if this is not the case taking advice early from a restructuring specialist can make a huge difference. They can help a business owner recognise and realise the value in the business. They can in some instances provide a pathway back to profitability. And, importantly, they can help you wind down and close the business in an orderly way, avoiding formal insolvency procedures. 

 Kreston Reeves LLP is a full-service accountancy and advisory practice which can provide you with assistance throughout the process of formalising a business exit strategy and/or beginning a wind down to ensure that you maximise the ultimate return for the shareholders. Depending on the circumstances, this might include tax advice, negotiations with landlords or other potential creditors, assistance with managing communications with employees and dealing with the formal solvent wind down process if that is the most appropriate method of ultimately dissolving the company. 

If you would like any further information, please get in touch with a member of our team who would be happy to help.