The owners of a firm often believe that if neither an internal transition nor a sale/merger can be consummated successfully, they will simply close the firm. The disadvantages to a firm closure are that the net proceeds to the owners are lower than an external sale or an internal transition, plus there is no continued employment for owners and staff and clients must seek other firms for architectural services. A more in-depth review of the process and factors to consider shows that such an alternative is not without its substantial challenges and disadvantages and thus is rarely viewed as a viable, planned course of action.
There are several steps in the closure process:
- Owners Agreement
The owners of the firm must first reach agreement to wind up and close the firm and ultimately liquidate and dissolve the firm.
- Closure Team
The firm must establish a closure team consisting of a firm leader and outside advisors (attorney, accountant, professional liability insurance agent, human resources consultant) to address the steps, costs and timeline to close the firm.
- Schedule of Closure
The closure team must develop a schedule of events and tasks and a plan to implement the process successfully. The schedule should provide for contingencies in timeframe, expenses and third party matters, all of which are necessarily difficult to determine in advance with precision.
- Client Contracts
The most valuable assets of a firm are its current contracts to provide services and proposals for future work and the staff to complete such contracts. However, since a firm cannot synchronize the end of all such contracts at the same time to coincide with the closing of the firm, the completion of all current contracts now becomes a liability since the firm is contractually obligated to perform such services. Therefore, the firm may need to find another firm to complete the contractual services and obtain the consent of the clients to an assignment of the contracts to the new firm, which is not a simple task, or keep staff on to complete the contracts.
Most firms have both office leases and leases for equipment. In a vast majority of cases, the lessors will not allow the firm and its personal guarantors, if any, to simply walk away from such obligations. Therefore, the firm must resolve its liabilities by settlement with its lessors, if possible.
- Other Contracts
Other contracts, such as for reproduction services, must be addressed and resolved.
- Employee Notification
The firm must comply with any and all state and federal notice requirements such as the WARN Act in notifying employees of the firm's closure. The biggest challenge may be to retain staff as long as desired to complete contracts since most staff will likely be seeking alternative employment and very well may leave prior to the date of closure. The firm may have to implement a policy of paying retention bonuses to incent staff to stay until a certain date.
- Final Payment to Employees
The firm must pay employees in cash, within the time periods prescribed by the applicable state and federal laws, all accrued wages and accrued paid time off plus severance, if applicable, after termination.
- Bank Financing
If the firm has outstanding bank debt, the firm and its owners, who are often personal guarantors of such debt, must address the payment of such debt.
- Accounts Receivable, Work in Process, Accounts Payable
Work in Process must be billed and accounts receivable collected. The collection of amounts owed in the context of a closing firm is often more difficult than in the context of an ongoing firm. Subconsultants and other accounts payable must be addressed and settled.
- Tax Returns/Final Accounting
The firm will need to prepare financial statements and final tax returns. Any state or federal states owed must be paid with such taxes.
- Bank Accounts
Bank accounts held by the firm will require closure.
- Business Licenses/Permits/Professional Licenses
All licenses and permits will require cancellation or be allowed to lapse.
- Articles of Dissolution/Final Distributions to Owners
After the assets have been marshaled and liabilities paid, final distributions to owners can be made and Articles of Dissolution filed.
- Post-Dissolution Matters
The firm and its owners should purchase professional liability tail insurance as required by contracts completed by the firm and to insure against claims arising after closing for prior acts before closing. The owners should store and retain business records for seven years after closure of the firm.
Factors to Consider
Before embarking on the closure of a firm, the following are among the issues that must be considered:
The process requires a concerted and focused effort by a team over a period of several months.
The costs and expenses of closure must be anticipated and adequate funds segregated to fund the process.
- Net Proceeds
It is likely that the closure of the firm may result in some portion of the net book value being returned to the owners, but in some cases the costs may approach, or even exceed the proceeds from liquidation, particularly if collecting accounts receivable becomes problematic.
- Comparison with Internal Ownership/Transition/Management Succession and the Sale/Merger of the Firm
How does firm closure compare overall to an internal ownership transition/management succession program? How does firm closure compare to the sale/merger transaction alternative? Again, the factors in weighing and comparing alternatives must be applied to the specific firm situation against the backdrop of the objectives of the owners.