Save Your Small Business

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Save
Your
Small
stop the red

ink now!
Business
10
Crucial
Strategies
to Survive Hard
Times or Close
Down & MOVE ON
Attorney Ralph Warner and

Bethany K. Laurence, J.D.
Free Legal Updates at Nolo.com
The
N O L O Story
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Save Your Small

Business
10 Crucial Strategies to Survive Hard Times
or Close Down & Move On
Ralph Warner, J.D. & Bethany K. Laurence, J.D.
first Edition
July 2009
Editor
Mary randolph
Cover and Book Design
susan putney
Proofreading
robert wells
Index
medea minnich
Printing
delta printing solutions, inc.
Warner, Ralph E.
Save your small business : 10 crucial strategies to survive hard times or close down &
move on / by Ralph Warner & Bethany Laurence. -- 1st ed.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-1-4133-1041-2 (pbk. : alk. paper)
ISBN-10: 1-4133-1041-9 (pbk. : alk. paper)
1. Small business--Management. 2. Business planning. 3. Business failures--Prevention.
I. Laurence, Bethany K., 1968- II. Title.
HD62.7.W376 2009
658.4'012--dc22
2009011899
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Acknowledgments
This book wouldnt have been possible without Toni Iharas assistance,
encouragement, and good ideas.
We are also indebted to a number of businesspeople who generously shared
their ideas and experiences, including Chuck Drulis, Laura and Kiran Singh,
Rich Stim, Lori Clawson, and Kay Klaczynski.
Stephen Elias, author of Nolos How to File for Chapter 7 Bankruptcy,
provided big assistance in reviewing our debt and bankruptcy materials,
as did Terri Hearsh in checking our financial calculations. And finally, and
most importantly, our Nolo editor Mary Randolph did the inspired nipping,
tucking, and reorganizing necessary to make our manuscript truly shine.
Table of Contents
Your Small Business Companion.....................................................................1
1 Can You Save Your Business?
................................................................................3
Stepping Back to Plan for the Short and Long Term.................................................4
Selling Your Business...................................................................................................................7
Putting Your Business in Hibernation................................................................................8
Saving Your Business...................................................................................................................9
Special Considerations for Different Kinds of Businesses.................................... 12
2 Dont Ignore Bad News
............................................................................................. 25
Why You Cant Wait................................................................................................................. 26
Cut Costs, Change Direction, Quit, or Sell . ................................................................ 28
Decide How Much to Cut Expenses................................................................................ 34
Act Slowly to Reverse Cutbacks......................................................................................... 35
3 Control Your Cash Flow
. ......................................................................................... 39
Keep Paying Your Bills on Time.......................................................................................... 41
How to Create More Cash..................................................................................................... 45
What Not to Do.......................................................................................................................... 66
4 Minimize Liability for Your Debts
. .............................................................. 69
Are You Personally Liable for Business Debts?........................................................... 71
Liability for Jointly Owned Debt........................................................................................ 74
What Can Creditors Do If You Dont Pay?.................................................................... 79
Prioritizing Debt Payments................................................................................................... 88
Staying Out of Deeper Trouble........................................................................................... 95
How to Protect Yourself From Further Personal Liability.................................... 96
5 Concentrate on Whats Really Profitable
..........................................103
Getting a Quick Profits Plan on Paper..........................................................................105
Making Money in a Service Business.............................................................................107
Making Money in Retail or Manufacturing .............................................................113
6 Innovate on a Shoestring
.....................................................................................117
Invention.......................................................................................................................................120
Copying..........................................................................................................................................123
Serendipity...................................................................................................................................126
Making Innovation a Continuous Process.................................................................129
7 Identify Your Customers
......................................................................................141
Aiming at the Bulls-Eye........................................................................................................142
Filling in Your Target...............................................................................................................145
8 Dont Waste Money on Ineffective Marketing
............................153
Market the Right Products or Services to the Right People.............................154
Dont Spend Big Dollars on Advertising......................................................................158
Ask Long-Term Customers for Support.......................................................................161
Encourage Customers to Recommend Your Business.........................................163
Use Paid Listings Effectively................................................................................................167
Market on Your Own Website..........................................................................................169
Hold a Trying to Stay in Business Sale.......................................................................172
9 Handle Layoffs FairlyAnd Keep Your Best People
.............175
Making a Wise Layoff Plan..................................................................................................177
The Logistics of a Layoff........................................................................................................179
Keeping the Great People You Hire................................................................................185
10 Dont Work Too Much
............................................................................................201
The Importance of a Sane Schedule..............................................................................203
How to Work Less and Make More................................................................................208
11 Work With Your Best Competitors
..........................................................213
Treat Competitors With Respect.....................................................................................215
Getting Business From Competitors.............................................................................217
Working for Your Competitors.........................................................................................218
Working With Your Competitors....................................................................................219
12 How to Close Down Your Business
...........................................................223
Create a Closing Team...........................................................................................................226
Look at Your Contractual Obligations.........................................................................227
Deal With Your Landlord.....................................................................................................228
Collect Bills and Sell Off Inventory ...............................................................................229
Notify and Pay Your Employees.......................................................................................230
Liquidate the Businesss Assets.........................................................................................231
Notify Creditors and Customers......................................................................................234
Pay Your Debts..........................................................................................................................239
Pay Your Business Taxes ......................................................................................................244
Dissolve Your Corporation or LLC..................................................................................248
Dissolve Your Partnership...................................................................................................250
Cancel Permits, Licenses, and Fictitious Business Names..................................251
Distribute Any Remaining Assets to Owners...........................................................252
13 Dealing With Debt: Bankruptcy and Its Alternatives
.........255
Negotiating With Your Creditors....................................................................................258
Hiring Help: Assignment for Benefit of Creditors...................................................261
Filing for Bankruptcy..............................................................................................................262
Whats Your Best Strategy?..................................................................................................267
More About Chapter 7 Personal Bankruptcy...........................................................269
More About Chapter 7 Bankruptcy for Business....................................................277
If You Might File for Bankruptcy......................................................................................278
to Prepare a Profit and Loss Forecast and

A How
Cash Flow Analysis
......................................................................................................283
Profit and Loss Forecast........................................................................................................284
Cash Flow Analysis..................................................................................................................292

Index............................................................................................................................................301
Your Small Business Companion
am not my business, and my business is not me. Now close your eyes
and repeat that three times.
Got it? We hope so, because treating your business and its chances of
survival in an objective, arms-length manner is your best chance to make
good strategic decisions in these difficult economic times.
Start by facing the fact that in the next year or two, hundreds of thousands
of small businesses will fail. Some will go bankrupt, while many more will
simply close the doors for the last time. Enterprises that were struggling
long before the economic downturn began are all but doomed. But many
other businesses can be saved if their owners act quickly and decisively to
cut expenses, increase low-cost marketing, and revamp their entrepreneurial
models to allow them to succeed in this recessionary environment.
In a nutshell, this book will give you objective tools to help you decide
whether it makes most sense to continue, hibernate, close, or sell your
business. If you decide to continue, we will help you start shoring up your
business, with ten strategies you can start to implement right now to get
your business back on track.
Some of our suggestions are tried and true. You may know that you need
to cut expenses fast and hard so that overhead wont gobble up your reduced
profits, but well tell you where to look first to make cuts (and what to leave
alone). Other strategies will require you to fundamentally rethink your
business, so you can develop innovative new goods and services and reach
new markets. No question, accomplishing this will be challengingbut
if your existing entrepreneurial model is failing, you know that your very
survival depends on changing it.
In addition to providing what we hope is advice that will help you save
your business, this book will give you the essential legal information you
need to prioritize your debt payments, protect your familys personal
assets, renegotiate your debts, and, if necessary, file for business or personal
bankruptcy. With a little effort, youll learn information that may prove
crucial to keeping a roof over your head and a car in your driveway.
2 | save your small business
Getting Started
If objectivity is the key to developing a viable survival plan, how will you
achieve it, especially at a time when so many around you are panicking? We
recommend a three-step approach.
Step 1. Create a business survival plan. For example, if in the past six
months, sales have been down 30%, your plan should convincingly explain
how your business will be able to cut expenses, increase sales, maintain or
reestablish an adequate profit margin, and manage (or attract more) cash so
that in X months youll be both profitable and have enough money in the
kitty to bring past-due bills current.
Step 2. Prepare a current profit-and-loss statement and cash flow analysis.
This is explained in detail in the appendix. You cant do the planning or take
the action that will be needed to turn around a recession-battered business
unless you fully understand your businesss key numbers. Its like trying to
land a plane in dense fog without instrumentsyoull encounter the ground
eventually, but it wont be pleasant.
Step 3. Establish an advisory board. This is a small group of knowledgeable
small business advisers, people with enough entrepreneurial experience to
understand your profit-and-loss statement and to review and challenge your
survival plan. (More about who to enlist as your advisers in Chapter 1.)
Its tough to run your own business during an economic meltdown. But
just as in the Great Depression, in the next months and years, millions of
entrepreneurs will figure out how to successfully accomplish it, and by doing
so will put themselves in a position to thrive when good times return. Well
help you develop and implement the best possible plan to cut costs, increase
marketing, and develop the basic entrepreneurial strategies necessary to
succeed. And if success in your business niche just isnt possible right now,
well show you how you can take the legal and practical steps necessary to
close down in a way that preserves your dignity, your business relationships,
and your personal assetsand lets you move on to the next venture.
C H A P T E R
Can You Save Your Business?

Stepping Back to Plan for the Short and Long Term.........................................4
Selling Your Business...........................................................................................................7
Putting Your Business in Hibernation.......................................................................8
Saving Your Business...........................................................................................................9
Special Considerations for Different Kinds of Businesses............................ 12
Retailers............................................................................................................................. 12
Services.............................................................................................................................. 16
Construction.................................................................................................................. 19
Restaurants..................................................................................................................... 20
Wholesalers and Importers.................................................................................... 22
Franchises......................................................................................................................... 23
In this business, by the time you realize youre in trouble, its too late to
save yourself. Unless youre running scared all the time, youre gone.
Bill Gates
he economic tsunami that has engulfed America and much of

the world means that the revenues of many small businesses have
dropped precipitously, in some cases 40% or more. Because most
small enterprises are marginally profitable in the best of times, and only a
miniscule number have the chunky financial reserves necessary to survive a
significant period of losses, its obvious that many will close.
But the good news is that many businesses will surviveand some will
emerge from the economic downturn stronger and better positioned to
thrive. Here lets look at your main options: selling, hibernating, or hanging
in there until better times return. If one of them will work for you, you wont
have to close your doors.
Stepping Back to Plan for the Short and Long Term

As a crucial first step toward creating a survival plan, your businesss key
stakeholders should take an objective look at its prospects. No question, in
the middle of an economic meltdown, it can be tough to take the time to
plan. But just as youll never grow a garden by pouring more and more water
onto sand, you wont turn around a failing business simply by working 15
hours a day and worrying the other nine.
To decide whether or not your business has a future, its absolutely essential
that you separate your personal hopes and dreams from your businesss
honest prospects. If you dont, you will likely end up throwing good money
after bad while needlessly dragging yourself (and your family) through an
extended period of unhappiness. In short, this is a good time to repeat this
books mantra: I am not my business, and my business is not me.
After you have your objective hat firmly on, create an advisory committee
of experienced businesspeople. This is important because, even if you do a
reasonable job of separating your ego from your businesss problems, your
chapter 1 | can you save your business? | 5
advisers are likely to be more rational and, if you choose well, collectively
more experienced and business savvy than you are. In other words, this
really is an instance where a group can arrive at a better decision than an
individual.
Creating Your Advisory Board

There is no one-size-fits-all rule for establishing an optimum advisory group,
but we favor keeping it small, with three to five members. If your business is
incorporated, some or all of the people on your board of directors may be
well positioned to play a role as an adviser. If board members dont have the
necessary skills, or you dont have a board because your business is a sole
proprietorship, LLC, or partnership, youll need to look elsewhere. Try to find:
Experienced small business people in your community who you know and
trust and who, in turn, respect your business.
A loyal customer with deep business experience who values your business
and is willing to help. Every business worth saving has supporters. Dont be
afraid to enlist yours.
An objective, business-savvy family member with the time and desire to help.
SCORE, a nonprofit organization that provides free in-person and online
mentoring to small businesses. Check out what they offer at www.score.org.
Its best to approach each potential mentor personally and explain that
your goal is to have a group of objective advisers who will meet with you
periodically to review your business and financial plans. If youll need a
considerable time commitment in the beginning (for example, a full-day
meeting followed by monthly two-hour sessions), make this clear up front.
Offering to pay a small stipend per meeting or per hour will be appreciated
even by people who dont need the money, because it tells them you value
(and wont abuse) their time. If your finances are too tight to afford that,
consider offering some other form of compensation, such as free products or
services, or, if you are incorporated, a small stock grant.
Now lets focus on how to decide whether your business is savable. You
wouldnt be reading this if your sales hadnt dropped, probably steeply, so
well begin with the assumption that your business is performing poorly.
Recognizing that you are undoubtedly trying to make sense of a confusing,
overlapping, and perhaps contradictory array of business and personal issues,
it will help clarify matters if you think about how to proceed over the short,
medium, and long term.
Short term: one to six months. In the short term, your job is to either
develop an objective and realistic plan to get the business back to breakeven
or, if thats not possible, to close or sell it. In general, you shouldnt allow
losses to accumulate beyond six consecutive months. The only major
exception to this rule is when a clear-eyed investor is willing to put new
money into the business under a long-term turnaround plan.
Medium term: six to 18 months. If you can make the cuts necessary to
get back to breakeven in six months, youll need to return your business
to profit, usually through a combination of more cost cutting, adopting
effective new marketing initiatives, and, if possible, pivoting your business so
that its goods and services are more desirable to penny-pinching customers.
But if your locale or industry faces a deep recession, the best you may be able
to do during this next year is to continue to break even. As long as you can
pay your household expenses, and you and your advisers conclude that the
business has a bright future, sticking with it may make sense.
Long term: beyond 18 months. Your long-term plan must return your
business to profit. No matter how much your ego is tied to your business
and how much you believe it will eventually succeed, theres no long-term
future for a business that doesnt make money. Cutting costs and increasing
marketing may keep your business alive for the short term, but chances are
good that to return it to solid profitability, youll also need to adopt a series
of business-enhancing innovations.
To plan for the short-, medium-, and long-term future of your business,
you need to do some basic financial work. First, complete a profit-and-loss
statement and a cash flow analysis. (The appendix tells you how.) Second,
read the rest of this book with special attention to the chapters on innovation
and marketing. And third, run your conclusions past your advisory board.
Selling Your Business

In good economic times, it can be tough to sell even a profitable small business. When times are tough and a business begins losing money, arranging
even a bargain-basement sale is usually impossible. But as with anything,
there are exceptions. A business with a great reputation, market position, or
excellent location might be salable even when profits have disappeared.
The key to selling anything, including a business, is that it must provide
value to the buyer that the buyer cant get in another, cheaper way. A copy
shop or Thai restaurant thats losing money probably cant be sold, because it
would probably be cheaper to start from scratch, assuming anyone wanted to
enter a highly competitive business where an existing enterprise was doing so
poorly.
But businesses that have well-established local brands and have been
historically profitable retain at least some value even when they dont make
money. Take, for example, a well-established plumbing supply company that
suffered significant losses when the recession dried up new construction.
It might be salable based on the value of its brand and the loyalty of its
customers. This would be even more likely if a competitor saw buying it as
a chance to corner the local plumbing supply market, gaining significant
pricing power.
Example: Randolph Colocation Services provides the infrastructure necessary to
support e-commerce websites. This includes ensuring that a site has stable and redundant electrical power, enough bandwidth to work fast, good security, and other
services.
When the recession hit and business suddenly dropped 20%, Randolph, which
had just committed to build two new facilities nearby, lost both a key investor and a
major line of credit. Suddenly, instead of dreaming of becoming a large and lucrative market player, Randolph worried about scraping up enough money to make the
next payroll. Seeing that Randolph was in trouble, two well-funded local competitors
called with offers to purchase. Both realized that grabbing Randolph meant picking
up hundreds of existing business customers and becoming well-positioned to dominate the local marketeven though Randolph would continue to lose money until
the new facilities could be successfully integrated or dumped.
resource
Information on selling. The Complete Guide to Selling Your Business,

by Fred Steingold (Nolo), is an excellent step-by-step guide. It will help you decide
whether it makes more sense to approach likely purchasers yourself or hire a
business broker to do it for you. It also takes you through a typical sales contract
clause by clause, identifying the key issues youll need to negotiate.
caution
Cut expenses while planning to sell. A deal to sell your business isnt
final until the ink on the signatures is dry and the money is in the bank, things that
can often take several months. In the meantime, its crucial to limit your losses by
cutting expenses hard and fast to avoid losing as much money as you reap from the
sale. (More on this in Chapter 3.)
Putting Your Business in Hibernation

Some money-losing businesses that are likely to have bright prospects once
economic times improve can sensibly be put to sleep for a period of time
rather than killed. The idea is to cut costs to the bone and keep the business
functioning at a minimal level, while concentrating your entrepreneurial
energy elsewhere.
Example: Chuck and Samantha, young architects with just a few years experience
at a large firm, open their own shop, C&S Design, to specialize in designing cultural
centers, museums, and public safety spaces for small cities. After quickly getting two
decent commissions, business dries up as cities facing depleted tax revenue delay
new projects and bigger architectural firms, losing commercial work, increasingly
target this niche.
Less than a year into the recession, Chuck and Samantha are out of money and out
of hope. Their last chance for survival hinges on their belief that new commissions
will quickly materialize after the two innovative buildings they have designed are
finally built. But when municipal funding cutbacks delay both projects, its clear that
C&S is not going break even, to say nothing of make money, anytime soon.
They decide to close down. But after talking to their advisory board, one of whom
is an older architect who has been through several boom-and-bust economic
cycles, they instead decide to hibernate their business. To this end, they give up
their way-cool loft and, at very low cost, rent a corner of a friends studio to keep a
business address and a place to meet any prospective clients. And they decide to
limit themselves to submitting three public sector proposals per year and entering
one large judged competitionjust enough to keep their firms name out there. In
the meantime, both take temporary contract jobs with larger architectural firms to
earn enough money to keep their kids fed. With the help of employed spouses and
supportive parents, they plan to put C&S Design to sleep for a year or two and then
recommit to it full time when the economy picks up.
Saving Your Business

Chances are that, like most small business people, you are an optimist
pessimists usually work for someone else. It follows that when a recession
wallops your business, you are likely to be overly sanguine about the future.
Even if your business is melting down in front of your eyes, you might
too easily conclude that sales will pick up next week, next month, or next
spring. Sorry, but when economic times are bad and threatening to get
worse, the opposite is more likely to be true. Just as in boom times your
happiest projections may consistently be surpassed, chances are that when
many things are going wrong, more will. To make changes and cutbacks fast
enough to bring income in line with expenses, we not only recommend that
you take off your rose-tinted glasses, but that you step on them.
Every small business rests on a set of fundamental and often simple
commercial assumptions such as these:
When dogs get sick, owners take them to a vet.
When cars are filthy, people wash them.
When people are hungry at the beach, they buy food.
This much is obvious. But what can be less obvious is that when a
recession hits, the assumptions behind many successful small businesses
become invalid or lose much of their power.
Example: Pam operates an upscale childrens clothing boutique in a trendy resort
town. Her fundamental business assumption is that grandparents on vacation will
pay top dollar for cute outfits to take home as presents for their grandkids. But six
months into the recession, Pam realizes that this is no longer true. Because only
about half as many older tourists are visiting the town as previously, and many are
traumatized by their shrinking retirement plans, the days of free-spending grandparents are plainly over.
So, with her sales down 50% and her lease expiring, and no reasonable prospect of
returning to profitability in the next six months, Pam has a big sale and closes down.
She knows shell eventually open another business, but for now shell spend more
time with her own grandkids.
Once you honestly face up to the fact that boom times may not return
for many years, you need to either close down, sell, or quickly develop and
implement a realistic plan to turn your business into a survivor. Almost
always this means identifying your businesss profitable core and shucking
off all or most activities that are not part of it. For instance, a publisher of
regional guidebooks with a dozen well-established, profitable titles, and
many others that barely break even, might be hit hard when a recession cuts
into the areas tourist business. It will need to quickly redesign its business
plan around income produced by the core titles that still make money. This
is true even though it will mean laying off valued employees, canceling
speculative new titles, and pruning the backlist.
Example: Jack owns Racafrax Roofing, a company with 32 employees, when the
recession hits and orders dry up. Immediately laying off 20 employees, moving to
a tiny, cheap office, selling two of his four trucks, and hiring a local lawyer to send
threatening but very effective letters to his past-due accounts stops the worst of the
bleeding, but Jack is still losing money. Realizing most residential and commercial
customers are putting off major roof replacement work, Jack focuses on repairs, a
fussy lower-profit business he used to avoid. But now, every time it rains, Jack leaflets
entire neighborhoods. With water pouring in, Racafrax gets lots of emergency calls,
most of which he can deal with before the next rain when the process starts all over.
Although Jack misses the days when big jobs produced big profits, he can return a
much smaller Racafrax to modest profitability just seven months after it began losing money. Then, six months later, when two other local roofers who havent hustled
as hard go out of business, Jack realizes that Racafrax is back in the black for good.
True, the local economy will have to recover before significant profits return, but he
knows hell be there when they do.
Once you and your advisers decide that your hard-hit business has a
decent chance of survival if you act fast, youll want to follow these often
overlapping steps.
Cut costs. You must urgently slash costs to fit your new lowered income
projection. Depending on your situation, this can involve cutting every
possible expense, moving to a less costly location, laying off employees,
aggressively collecting past due debts, and a host of other penny-pinching
techniques discussed throughout this book.
Change your strategy. You need to promptly face up to the fact that your
businesss current strategy is failing and then fundamentally change it. There
are as many ways to do this as there are small businesses, but when times are
tough a common theme is to pivot a business so that its more in tune with
the recessionary environment. To attract the newly frugal recessionista
customers, youll typically want to convince them that your business is all
about providing value, reliability, and frugality. For example:
Millies Way Cool Boutique might devote half of the store to Way Cool
Vintage clothing.
Ihara Marine, which offers full-day charter trips, might add lower cost
half-day fishing trips priced to fit shrinking family vacation budgets.
Elegant Lighting of Lakeport might reconfigure itself as the Lakeport
Green Lighting Center, offering environmentally conscious choices.
James & Cirelli, a small business law firm, might start handling business
bankruptcies, lease workouts, and bad debt collections, and tell clients
that fees will be $50 per hour less until the economy recovers.
Come up with new marketing ideas. Youll need a low-cost and highly
effective marketing campaign to reach out to recession-shocked customers.
Your strategies must hinge on understanding who your best customers are,
how to reach them most effectively, and how to provide incentives for them
to purchase goods and services on which you make a decent profit. (Chapters
7 and 8 discuss this.) Here are a few examples:
A yoga studio that offers existing customers a 10% discount for bringing
in a new student.
A boutique that offers periodic Present-Buying for Guys classes (husbands and boyfriends), along with a 15% after-class discount coupon.
A roofer who advertises low-cost gutter cleaning in affluent neighborhoods, letting him at the same time give each homeowner a free roof
assessment highlighting areas that need immediate attention.
A hardware store that features low-cost holiday lights to attract people to
the stores high-margin Christmas ornament section.
A jewelry store that features three watch battery replacements for the
price of two and, in the process, attracts thousands of dollars worth of
higher-margin repairs on jewelry that customers bring along.
Special Considerations for Different Kinds of Businesses

Okay, now that you have begun to come to terms with what youll need to
do to rescue your business, lets look more closely at the typical problems
and opportunities faced by the most common kinds of small businesses:
retail, service, wholesale, construction, and franchises. Although you may be
tempted to read only the material most relevant to your business, many ideas
overlap, so take a moment to at least skim it all.
Retailers
Even when the economy is strong, its hard to make a decent living running
an independent retail business. The long-term trend that makes it tough for
the little shop owner to survive began way back in the mid-19th century,
when department stores began selling a wide variety of mass-produced
consumer goods. It hugely accelerated in the decade after World War II with
the advent of large discount chains, and went into hyper-drive in the last two
decades with the marriage of computerized just-in-time inventory systems
to low-cost but highly reliable foreign production.
Today there can be little doubt that if for no other reason than price,
most Americans prefer to shop at the huge, low-cost megastores that have
all but taken over the retail environment. The proof can be seen both in the
empty storefronts that line the main streets of Americas small cities and the
crowded parking lots of the Walmart, Home Depot, Staples, and other bigbox retailers. The main exceptions to the inexorable march of the megastore
have been niche businesses that sell products not available from the big
players: luxury goods or specialty items such as Balinese imports, fly fishing
gear, or high-end bicycles.
Unfortunately, when times are tough, specialty goods retailers are
extremely vulnerable to a devastating drop in sales even as their fixed costs,
including rent and insurance, remain high. For example, stores that sell fancy
kitchenware, lingerie, or wine all offer goods that newly frugal customers can
do without or replace with less expensive alternatives. (When times are hard,
lingerie is called underwear, and women wear last years or shop at Target.)
In all but the most upscale neighborhoods, these businesses face the double
whammy of many customers who can no longer afford boutique shopping
and others who, even though they still have money to spend, find that its
suddenly cool to consume less and patronize consignment stores. And then
there is the increasing competition from online niche retailers, who because
of their nationwide reach can often offer a huge array of specialty goods at
extremely attractive prices. The upshot is that many retailers, especially those
that sell upscale items in areas hard hit by layoffs or a drop-off in the tourist
business, have little chance of survival and are best abandoned early.
Example: Frederika owned Fancy Food, a store that featured organic and other
upscale food for dogs and cats. But with half a dozen local competitors, Fancy Food
never made more than a modest profit. Then several large local employers cut
workers and closed facilities, hurting her customer base. Almost immediately, Fancy
Foods monthly sales dropped, first 25%, then 35%, and finally more than 40%.
To try to turn the situation around, Frederika, who by this time was almost out of
cash, came up with a plan to increase her marketing for lower-priced brands. But after
talking to her advisory board, she realized that even if sales fully recovered (unlikely
given that Costco and Walmart were nearby), the far lower profit margins on budget
food would still result in a substantial loss. Facing this truth, Frederika closed down.
On the other hand, retailers who have kept overhead low while providing
convenient access to essential products may do just fine when times are hard.
For example, people who do fix-it projects themselves rather than hiring a
contractor might actually buy more from a local hardware, electrical supply,
or paint store, especially one with deep community roots and the marketing
savvy to compete with the discounters. True, some shoppers will be tempted
to switch to the big-box retailer at the edge of town, but local providers who
have lasted this long have learned how to emphasize service, convenience,
and marketing to keep most customers loyal.
Enough generalizations. To get a good idea as to whether your store has a
chance to survive until the economy improves, do these two things:
Identify the month your sales suffered a significant drop. Then find the
average sales for each month since, extrapolating for a full 12 months
if the decline is more recent. For instance, if sales started to decline
eight months ago and have averaged $15,000 per month since, figure
that yearly sales will be $180,000, unless you have a good reason (for
example, that sales are still declining) to adjust this number up or down.
Run a profit-and-loss statement and a cash flow analysis based on your
new sales numbers (see the appendix for instructions).
The results should give you a pretty accurate confirmation of what you
may already knowwhether or not your business is savable. If, even given
declining sales, you are still within shouting distance of breakeven, chances
are you can cut costs and increase marketing to get back in the black. But if a
huge sales drop has decimated your balance sheet, trying to keep going until
business eventually improves may be as unwise as it is impossible.
Example 1: John and Becky run a wine shop specializing in high-priced imported
wines not available at mainstream retailers. Last year they made $50,000 on sales
of $450,000 and hoped to improve significantly on this in the current year. Then, as
Americas financial system began to melt down, sales started dropping 5% to 10% per
month, finally leveling off at an annual rate of $350,000. John and Becky do a detailed
profit-and-loss statement and cash flow analysis based on this lower sales number
and find that they are now losing $20,000 per year.
After checking with their advisers, John and Becky decide to take a number of
steps to get the business back at least to breakeven. If they can, they have an assurance that Beckys dad will lend them money for their personal expenses for the next
year, an amount that will be subtracted from Beckys eventual inheritance.
Here are the steps Becky and John take:
They contact their landlord and show him their balance sheet. In part because
he fears having an empty shop if they go under and in part because he likes their
spunk, he agrees to lower the rent 10%.
They lay off their one part-time employee and go to a five- instead of six-day
schedule.
They increase the number of moderately priced but still unusual wines. This is
not so much calculated to make money (lower priced wines are less profitable),
but to bring customers into the store, where at least some of them would also
buy a more upscale and profitable tipple.
They adopt a number of low-cost marketing techniques (see Chapter 8), the first
and most successful of which is to write a forthright letter to everyone on their
mailing list explaining that they are on the edge of insolvency and asking for help.
They also include a 30%-off coupon good for any bottle over $20. Hundreds of
people, concerned that their favorite little wine shop might close and wanting to
help the nice couple who ran it, respond, with a surprising number purchasing a
case or more. The result is that John and Becky have their best month of the year.
Example 2: Phyllis runs an upmarket womens clothing boutique called Festoon,

out of a hole-in-the-wall shop near a large university. After making money 20 years
in a row, Festoon suffers six consecutive losing months. When a larger boutique goes
out of business around the corner, Phyllis considers moving and turning half of the
new shop into an upmarket vintage clothing store.
But after talking extensively with her advisers, she decides that with her house paid
for, some money in the bank, and Festoons lease running out in three months, her
best bet is to have a three-month going-out-of-business sale, put her store fixtures in
storage, and consider reopening at a lower-rent location when the recession finally exhausts itself. Fortunately, when her long-term customers hear Festoon is closing down,
they flood the store and all but demand Phyllis stay open through the holidays. The
resulting profit from the going-out-of-business sale is much larger than Phylliss previous losses, meaning that she has a nice nest egg to cushion her temporary retirement.
Services
A house painter, roofer, electrician, lawyer, or other service provider whose
overhead costs are only a small percentage of gross salesand who cuts back
quickly after experiencing a significant sales dropusually has an excellent
chance to survive. Thats because in a service business where overhead is
low (and can usually be reduced), even a small sales uptick resulting from
a properly targeted, low-cost marketing campaign will mean a substantial
fattening of the bottom line.
Another way of saying this is that if you can charge a substantial hourly
rate, with little or no overhead, youll normally be able to hang in there
even if sales initially plunge as much as 40% to 50%. Of course you still
need enough income to put bread on the table, and may even need to take
a part-time job to do it, but especially if your business is both established
and historically profitable, it will probably survive. Thats because for most
quality service businesses, continued success depends on the accumulation
of positive word of mouth. Thats something that in hard times you might
be able to leverage as part of a marketing plan to reach out to long-term
customers, asking them for both their personal support and their help in
recruiting others. (This may not be true if your business is the new kid on
the block.)
If your company provides services that can easily be put off, however, you
can face a customer meltdown in tough times. So if you paint houses, detail
cars, install garage doors, landscape gardens, or cater business events, no
matter how hard you are willing to work, you need a convincing survival plan.
It might involve repositioning your business to deliver services that pennypinching customers still are willing to pay forfor example, a veterinarian
might contract with a city to provide services at the animal shelter.
You might also have a difficult time if, by industry tradition, your
company does the work first and bills later. Thats because when times are
hard, inevitably some customers will pay late and others not at all. Thats
why its often crucial to quickly revisit and tighten credit policies before bad
debts mount. One way to do this is to require a substantial up-front deposit
as well as appropriate progress payments. To help long-term customers adjust
to your new rules, its helpful to also extend a discount.
Example: The Myers & Pedroilla law firm informs its clients that in recognition
of hard economic times, it is lowering its hourly fee by $50 per hour. But because
its impossible to both charge lower prices and wait to be paid, M&P is simultaneously moving to a new billing routine in which clients are asked to pay half of the
estimated cost of their legal task up front and the other half within seven days of
completion. As a result, M&P loses a couple of significant clients, but when one of
them goes bankrupt a few months later owing its new law firm $35,000, M&P knows
it made the right choice.
A sales meltdown is more difficult to overcome if you run a service business

with a relatively high overhead such as a hair salon, car repair shop, dry cleaners, car wash, or bed and breakfast. Like retailers, the cost of keeping the doors
open and the business staffed can gobble up all of your declining income and
more, resulting in a substantial loss. In Chapter 2, we discuss how to make
cuts quickly, something that all businesses with substantial overhead must do.
Because in our 21st-century commercial world its a lot easier to make
money selling services than goods, most service providers have many local
competitors. Always remember that youre not operating in a vacuum.
Recall the old joke about the three hikers who, while walking in the forest,
encounter a huge, hungry tiger. The first slumps to the ground and says,
Were as good as deadno one can run faster than a tiger! The second,
who cant argue with this, collapses next to him. But thats when the third,
who is already running away as fast as she can, shouts over her shoulder, I
dont need to run faster than the tiger, only faster than you two!
If you equate hard times with the tiger and your direct competitors with
the hikers, the point is simplechances are your business will survive if you
outlast at least a good number of the other businesses that provide similar
services. Even in a declining market, lots of people will still get their hair cut
and colored, have spots removed from their clothing, or get their nails done.
Lucky ones will even be able to afford a few days vacation. It follows that if
your business can stay open until others close, you may even do better than
you did when times were good.
How can you outperform your rivals? Start by making a list of your
direct competitors. You have doubtless known most of them for years. But
dont forget that when times are hard, many cash-strapped consumers look
for cheaper alternatives. So if you operate an upscale hair salon and never
previously thought of the local Supercuts outlet as a competitor, you may
need to think again, depending on just how depressed your local economy is.
Then make a short list of the strengths and weaknesses of each competitor.
This might include their customer base, reputation, employee relations, cost
structure, and marketing savvy.
Finally, come up with a realistic plan to outperform and outlast a
percentage of them. (We discuss the possibility of lowering your overhead by
combining operations with a favorite competitor in Chapter 11.) Once your
plan is made, run it by your advisory board. Here are some examples:
Cedar Cleaners, whose business is hard hit by the recession, decides that
it has the financial resources to survive two years of low, or even no,
profits. Accordingly, to keep its long-time customer base loyal, it runs a
sale per week (sleeping bags, drapes, formal wear, quilts, and so on) to
keep volume up, even though profits take a hit. When, after a year of
deepening recession, two other dry cleaning establishments close, Cedar
is able to regain pricing power and return to solid profitability. Once the
local economy finally improves, Cedar has its most profitable year ever.
Two bed and breakfasts in the same seashore town combine marketing
efforts, sending three nights for the price of two offers to their
combined mailing lists, merging their websites, and even taking turns
doing breakfast. On the website they provide loads of information to
make it easy for people organizing weddings, family reunions, and small
business getaways to book both inns at once.
Construction
In a deep recession, tiny construction outfits with good marketing savvy
and energy often survive, and some even do well. Thats because a fair
number of home remodels and other smaller jobs tend to go forward even
when new housing and commercial construction is put on hold. True, small
construction outfits may have to shrink even more, but because most already
operate out of a home office and have little overhead, they can cut costs by
simply hiring less labor.
Slightly larger construction outfits in the 20 to 70 employee range,
however, often face severe problems. Not only is their overhead higher, as a
percentage of sales, but they also typically rely on suddenly iffy bank lines
of credit to smooth out payment cycles. Some fail for a combination of
reasons, the most important of which is that much of the new residential and
commercial construction they typically rely on grinds to a halt at the same
time that they dont cut expenses nearly fast enough.
Example 1: Six months into the recession, new business at J&B Concrete begins
to drop precipitously as residential and commercial construction severely contract.
At the same time, payments to J&B for cement jobs begin to slow down as everyone
from prime contractors to several municipal governments begins to hoard cash. Out
of loyalty to longtime office workers and estimators, J&B is slow to cut overhead,
hoping against hope that, as it always had, business will soon pickup. As a result,
monthly payments for rent, equipment, and staff exceed income.
J&B turns to its bank with a request that it increase their line of credit. Instead,
after seeing that J&Bs negative cash flow already violates an existing loan covenant,
the bank cancels the credit line. J&B immediately lays off 60% of its staff, tries desperately to collect on past-due receivables, and asks everyone from their landlord to
trade creditors to accept late payment. But even though some of these efforts show
promise, J&B runs out of money two weeks after the line of credit is canceled. Theyre
unable to pay even their diminished payroll, so the state labor commissioner closes
them down, and a bankruptcy filing follows.
When you realize that from start to finish, J&Bs crash from solvency to
bankruptcy took just five months, youll understand just how financially
fragile many construction outfits are. Nevertheless, had J&B moved faster
to shrink overhead, it might have survived. So in, lets give J&B a second
chance.
Example 2: When J&B has its first bad month, the owners meet with their experienced advisory board and explain that with construction drying up everywhere,
business is only likely to get worse. Following their advisers good advice, J&B immediately cuts office staff from ten employees to three. In addition, it sells $100,000
worth of equipment, using the receipts to pay off several equipment loans. Telling the landlord they plan to move in six months when their lease was up elicits a
counter proposal that they sign up for another two years at a 25% rent reduction,
which J&B accepts. Applying an aggressive full-court-press strategy to their lagging
accounts receivable, they collect many of them and sell several more to a factoring
company that specializes in collecting from municipalities and other public entities.
Then, with their balance sheet more or less in order, Jim and Bart meet with the
bank and present their plan to further shrink the business as necessary with the goal
of quickly returning to profitability, no matter how deep the cuts need to be. Their
loan officer, saying that he appreciates J&Bs determination to take the steps necessary to operate in the black, renews their line of credit. When several other local
concrete outfits go under, J&Bs business stabilizes. After several months of savvy,
low-cost marketing efforts focused on smaller home remodeling projects and solar
panel installations, business actually improves.
Restaurants
In most parts of America, there are at least one-third more restaurants than
the local market can support. In hard times, when cutting back on eating
out is near the top of most peoples spend less list, in some areas up to 50%
wont make a profit sufficient to sustain themselves.
Established eateries, especially those whose equipment is paid for, have
the best chance of survival. Fancy new restaurants that borrowed heavily to
pay for upmarket kitchens and pricey dcor are the most vulnerable, because
they have little room to cut prices. Even a small dip in patronage can make
it impossible to meet debt payments, to say nothing of making a profit. For
those restaurants lucky enough not to have high fixed costs, closing down
a couple of the slowest days of each week may be the best option, since it
will avoid paying out more in staff and supply costs than it takes in. But this
strategy wont work if youve got $1,000 a day in fixed costs whether youre
open or not.
Start by asking yourself How do I make money? Is it mostly on the weekends, on nights when the curtain goes up at the local theater, on the la carte
side of the menu, or on fancy coffee drinks, or does 80% of the profit come
from the bar? (See Chapter 5 for more on how to answer this question.)
Assume for a moment that, like a lot of restaurants, you make more money
selling alcohol than food. If so, the strategy for a midpriced communitybased restaurant might be to create specials and eventseven some that
reduce profits on food to zerothat keep the place full, figuring that once
folks come in theyll order their two glasses of wine (or whatever). Although
we discuss marketing in detail in Chapter 8, examples and ways to bring in
diners include:
A Beggars Banquet Tuesday, where you cook up only three entres, but
cut prices in half.
Kids Night, where you provide free kids meals in your banquet room
along with free babysitting.
Thursday Singles Night, where women eat freethe idea here of course
is that where single women go, men will follow. And organized as a
buffet where people can grab some food and sit at communal tables,
chances are your booze profits will more than make up for the cost of the
womens food.
Obviously these strategies wont work for a restaurant suffering from a
dearth of tourists or a drop-off in business at the nearby convention center.
But the questions you must ask remain the same: How do I make money?
and What can I do to preserve and build on this most important part of my
business? Hopefully youll find some good ideas in the rest of this book in
the chapters on making a profit, innovating, and marketing.
Wholesalers and Importers

By definition, wholesalers, importers, and other middlemen face a number
of risks when the economy seizes up and their customers suffer. There is
little new we can suggest by way of survival strategies if your entire business
is rapidly shrinking. For example, a wholesaler that provides a wide range
of sealants to the commercial construction industry may simply no longer
be viable if local construction all but stops, and an importer of handwoven
Indonesian fabric may go under if decorators are no longer willing to pay its
premium price.
But, if despite a short-term sales decline, yours remains a viable field, here
are the survival strategies youll want to consider.
Quickly reduce overhead to fit your reduced sales volume. As part of
figuring out how to do this, consider combining warehouse operations with
another wholesaler.
Sell only to people who pay their bills on time. This means staying
relentlessly current on your customers economic situations and may mean
cutting off some previously good customers. But as a middleman who
operates on a relatively thin profit margin and who must pay suppliers on
time, you simply cant afford to be in the collections business.
Reduce inventory. Turning over inventory too slowly and tying up precious
cash is the bane of all wholesale operations, so get rid of some inventory so
that precious cash is not sitting in your warehouse. If slow-selling goods have
already accumulated, offer whatever deals you need to move them, even at a
substantial loss. Wishful thinking wont serve here. No matter how little your
excess inventory is worth now, it will likely soon be worth less.
Consider adding hot-selling product lines. Even in a severe recession, some
things sell well. So while the market for expensive sweaters may take a big
hit, sales of yarn to make sweaters may boom, meaning that the first regional
sweater wholesaler who adds knitting supplies may do well. In short, take the
time to think hard how you can reposition your business to be in better tune
with the times.
Improve your marketing. Cutbacks alone will rarely return a business to
profitability. To do that youll also need to adopt the marketing strategies
necessary to move more product. So hit the phone, hit the Internet, hit the
bricks, and do whatever else you must to keep sales humming. (See Chapter
8 for ideas.)
Franchises
The biggest problem with many, if not most, franchise operations is
depressingly simple: Franchisors charge too much for a business that doesnt
have enough value to justify the high up-front and ongoing costs. In a
recession, many franchises wont have enough income to cover the cost of
capital and ongoing franchise fees. If yours is a typical franchise, youll have
agreed to pay the franchisor 3% to 6% of your monthly gross revenue (bigname fast food operators, such as Wendys, McDonalds, Burger King, and
Subway typically charge between 8% and 11.5%), plus a few more cents
on your sales dollar for the franchisors marketing efforts. You may also
have obligated yourself to buy goods and services either directly from the
franchisor or from an approved supplier, meaning youll almost surely be
paying more than if you bought them on the open market.
Add it all up, and youre likely sending the franchisor eight to ten cents
of every dollar you take in. This is obviously a huge added burden if your
business has begun to lose money, because unlike an independent business
you need to make not only an operating profit, but also enough extra to pay
the franchisor.
What to do? As with any business, cutting payroll and other expenses is a
priority. But even here your hands may be partially tied if you have agreed to
buy pricey goods and services from the franchisor. If cost cutting isnt enough
to get your operation back in the black, there may be little else you can do.
Thats because, unlike independent businesses where you are free to tinker
with the product, prices, and marketing strategy, your franchise agreement
may contractually obligate you to follow a paint-by-number business plan.
Targeting your best customers and engaging in your own guerilla marketing
techniques to reach them, whether technically allowed by your franchise
contract or not, is probably your best hope of reversing your sales decline.
(See Chapters 7 and 8.)
If, given your best effort, your operation is hemorrhaging money, think
about selling. (Youll probably need the franchisors approval.) Obviously,
selling is difficult when a business is losing money, but you may have some
hope if there are successful operators of the same franchise in your area, you
have a good location, and you sell cheap. Thats because a franchise operation
with a number of outlets may have the management savvy and deep pockets
to succeed where you could not.
If you cant make a quick sale, your only choice is usually to shutter the
business, add up your debts, and move on. (See Chapter 12.)
C H A P T E R
Dont Ignore Bad News

Why You Cant Wait......................................................................................................... 26
Cut Costs, Change Direction, Quit, or Sell........................................................... 28
Cut Back............................................................................................................................ 28
Take Your Business in a New Direction............................................................ 30
Sell Your Business or Its Assets............................................................................. 33
Close Down..................................................................................................................... 33
Decide How Much to Cut Expenses........................................................................ 34
Act Slowly to Reverse Cutbacks................................................................................ 35
Take all the time to reflect that circumstances permit but when the time
for action comes, stop thinking.
Andrew Jackson
mall enterprises are incredibly sensitive to both good and bad fortune.
Catching an important entrepreneurial trend or operating in a
booming locality or business sector can result in quick growth and
outsized profits. Unfortunately, the opposite is also true. When the local
economy sours, or for some reason your business niche falls out of favor,
profits can turn into losses faster than the neighbors pest of a cat disappears
when you reach for the garden hose.
Its exciting and fun to expand a successful business by hiring additional
employees, buying more equipment, renting new space, and doing all the
other things necessary to grow. But there is precious little joy in quickly
downsizing a business that has become overextended, especially one that has
borrowed heavily to fund expansion, only to find that a declining market
wont sustain it. Unfortunately, entrepreneurs whose businesses are suddenly
caught in stormy financial seas typically start by either denying they are in
trouble or underestimating its severity. The result is that many businesses
that could have been saved by rigorous early action quickly become so debtburdened that they die unnecessary deaths.
Why You Cant Wait

Huge, once highly profitable companies such as Ford or Kodak can see their
market position deteriorate for years or even decades without closing. But
small entrepreneurs rarely, if ever, have the luxury of being able to similarly
ride their declining businesses slowly into the sunset. In the small business
world, if revenues drop significantly for more than a few months, you must
promptly both cut expenses and address the causes of the decline. If you
dont, you risk quick and brutal failure.
How do you know when its time to cut back? As a hands-on entrepreneur,
you should immediately know aboutor better, anticipatenegative news
such as a precipitous sales drop, the loss of a big contract, the failure of a
chapter 2 | dont ignore bad news | 27
large account to pay on time, or the emergence of a tough new competitor.

The problem is rarely spotting the disturbing event or trend, but admitting
to yourself that it is serious enough to require quick and decisive action. For
example, the owner of the small Readers Corner bookstore who learns that
Barnes & Noble is planning to open a superstore on the next corner is all too
likely to hope for the best while carrying on business pretty much as usual.
Similarly, the operator of a hotel in a pricey tourist area might do little or
nothing even when future bookings drop by 30%.
Whistling a happy tune in the face of entrepreneurial adversity, especially
a true recession, wont work. Once you see clearly that your business faces
a boulder-strewn road, you must immediately come up with a workable
plan to either clear the rocks, choose another path, or sensibly deal with the
problem in some other way. Depending on your business and the severity of
its financial problem, this might involve quickly cutting overhead, moving to
a cheaper location, selling pricey equipment, introducing a new product or
service, developing a better way to reach customers, cutting office expenses,
selling the business (or a part of it), or closing down, before business losses
gobble up all your familys assets.
But because survival depends on quickly reversing losses, what you do is
usually less important than how fast you act. Delay even a couple of months
too long and fast accumulating debt can turn the boulders in your path into
gravestones.
Example: All Wooden, a company that builds and replaces wooden windows in
older houses, has operated successfully for 38 years when the recession hits. New
orders slow dramatically; customers begin to pay late if at all. Owners Janet and Bill
try to avoid layoffs by undertaking an expensive cable TV ad campaign. When that
fails to bring in many new customers, they again consider layoffs, but decide to wait
60 days in the hope that business will improve.
But in less than a month, the bank, pointing out that All Wooden is in violation of
two major covenants (they were operating at a loss, and their debt-to-equity ratio was
out of balance), pulls their line of credit. Janet and Bill try to find a factor to buy their
receivables, but because many of them were past due, there are no takers. With little
cash and a gaggle of suddenly aggressive creditors, All Wooden files for bankruptcy.
Cut Costs, Change Direction, Quit, or Sell

What exactly should you do when hard economic times cause your
enterprise to suddenly operate in the red? Commonly youll have three
choices:
cut expenses and increase low-cost marketing in an effort to return to
profit
take the business in a promising new direction, or
close down.
In addition, the owners of a minority of troubled small businesses that
have obvious long-term value may have a fourth choice, to sell.
Lets look at all four in some detail.
Cut Back
When times are good, its easy to expand too fast or be too casual about
controlling costs. Like a victorious army that advances so quickly it outraces
its own supply lines, a rapidly growing business can easily become a victim
of its own euphoria, snatching defeat from the jaws of victory. It can become
financially, personally, and logistically overextended if, for example, owners
open a second caf, hire more production workers, or ambitiously expand
a website. And when this occurs, you become highly vulnerable to any
significant drop-off in business.
Even if a business hasnt been on a growth binge, a long period of financial
success often leads owners to tolerate inefficient and sometimes even downright sloppy business practices. For example, the head of a solidly profitable
time-share management company in a booming resort area might pay himself
and key employees generous salaries and lavish perks, while still expecting to
take off Fridays to play golf. Hell quickly be in trouble when the real estate
boom goes bust.
As you might expect, both in war and business, the best antidote for advancing too fast or managing too loosely is to pull back quickly and consolidate your initial success. Executing a strategic retreat can work particularly
well when your expansion hasnt locked in high capital costs. But if your car
dealership, furniture store, or financial management company has maxed out

its credit and increased its expenses to move to a fancy new sales complex,
simply cutting the number of employees and other expenses wont solve your
problem. Youll either have to figure out a way to keep sales growing, sell to
someone who can, or find a way to shed your newly acquired overhead costs.
Likewise, opening a second or third location or otherwise substantially
expanding just before an economic downturn hits almost always leads
to serious economic troubles. If your new location, new product line, or
expanded operation isnt quickly profitable, your survival usually depends on
shutting it down. If you dont, you are at high risk of transferring precious
time and energy from the successful part of your business to the new piece
that is sucking your cash while killing your profits, almost always a terrible
strategy.
Example: Just before the recession hit, Alexia, the owner of Patina, an upscale
hair salon that earned good profits for over a decade, decided to open a branch on
the other side of town. Facing several entrenched competitors at the new location, Alexia lost money from day one, something that suddenly threatened Patinas
survival when business at her original shop dropped 25%. Alexia wanted to close
her new shop, but had agreed to a pricey two-year lease and bought a shop full of
expensive equipment.
With the help of her lawyer, Alexia convinced the landlord that Patina faced
bankruptcy if the lease couldnt be terminatedwith the result that, in exchange
for a payment equal to four months rent, he canceled the remainder of the lease.
Then Alexia moved the fancy new work stations to her old shop, selling the older
equipment to a low-rent shop in the next county. Helped by a short-term loan from
her mother, Alexia had just enough money left to hang onto her still-profitable core
business.
Assuming for now that your businesss situation is still sufficiently sound
that a cutback plan can work, youll want to focus energy and resources on
your profitable core competencies while shucking off other money- and
energy-draining activities. To develop your back-to-basics business plan,
start by looking at the profit margins of each key area of your little empire.
Youll probably find that the areas that made you successful in the first place
are still your cash cows. For example, a coffee shop that added dinner to
its traditional breakfast and lunch business just a few months before the
local economy turned sour might find that most of its profits are still made
before 2:30 p.m. and that the new dinner business, no matter how excellent
its long-term prospects, is causing unsustainable losses. Finecut dinner,
take a hard look at lunch, and reemphasize coffee and breakfast. When
the operation is profitable again, and sunnier economic times return, take
another look at expanding into pork chops and pasta. (For help on this, see
Chapter 5.)
Although there is no one-plan-fits-all business formula to cutting costs in
bad times, most businesses should cut expenses by at least as much as lost
income. For example, if sales drop 30%, youll want to quickly cut costs by
that many dollars. In a very small business, this will almost always mean
cutting your own pay as well as trying to minimize every possible expense. At
the same time, youll want to work hard to increase sales. (For help with that,
read about innovation in Chapter 6 and marketing in Chapter 8.)
tip
Cut first, market second. Dont forget that when you cut spending, you
save 100 cents of every dollar. Marketing can bring in profitable new sales, especially
for low overhead service businesses, but you never get to keep 100 cents of every
dollar. Chapter 3 discusses many strategies for cutting costs.
Take Your Business in a New Direction

In some situations, cutting expenses will simply forestall failure, not prevent
it. Pivoting your business so you can face the recessionary era is essential,
especially where its obvious that failure is inevitable if you stick to your old
business model. Innovating in tough times is hard to do, especially when
your company is already under financial pressure, but your chances of success
will improve if you are moving with, not against, the spirit of the times.
(More on this in Chapter 6.)
For example, a lawyer might shift from advising business startups to
helping entrepreneurs with the legal problems that frequently accompany
downsizing. Or the owners of a rural bed and breakfast with a substantial

mortgage, who are hit by too much local competition and an area-wide
economic downturn, could combine expense cutbacks with a new recessionsensitive marketing strategy, such as using the Internet and other outreach
efforts to market to urban families looking for an affordable place to hold
family reunions, weddings, or retirement events.
If your business is in danger of failing despite expense cutbacks, we suggest
a two-step approach to analyze whether a major change of direction may save
you. First, inventory and list your enterprises core skills and competencies.
Second, assess whether or not you can market them in new and affordable
ways. For instance, if Wang Flooring spots a potentially lucrative opportunity
to sell a suddenly popular new type of kitchen flooring to existing customers,
or an existing commercial floor product to new home-remodeling customers,
exploring whether either will work quickly and on the cheap is probably its
best survival strategy.
Example 1: Sandrine, Mavis, and Paul formed SMP & Associates to design websites
for e-commerce companies. For two years, business was so good SMPs headcount
ballooned to 30, and it was about to sign a lease for office space in a pricey area. Then
the credit meltdown scared potential customers, who axed new projects, and new
business dried up. Still, for months, the partners believed they could survive until business picked up by completing SMPs many existing contracts. But when two of their
best remaining customers suddenly declared bankruptcy and a third simply closed
without paying its bills, SMPs owners concluded that SMP was no longer viable.
Thats when Mavis mentioned that River People, a nonprofit environmental group
whose board she chaired, needed help with its website. With nothing else on the
horizon, SMP made River People a quick proposal and landed a fair-sized job, albeit
at an hourly rate far lower than they were used to charging profit-making enterprises.
Based on this success and a few days of calling other area nonprofits, the partners
decided that redeploying their skills to design state-of-the-art websites for nonprofits
was their best strategy to stay in business, at least until higher-margin commercial
business again became available.
To get started, they made a list of the 20 largest health, environmental, and education groups in the area. Next, they studied each organizations website, easily spotting
a number that badly needed improvement. Then they pitched SMPs design services,
taking the time to do quick redesign specs for the largest nonprofits. Although many
of these potential customers claimed to have absolutely no funds to improve their
sites, a half dozen changed their minds when Mavis explained how River People had
quickly raised the needed money through a focused membership appeal.
Over the next six months, SMP continued to work with a number of nonprofits,
still intending to eventually return to the profitable world of e-commerce. But then,
at an owners meeting one fine spring day, a funny thing happened. In the middle of
outlining his planned proposal to a potential client in the childrens health field, Paul
announced that he was having so much fun working for people who really stood
for something that he didnt want to do anything else. When Mavis and Sandrine
agreed, the owners realized that they hadnt just temporarily adjusted their business
plan in reaction to a financial emergency, they had fundamentally changed it.
Example 2: Jorge and Guillermo thought they would be tremendously successful when they opened Los Padres Grill, a midpriced Mexican restaurant across from
a universitys large complex of married-student housing. With the exception of a
McDonalds, there was no real competition nearby. Initially quite successful, the grills
monthly numbers began to display red ink when the recession hit and anxious families cut their eating-out budgets. After four bad months, each one worse than the
last, Jorge and Guillermo realized they had to either quit or try a different approach.
With the help of a small loan from their uncle, they converted their sit-down restaurant to a takeout place with just a few tables. Because customers now lined up at
a counter to order food, there was no need to provide table service. Prices could be
reduced, which somewhat improved their student business.
But still, because only the dinner business was marginally profitable, it was obvious
Los Padres Grill needed to quickly develop additional markets or close down. Jorge
and Guillermo decided their best bet was to increase sales to people who worked in
the light industrial area just north of the campus. Taking a few days to talk to workers
at an auto body shop, metal fabricating company, wholesale plumbing supply outfit,
and similar businesses, the partners learned that few workers patronized Los Padres at
lunch primarily because they were too busy to take a formal lunch hour. Instead, they
grabbed a sandwich off a roving lunch truck or brought food from home. To improve
access to their food, Jorge and Guillermo converted Guillermos truck into the Los
Padres Taco Wagon complete with warming ovens, coolers, and food display units.
Now able to take its food to customers, Los Padres business immediately improved, something that encouraged Jorge and Guillermo to further diversify into
catering. Reasoning that even in tough times virtually all small businesses sometimes
order food for meetings and celebrations, and financially challenged students occasionally have parties, the partners created a menu of reasonably priced catered
meals. When flyers were distributed at all businesses on the Taco Wagons route and
throughout the student housing complex, orders quickly began to come in.
Sell Your Business or Its Assets

Very few owners of economically troubled small businesses have the
opportunity to sell their business as a whole. But if your company has a
valuable asset, such as real estate, intellectual property, a respected brand, or
valuable equipment free of debt, you may be able to sell it. Youll be able to
pay off your debts and, if you are truly fortunate, end up with a few dollars
in your pocket.
While you explore whether its possible to profitably sell your business or
its assets, you will almost always need to also cut expenses quickly. Thats
because finding a buyer and completing a sale will almost always take time,
something you dont have if losses are mounting. Theres not much point in
selling your business or its valuable property only to have all of the proceeds
go to pay your creditors.
Close Down
For a variety of reasons, including new competition, a changing marketplace,
or most frightening, a recession-driven loss of customers and pricing power,
many small businesses wont survive. Sadly, when an economic tsunami hits
and customers stop spending, many small businesses fail despite the fact that
their owners work hard and do lots of things right. In these circumstances,
even formerly highly successful businesses can sail into weather too heavy
to survive. In short, if you are the owner of a terminal business, your best
course of action is to repeat I am not my business, and my business is not
me, as you close the doors for the last time.
Perhaps it will help you maintain your perspective if you think about
the many New York City tourist-based businesses that failed after 9/11.
Suddenly, with no out-of-towners to ride their excursion buses, sign up
for their theater tours, or buy their souvenirs, many either qualified for
government assistance or closed down. Only you can decide whether your
business occupies a niche that can outlast a severe downturn, but especially
if business has dropped by 40% or more, chances are the decision has been
made for you. For example, if a recession decimates your sales of luxury
watches, there may be little you can do to surviveunless you come up with
a successful new marketing campaign, perhaps one that focuses on value,
practicality, and durability and that can convince wealthy penny-pinchers
that it still makes sense to purchase a fine watch.
Decide How Much to Cut Expenses

If you believe that your business still has a heartbeat, you have probably
already acted to reduce expenses. But if, like most entrepreneurs, youre
optimistic about the possibility of a quick turnaround, you probably havent
cut enough. The result is that as hard times get harder, youll have to cut
again, and deeper. But whether youre doing it for the first, second, or even
the third time, moving quickly to cut expenses without killing an already
troubled business is no easy task.
Your first step is to decide how much you need to cut. Approach this by
creating a worst case, a middle case, and an optimistic budget for the next
three, six, and 12 months. (To learn how to do a profit-and-loss forecast,
see the appendix.) Then gather your advisers and go over these numbers.
Chances are, after challenging all of your assumptions, theyll recommend
that you go with a version of your budget close to your worst-case scenario,
reasoning that your chances of survival are far better if you err on the
conservative side.
Example: Because of government budget cuts, sales of your public-librarycentered consulting business have dropped 25% in the last three months with no
rebound in sight. Obviously, your budget for the immediate future should reflect at
least this reduced income. But unless you have been quickly able to diversify your
business to create a new and profitable income stream, it is wise to assume that
income will drop further, since there is no sign your decline has bottomed out. If,
as might be sensible, you predict that sales will be down 40% for the year, it follows
that to balance your budget youll need to cut expenses at least by that amount and
probably significantly more.
But where will all your savings come from? Here are some of the main
areas to look to when you need to cut costs:
discretionary spending (nonessential maintenance and employees)
rent (landlords are more willing to renegotiate a lease in an economic
downturn)
capital costs (put off that new equipment purchase), and
payroll (you might not need to lay anyone offinstead, temporarily cut
back salaries and hours).
Cutting expenses, of course, is easier said than done. Chapter 3 includes
a long list of creative ways to back on specific kinds of spending without
crippling your business.
Act Slowly to Reverse Cutbacks

After youve had to make painful cuts in jobs and salaries, you would be
only human if you were tempted to quickly reverse them should business
even modestly improve. This is understandable, especially when you hope to
rehire employees whose personal budgets you know are miserably stretched.
But there are at least two reasons why this is not a good idea.
First, if significant cutbacks were needed in the first place, it will almost
certainly take many months and possibly a year or more to bounce back
to health, even should the economy pick up or other factors that triggered
the need to downsize begin to dissipate. And before you should even think
about increasing expenditures, your business not only needs to return to
profitability, but also to dig itself out of its financial hole. In many instances,
youll also want to repay at least a good portion of borrowed money, catch
up on deferred maintenance, and replace dodgy equipment before you give

a thought to restoring benefits, hours, paychecks, and especially, hiring
more employees. For example, if you have borrowed $50,000, deferred the
purchase of $25,000 worth of new equipment, and failed to repaint your
tatty-looking building, youve got lots to spend money on before adding to
your payroll expense.
A second reason not to restore jobs and pay too quickly is to avoid the
possibility of a double dip. If, after a couple of months, your business again
underperforms, it will be emotionally devastating to you and your staff to
have to reimpose cuts. To say your credibility as a leader will be shot is an
understatement.
In addition, rehiring laid-off workers will almost always be a lower priority
than restoring at least some or hopefully all of the pay and hours of the
employees who have stuck with you during the hard times and worked extra
hard to achieve the recovery. Indeed, if you really did adopt a good process
to cut your least important functions and your most inefficient people,
it might not make sense to reverse these decisions, no matter how much
business prospects improve. Instead you would be smarter to employ fewer,
more efficient workers at the same time you lift the pay of those who have
experienced cutbacks. (See Chapter 9.)
Example: When the snow fails to arrive by December that year, John and Adelle,
owners of the HillTop Lodge, are forced to lay off several maids and restaurant
workers and make an across-the-board salary reduction. Finally, in the last week of
February, the mountains surrounding HillTop Lodge experience a deep snowfall.
Even though business immediately improves, John and Adelle decide to keep a lid
on costs until they can reduce their maxed-out bank line of credit. So except for
rehiring a couple of essential room cleaners and restaurant staffers, they and HillTops
managers continue to fill in behind the front desk and grab the now happily jingling
phones. Adelle, who has learned to make a killer martini, decides that she can handle
a few more months behind the bar.
Only when a long and busy spring ski season gives way to an equally good summer,
allowing HillTop to reduce its line of credit to a comfortable level, do John and Adelle
restore half of the salary reductions. A month later, when business stays good, they hire
back the assistant reservations manager. But they decide to stick with a number of the
economies imposed during the downturn, including contracting out maintenance and
snow removal instead of paying a full-time maintenance employee. Finally, when bookings for the fall color season come in strong, they decide to restore all salary cuts to
their pre-drought levels and hire a weekend bartender. At Christmas, with business still
strong, everyone who had survived the tough year receives a small bonus, along with a
personal note from John and Adelle thanking them for their loyalty.
C H A P T E R
Control Your Cash Flow

Keep Paying Your Bills on Time.................................................................................. 41
Why Paying on Time Makes Sense..................................................................... 41
What to Do When You Must Pay Late............................................................. 45
How to Create More Cash............................................................................................ 45
Spend Less........................................................................................................................ 46
Take in More Cash....................................................................................................... 57
Borrow Money.............................................................................................................. 61
What Not to Do................................................................................................................. 66
Dont Use Merchant Cash Advances................................................................ 66
Try Not to Max Out Your Credit Cards........................................................... 67
Weigh Borrowing Against Your House............................................................ 67
Anybody who thinks money will make you happy hasnt got money.
David Geffen
hen times are tough, cash becomes king, emperor, czar, and
grand vizier rolled into one. Suddenly, in a few weeks or months,
what was once abundant in your small business can become
difficult to get and hard to hold onto. This sudden cash contraction is usually
caused by some or all of the following: poor sales, lower profit margins, pastdue accounts receivable, bloated inventory, restricted or lost credit lines, and
the impossibility of raising more investment capital.
If youve decided to soldier on, you need to trim expenses quickly so that
they match your lowered income. (See Chapter 2.) And to make informed
decisions, not guesstimates, about how much to cut, you should by now
have created a formal profit-and-loss statement and a cash flow analysis (see
the appendix).
Now its time for the next step, which is to focus on your current cash
position with an eye to improving it. If cash is flowing out of your business
significantly faster than its coming in, youll have a very short window in
which to fix the problem, assuming its fixable at all. Viewed most broadly,
you need to examine three aspects of your cash flow:
how and when cash comes into your business
how and when it goes out again, and
where it gets tied up in the meantime (in inventory and equipment, for
example).
How much cash does your company need? Because businesses are so
different, there is no one-size-fits-all answer. But generally speaking, when a
deep downturn hits and sales drop, you need at least enough cash to survive
six months. That gives you enough time to cut expenses, increase marketing,
and quickly develop innovative new products or services. Dont panicthis
doesnt mean you need to have six months revenue in hand now. What you
do need is the confidence that you can somehow produce enough cash or
credit to cover any shortfall between what youll take in and what youll pay
out during this period.
chapter 3 | control your cash flow | 41
Keep Paying Your Bills on Time

When a business begins to run short of cash, its common for the owners to
start paying billssometimes even federal and state taxeslate. We hope we
dont need to explain why skirting tax obligations is an absolute no-no and
a clear sign that you are at (or past) the point where you should close down.
(But if youre unconvinced, see Chapter 4 for more on why shortchanging
the IRS is a terrible idea.)
Even paying garden-variety bills late is almost always a poor approach,
for all the reasons discussed below. But perhaps the biggest benefit of
keeping current on your accounts payable is that doing so tells you that
you are making the decisions necessary to keep your business viable. Maybe
being able to pay your bills on time means you have developed a successful
guerilla marketing campaign, moved to a low-rent location, sold unneeded
equipment, laid off employees, refinanced an equipment lease, held a killer
inventory reduction sale, or cajoled your customers whose accounts are
overdue into bringing them current. Whatever youre doing to cope with
your cash problems, if the result is that you can pay your creditors on time, it
is a clear sign that you are following a winning survival strategy.
Why Paying on Time Makes Sense

But what about the argument some small business commentators make that
by keeping accounts current you are paying out money before you absolutely
have tosomething you cant afford to do in tough times? Sorry, in the real
world of small business this is nonsense for at least six important reasons.
Saving Your Good Name

The cost of paying on time is low as compared to almost anything else you
can do to maintain a good reputation in your business community. When
you pay late, you kick your cash problem down the road a few months at
great cost to your credibility, something that is crucial to preserve in tough
economic times. To survive, your business will eventually have to pay its
debts, so by putting them off a few months you gain nothing but risk losing
your good reputation.
Saving Money
Paying early can get you discounts that net you more cash then you could
earn in interest by holding onto the money longer. Dont be shy about asking
for deeper discounts than your vendors initially offer. Especially if you have
the cash to pay early, you should be able to achieve reductions as high as
10% to 15%.
Example: A few months after the recession hit and new construction plummeted,
Solar Supply LLCs bank threatened to pull its line of credit. This was avoided when
the companys founders loaned Solar Supply a substantial sum. Now with both the
loan money and line of credit to draw on, Solar Supply had adequate cash, but no
profits. So after making lots of money-saving cutbacks, Solar Supply called its ten
largest vendors with a simple proposition: For the next six months, Solar Supply will
pay on delivery for all orders, in exchange for a 15% discount. Five vendorsthemselves short of cashimmediately agreed, and two more said yes when it became
clear they would otherwise lose the business. The three holdouts were easily replaced
by companies that realized that when times are tough, everyone has to give a little.
Ensuring Excellent Future Service

Every working day, you (and every other small entrepreneur on Earth) form
judgments about the businesses you come into contact with, judgments
that are particularly crucial at a time when many businesses are in financial
trouble. For example, you likely have thoughts like these on a regular basis:
Business A produces a reliable product.
Business Bs employees can be relied on to show up when they say they
will and work overtime if thats what it takes to finish a job.
Business C constantly comes up with new and innovative services that
frequently anticipate our needs.
Business D always seems to be understaffed by surly employees who
never return phone calls.
The owner of Business E is great, but some of his younger employees are
not properly trained.
Damn Business F. Another day is here, and its check isnt.
When these thoughts run through your head, youll doubtless question
whether you ever want to deal with business D, E, or F again. And if you
had to choose one of these less-than-stellar outfits to head your blacklist,
we bet it would be Business F. That just makes good sense. Tough as it is to
cope with late deliveries, unreturned phone calls, inexperienced workers, or
even poor quality products or services, its far harder to survive without being
paid. This is doubly true for a business in a field where payment isnt due
until after goods or services are provided. Here, if payments are substantially
late, a business can actually fail even though its bottom line shows it to be
profitable.
You want to be a company that other companies want to do business with.
For example, if your business suddenly needs to ask a print shop to turn
around a flyer in a few hours, youll have a much better chance of getting
them to say yes if you paid your last bill the day it was due.
Encouraging People in Your Network to Recommend Your Business

Keep in mind that its not just your satisfied customers (people who pay you
money) who tell others about your business. All the people who work for
and with you can also be powerful recommenders. This includes everyone
you cut a check to, from your landlord and insurance broker to the owner of
the restaurant down the street that occasionally caters your meetings. If they
feel positive about your businesssomething that is greatly aided when you
pay their bills promptlyeach can become a significant marketing ally.
Example: Doug, an insurance broker, goes to great lengths to help Bluebelle Web
Design find an insurance company willing to customize a standard business policy
to meet Bluebelles special needs. Joan, Bluebelles president, is so impressed with
Doug that after the policy is finally in place and Bluebelle is billed, she ignores the
ten-day payment terms and immediately mails the premium check, along with a
note of thanks. Now its Dougs turn to be pleased. Later that week, when he attends
a service club meeting and the subject of small business websites comes up, he favorably mentions Bluebelle to what amounts to a roomful of potential customers. As a
result, Joan picks up two excellent new accounts.
Building and Keeping a Positive Credit Profile

If your business is new and tiny, you might assume the rest of the commercial
world doesnt even know you exist. Not so. Almost from day one your small
business will leave tracks in the commercial sands. For example, if you
incorporate, form an LLC, hire employees, or apply for a bank loan, credit
card, or trade credit, youll quickly appear on the radar screen of Dun &
Bradstreet and similar data collection organizations. These outfits gather and
sell credit information about virtually every American business. Among other
things, they note what your business does, how many employees it has, who
owns it, and, probably most important, its credit and bill-paying history. In
short, your bill-paying profile is available to anyone who pays a modest fee.
Who would buy such a report? Especially when economic times are
tough and many businesses are losing money, the answer is: Virtually all of
your creditors and potential creditors, including banks that are considering
lending you money, companies reviewing your application to lease
equipment, and suppliers, wholesalers, and other businesses from which
you have requested credit. True, an excellent payment record alone wont
guarantee that youll receive a bundle of commercial credit or a particular
loan; other information is also important. But if Dun & Bradstreet reports
that you habitually pay late, your credit application is sure to raise a red flag
and greatly increase the likelihood that youll have to pay cash up front.
Getting a Payment Cushion

Paying on time acts as an effective rainy day fund if and when you face a
serious reverse like losing a major client, having a horrible sales month,
or dealing with the bankruptcy of someone who owes you a lot of money.
Thats because in case of emergency, youll have a payment cushion of
several months: If youve paid promptly over the years, youll have built up a
substantial reservoir of goodwill and respect with creditors. They are likely to
support you when you cant pay on time if you can show them a convincing
plan to solve your temporary cash problem.
Example: Franks Marine Services, a long-term customer of your engine repair

business, faces a difficult business patch because a charter company went bankrupt
owing it $40,000. Frank has always paid you early or on time, so chances are you will
be as accommodating as possiblecertainly far more generous than you would be if
Benjis Boat Repair, your most feckless customer, asked for similar help.
What to Do When You Must Pay Late

Sometimes, despite your best efforts, you might not be able to pay all your
bills on time. For example, you might be forced to delay some bills a month
or two while you deal with a one-time problem like a lost line of credit, a tax
lien, or closing a money-losing part of your business.
In this situation, your best strategy can be stated in three words: communicate, communicate, communicate. Dont wait until you receive a third dun
letter to talk to the people whose check is not in the mail; pick up the phone
as soon as you know you have a problem. Talk to the person who has real
authority to manage accounts receivable to briefly explain what the problem
is, how youre solving it, and when you expect to be able to pay. If you can
make an immediate partial payment, even a small one, its absolutely essential that you do so. As the old saying goes, it always pays to put your money
where your mouth is.
tip
Dont overdramatize your business problems. Occasionally, people

who cant pay a bill on time are tempted to detail every miserable thing that
prevents them from doing so. Better to briefly explain a good reason for the holdup
and focus on when you will be able to send a check. Otherwise, you risk convincing
the creditor that things are so bad they should immediately cut off future credit.
How to Create More Cash

If paying bills (especially tax bills) late is a terrible idea, what are some more
effective ways that a cash-strapped business can keep its checking account
in positive territory? Generally speaking, all suggestions fall into two broad
categories: spend less and take in more. And in businesses that maintain
inventory, there is the added wrinkle of not allowing too much cash to be
tied up in a warehouse or shop.
Spend Less
Especially in a recession when customers are scarce, the quickest way to raise
cash is not to spend it. There are many ways to reduce the amount of money
flowing out of your businessand implementing just a few can make a big
difference.
Eliminate Discretionary Spending

If you planned to paint your building, buy new equipment, or hire additional
employees, dont. Only if a particular expense is essential to carrying out a
crucial marketing or diversification plan should you go ahead. In virtually
every other instance, just close your checkbook.
Even if youve made a contractual commitment to spend money, you can
try to negotiate your way out of it. If you are willing to pay a reasonable
buyout fee, its legal and honorable. After all, once clued in to your financial
problems, the other party may be happy to accept a partial payment from
you rather than risk your business failing and receiving no payment at all. If
the other party simply wont renegotiate, accept a reasonable buyout offer, or
otherwise work with you, you or your attorney may need to point out that if
you cant stem the flow of red ink, bankruptcy may be your only option.
Buy More Carefully

All businesses buy things. It should go without saying that it will help preserve cash if you buy in smaller quantities and negotiate lower prices. But
given that prices usually go down when volume goes up, accomplishing these
things together may seem impossible.
But when times are tough and suppliers are hungry for business (especially
from companies that pay on time), youll be surprised at how many will
lower prices, if you ask and dont take no for an answer. Dont overlook basic
expenditures, such as phone service, electricity, copying, janitorial services,

and payments to a variety of independent contractors.
Even for smaller purchases, often its best to ask for bids (prices) from a
number of suppliers, including your old standbys. And dont sign a longterm contract with the first vendor who offers you a better deal. If someone
eager to get your business offers you a lower price, the vendor you use now
will probably try to keep your business by going lower still.
Look for a Cheaper Credit Card Processing Service

If you take credit cards, chances are that you pay your processor too much,
thus every day giving up cash you desperately need. Because many banks
quote a complicated menu of charges to handle different types of credit
cards, it can be confusing and time-consuming to compare prices, something
deliberately calculated to give bank sales reps a huge advantage over often
extremely busy merchants.
As a general rule, if you solicit a number of bids and buy your own
processing equipment, youll save a significant amount. But because getting
several bids may take time you dont have, here are a couple of shortcut
ideas. First, if you raise the issue at a local merchants meeting or industry
trade group message board, you might find that someone else has done
the comparison shopping for you. Second, check out the prices offered by
Costco Services and compare them to what you pay now. Costco may not
always be cheapest, but its known for offering a high-quality service at a
competitive price.
Stop Paying for Equipment You Dont Need

When times are good, its easy to commit to buying or leasing expensive
equipmenttrucks, cars, bulldozers, electronic gear, forklifts, and so on.
Take a hard look at everything you own, especially items youre still paying
for. Sell everything you dont absolutely need. Even if you sell a vehicle for
less than you owe and must make up the difference to pay off the loan, youll
often net large cash savings over time. And if you still need the item from
time to time, you can probably rent it by the day for far less.
Dont forget leased equipment. If you are leasing equipment you dont
absolutely need, ask the leasing company to renegotiate payments or cancel the
lease in exchange for taking back the equipment. If no one takes your requests
seriously, dont be afraid to involve a lawyer, who should be experienced in
explaining that without quick cooperation, your business may fail. Especially if
the leasing company believes you might close down and file for bankruptcy, it
will likely make you a better offer or take the equipment back.
tip
Share equipment with other businesses. Consider the possibility of

partnering with another small business if you could sensibly share equipment. Chapter 12 discusses the potential financial advantages of combining some or all of your
operations with a competitor. Sharing the cost of expensive equipment is one of them.
Renegotiate Your Lease or Move

Renegotiating an ongoing lease to get a lower rate is rarely easy. But
especially if the poor economy has caused tenants in your area to be thin on
the ground and your lease will be up for renewal soon, chances are good that
if pushed, your landlord will give you a better deal.
Even if you have a long-term lease, try to renegotiate. If properties are
emptying out around you and you open your books and show your landlord
that, without a reduction in rent, your business wont survive, he or she may
be willing to accommodate you. One possibility is to propose a significantly
lower rent for the next year, with a built-in increase to kick in when and if
your sales return to normal levels.
Example: Cleveland and June run Ambrosia Gifts at the Fairview Shopping Mall.
Sales have fallen 40% but they must keep paying their lease, common area fees,
advertising surcharges, and a small percentage of sales to the mall, the gift shop falls
hopelessly into the red.
Believing that mall management will never negotiate a more favorable lease,
they decide to close the store immediately and then research whether to file for
bankruptcy. But to their surprise, no sooner do they notify Fairview Mall of their
intentions than the mall, which by this time has a number of empty shops, offers
to cut their rent and fees by 50% for the next 12 months. The deal convinces June
and Cleveland that with a more energetic and creative marketing effort, they have a
chance to survive.
Be careful not to trade a short-term rent reduction for a significantly longer

time commitment, because you cant know for sure that this adjustment will
be sufficient to keep you going. In exchange for your requested reduction,
your landlord may ask for your personal guarantee (even if you are organized
as an LLC). Giving it could imperil your personal credit. (See Chapter 4
to understand why when times are hard, its particularly important to keep
business and personal debts legally separate.)
tip
Consider having a lawyer or other third party negotiate for you.

Unless you have a personal relationship with your landlord, it can often help to let
someone else do the negotiating. A lawyer will know how to reassure the landlord
that your business can survive if you resolutely reduce expenses, while at the same
time suggesting that if you cant quickly reduce expenses, bankruptcy may be your
only option. (See Chapter 13 for a discussion of how to get out of a lease.)
Sublet Unneeded Space

If your business is losing money, your real estate may now be your most
valuable assetmake sure its producing every penny of income it can.
Especially if your business downsizes, rent out unused space if your lease
allows it (you may need to obtain your landlords prior consent). You might
even want to look at moving your business to another location and renting
out your entire building.
You might conclude that it would be impossible to find a subtenant
because, in a recession, other businesses also have surplus space. But it can
put real dollars in your pocket to think again. List your vacancy online and
canvass your area for a subtenant who can no longer afford space of its own.
Be creative. Even formerly fiercely competitive retailers may survive by

operating out of the same space or combining office, warehouse, or even
small manufacturing operations. (See Chapter 11 for more on how a
recession profoundly changes the competitive landscape.)
Cut Employee Perks

If you havent canceled extras, from company-paid cars, parking spaces, and
club dues to the daily newspaper and bottled water, you may be beyond help.
Once again, examine every check your business writes. Even when cuts are
more symbolic than significant, such as no longer buying pizza for meetings
or renting parking spaces for employees, working hard to chop every possible
expense sends an important message to everyone associated with your
business that you are determined to do what it takes to survive.
Cut Employee Benefits

Benefits should be the first place you look to cut employee costs. For
example, if your business matches your employees contributions to a 401(k)
plan up to $1,000 per year or it has other generous benefits such as paying
health club memberships, alternative wellness programs, or a pricey dental
plan, seriously consider eliminating them. Although painful, when times are
tough its better to cut most benefits rather than lay off people.
The one big exception is your medical plan. If you provide one, do your
best to keep it, even if you have to cut your premiums by raising employee
contributions and co-pays. For most people, health insurance is an essential
part of their personal safety net, and if you dont provide it, they will look for
an employer that does. (More on this in Chapter 9.)
Cut Your Pay and That of Highly Paid Employees

Payroll is the biggest expense for many small businesses. If this is true for
your enterprise, it follows that cutting other expenditures is unlikely to
produce the savings your troubled business needs. Sooner or laterand the
sooner the betteryoull need to reduce the size of your payroll.
In bad economic times, when jobs are scarce, its usually possible to cut pay
by a small percentage and not lose employees. The first person to take a pay
cut should be you (and if your spouse works for the business, both of you).
Even if your compensation is already modest, so that cutting it wont save
much, trimming your own salary is sure to get employees attentionand
their respectin ways a dozen dire financial pronouncements never will.
Next, sit down with any well-paid employees to help them confront the
need to voluntarily accept similar reductions. Depending on pay levels and
other circumstances, a cut of 10% to 20% is often reasonable. But be very
reluctant to cut the pay of people at the bottom of your scale. Not only is
this the decent thing to do, it helps you keep experienced employees who, if
forced to take less, would probably look for another job.
This cut-from-the-top approach usually makes sense for several reasons.
First, it should help you save money without losing essential employees.
Second, and perhaps more important, it sends a message to everyone
connected to your company that you and other managers take personal
responsibility for coping with tough times.
Example: John and Adelle own and operate the HillTop Lodge, a 60-room country motel near a ski resort. Although the motel does decent business year-round,
in most years the lions share of profits are made from the winter ski crowds, who
cheerfully pay high-season rates and eat and drink everything in sight. After a decade
of hard work, during which they invested most profits back in the business, John and
Adelle were finally able to pay themselves and several key employees comfortable
salaries. Then came the year when the snow failed to arrive in their corner of the
woods, and the skiers went elsewhere. It didnt take many weeks of brown slopes and
terrible business before John and Adelle realized that HillTop was in serious trouble.
Calling a meeting of their five highest-paid employees, they suggested freezing all
nonessential expenditures, such as replacing older but still serviceable equipment
and repainting several hallways and rooms, as well as cutting nonessential items
such as subscriptions to periodicals and memberships in trade organizations. They
even decided to ask several employees to turn in their cell phones. In addition, they
resolved to severely cut the budget for outside services, transferring work to employees who now had time on their hands. Next they announced they were cutting
their own pay by 20% and asked all managers to accept a 15% reduction. A couple of
people grumbled, but all they had to do was look out the window to understand the
problem. Respecting Johns and Adelles determination to take the biggest hit, they
accepted their lower paychecks.
This strategy isnt just for small businesses, by the way. To save jobs, shipping giant FedEx froze 401(k) contributions and cut all salaried employees
pay for 2009. The companys CEO took the biggest percentage pay cut,
20%. Other top executives were cut by 7.5% to 10%, and the rest of the
salaried employees got a 5% hit. Hourly workers werent affected. The company made these cuts even though it was profitableit was looking ahead to
an expected downturn in shipping caused by the sluggish economy.
Cut the Work Week

Another way to spread the economic pain while saving jobs is to cut the
work week. For example, going to a four-and-a-half day work week saves
10% of payroll; a four-day week saves 20%. Similarly, putting a freeze on
overtime hours will save you money.
If your employees are highly motivated to see your business through to
better times (and appreciate the fact that the cuts avoid or reduce layoffs),
the change wont significantly reduce productivity. People will realize that to
keep your enterprise afloat they need to work a little harder and smarter to
accomplish the same amount of work in less time. A few employees may quit,
but in a deep recession most will be disposed to hang on to what they have.
Lay Off Employees

Cutting jobs and showing loyal employees the door is never a pleasant
prospect. But for many businesses where payroll is the biggest cost, its the
only realistic way to achieve needed savings.
In the big business world, a CEO can order 10,000 job cuts without ever
meeting anyone who gets laid off. But reducing a small workplace entails
the excruciating task of laying off people you know well and are on friendly
terms with. Its so hard that some businesspeople watch their business fail
rather than wield the axe. But to survive, you must accept the proposition
that your duty to your employees is limited by economic reality. Remember,

you hired employees in an effort to make a profit, not to pay them in all
circumstances forever.
Always cut jobs, not people. Things are likely to go downhill further and
faster if you base your cuts on the personal needs of the people who work for
you, sparing those who have the most sympathetic personal problems. If you
keep them, then it means youll be cutting those who are more efficient or
needed. Far better to look at the tasks that need doing and the people who
can do them best.
In a very small enterprise, it will fall to you to decide which jobs must
go. But if you depend on others to help with management decisions, its
extremely important to solicit their help in deciding who you should lay
off, unless of course you have decided that the manager must also go. They,
not you, probably have the best frontline knowledge of which tasks are
essential and which expendable. And because they are the ones who will be
responsible for accomplishing the essential work with a smaller staff, they
are likely to be highly motivated to hold onto the most talented workers
who can do the most for the company. (Chapter 9 discusses how to plan and
conduct layoffs.)
Example: Returning to the HillTop Lodge, it becomes clear to John and Adelle that
to survive, it isnt enough to cut discretionary expenses and managerial pay. To plan
deeper cuts, Adelle, the financial officer, prepares a revised budget based on their
newly drafted worst-case income scenario. This rebudgeting reveals that to achieve
balance, an additional $200,000 needs to be cut, pronto.
Some staff reductions are obvious, such as laying off several maids and restaurant
workers who, given the lack of guests, arent needed. To help plan other staff cuts,
John and Adelle convene an off-site meeting of their key employees. Fortunately,
when these employees share their opinions about how best to reduce staff, a consensus emerges. For example, Constantine, the head cook and restaurant manager,
suggests that while things remained slow, the jobs of bartender and restaurant host
be combined.
Then Phyllis, the reservations manager, suggests that while business is in the
dumps she can handle bookings without an assistant. She points out that occasion-
ally, this change will mean that customers will get a message machine promising
a prompt call back, but given the low volume of calls, this shouldnt be a serious
problem. Finally, John proposes taking over many routine maintenance tasks himself,
allowing HillTop to eliminate the position of in-house maintenance person.
The result of these and several other job consolidations and cuts is to save $200,000
in salaries without significantly reducing essential guest services or eliminating key
employees who will be needed as soon as business eventually picks up. All told, ten
peopleincluding Adelles niece, who worked as a part-time desk clerklose their jobs.
Increase Marketing, Cut Costs

When sales drop, you need to increase your marketing outreach. But its
not usually cost-effective to do this by paying for expensive advertising or
other high-cost techniques. Instead, your cash preservation strategy should
usually dictate cutting conventional marketing costs while relying instead
on low-cost guerilla marketing efforts that, among other techniques, enlist
your loyal customers in helping rescue your business. (Chapter 8 has lots of
suggestions.)
Cut Business Travel

Assuming your business still does a significant amount of travel, cut it at
least in half. Just committing to this will force you to focus on eliminating
the least profitable half.
Reduce Professional Fees

Handing out money at $300 per hour is no way to save your business. Ask
your lawyer to give you a recession discount and, if its not forthcoming,
shop around for someone who will. And make sure you understand what
your lawyers minimum billing interval is. If its 20 minutes (meaning you
are billed a minimum of 20 minutes for every call), bunch your questions
together so you use all of the time youll have to pay for. And if, as part of a
plan to reduce expenses or deal with anxious creditors, you need your lawyer
to negotiate on your behalf, do a little negotiating of your own and ask the
lawyer for a flat fee stated in advance.
When it comes to accounting services, dont pay for bookkeeping that you
can do much cheaper in house or by hiring a part-time bookkeeper. And
again, as with every vendor, be aggressive in asking for a recession discount
from your accountant, and if you dont get it, bid out your account.
Cut Printing Costs

Every business weve ever seen prints far too many copies of far too many
pieces of paper with the result that lots end up in the trash. And consistently
printing too much isnt the only money-eater; lots of businesses pay far too
much even when they print exactly what they need. For example, if youre
printing 3,000 copies of a four-color catalog at a printer down the street,
chances are you can cut your bill in half by using two colors and getting bids
from half a dozen area printers. And when the lowest bid comes in, ask how
they can cut it further, possibly by using a slightly unusual type of paper left
over from another job or waiting a few days until their equipment will be idle.
Ask Creditors to Write Off a Portion of What You Owe

If you are far behind on your bills, and especially if you think you may have
to close down because it will be impossible to catch up, consider asking your
creditors to write off a portion of your debt.
Your pitch should normally be along these lines: Our company cant
survive the economic downturn with its current debt load. But following
our new frugal business plan, we can survive and prove to be a good longterm customer if our debts can be reduced on a one-time basis. The creditor
may be willing to accept as little as 40 to 60 cents on the dollar, especially if
it believes you may go bankrupt without helpor if you have found a new
source of income to tide you over (perhaps a hard-headed investor who will
invest only if you reduce your debt load).
Because it can be difficult to beg for debt forgiveness at the same time
you promise that your business can operate in the black if you receive it, it
usually makes sense to involve a small business consultant or a lawyer with
business and bankruptcy experience. A call from a lawyer may be just what
a creditor needs to realize that your offer is far better than a notice of your
bankruptcy filing. (You can check Nolos Lawyer Directory for in-depth
attorney profiles of local lawyers.)
If you dont have cash to pay off a portion of your debt, youll have a lot
less leverage when it comes to trying to convince a creditor to write off part
of it. As an alternative, you may be able to convince a creditor to instead
convert your debt to a term loan with low initial payments, or, if your
creditor really believes in your future, to trade debt for an equity stake in
your corporation or LLC.
tip
Open your books to your creditors. Creditors will be far more likely to
support your survival plan by writing off a portion of your debt if they really believe
you are taking the hard steps necessary to return your business to profit. It follows
that your best course of action is often to open your books and show them.
caution
Dont convert business debt to personal debt. If your business is a

corporation or LLC and asks creditors to restructure current debt, the creditors
may in turn ask for your personal guarantee. Agreeing to this is probably unwise,
especially if you have valuable personal assets and your business may fail anyway.
Read Chapter 4 for more on this.
Cut Back on Insurance Expense

Faced by tough economic times, the last thing you want to do is eliminate
essential insurance coverage for fire, theft, and liability. But by increasing
deductibles and canceling less essential coverage for things like business
interruption or the death of a key employee, you may be able to reduce
your overall payments. It makes more sense to scrimp on insurance if your
business is organized as an LLC or corporation than it does if you are a sole
proprietor or partner and therefore personally liable for business losses.
Also, if your business is co-owned and you have established a buy-sell
agreement to allow surviving owners to buy out the deceased owners
inheritors, you might have also bought a life insurance policy to provide
funds for the purchase. If so, consider canceling this policy, and if you have
had it for a while, pulling out its cash value, if any.
Take in More Cash

When a sharp economic downturn hits, customers, suppliers, lenders, and
investors all simultaneously try to hoard cash. This can mean that even if
your business is still showing a bottom-line profit, you might have an empty
bank account and no funds to pay bills. And if your sales have dropped to
the point where youre in the red, you can be sure your cash problems will
soon be even worse.
Okay, so far we may not have told you anything you dont already know. But
hopefully here are a few ways to raise cash you might not have thought of.
Get Cash Out of Inventory

Whether you are a manufacturer, wholesaler, or retailer, if your sales have
dropped significantly, chances are you now have too much inventory. That
means the cash you so desperately need is sitting in your store or warehouse
in an illiquid form. To convert it to pieces of paper with pictures of dead
presidents, take some or all of these steps:
Begin an energetic guerilla marketing campaign to coax more customers
to buy more of what you are selling. As discussed in Chapter 8, one of
the most effective ways to do this is to ask for support from your longterm customers.
Hold a blowout sale offering enticing discounts on slow-moving items.
But remember that your goal is not only to reduce inventory, but also
to make a profit. So be sure to surround sale items with attractive goods
that you discount only slightly.
Example: Bangkok Designs, a clothing importer, has a warehouse and retail store
overloaded with womens wear. Holding a three-day warehouse sale, in which a few
items of essentially unsalable merchandise are marked down as much as 90%, other
hard-to-move items are discounted 50%, but the more popular intimate wear is
reduced only 20%, Bangkok is able to pull in a quick $30,000.
Consider unloading dead inventory to deep-discount resellers such as

liquidators, dollar stores, or even flea market operators. Even a few cents
on the dollar is better than a truckload of unsalable items.
Coax Customers to Prepay

Health clubs, movie theaters, and car washes have for years given people an
incentive to pay in advance for discounted services. For example, a theater
might offer ten shows for the price of seven if you buy a coupon book. A
health club might give you three months free if you join for a year.
Although many types of businesses have not traditionally marketed this
way, offering discounts for prepayment, its time they thought about this
highly effective way to raise quick cash. So whether you are a landscaper, a
physical therapist, or a paper box company, figure out a way you can sensibly
encourage your customers to give you their cash ahead of time.
Example: In January, always its worst sales month, Sugimoto Pool and Pond, a
business that maintains swimming pools and decorative ponds, offers its customers
a card worth 120% of its face value, redeemable anytime during the next year. When
35% of its customers sign up, Sugimoto has enough money to pay off the debt accumulated by virtue of its poorly timed expansion.
Raise Prices
During hard times, businesses typically must lower prices in order to attract
customers. But especially for businesses that offer a wide array of goods or
services, there are always some items for which prices can be raised. Often
this results from the fact that during prosperous years, businesses neglect to
do a careful analysis of all their prices.
As a general rule, prices designed to attract customers to your shop, office,
or website should be kept as low as possible. Be more aggressive when you
price discretionary items customers might purchase once theyre there. For
example, a yarn shop might feature rock-bottom prices on basic, singlecolor yarns, while keeping prices up for the luminescent, multihued varieties
customers gravitate to once through the door.
Example: Koski Firewood is forced to lower prices for cords of oak after an aggressive competitor with a wood yard on a main road puts up a huge sign advertising
bargain prices. As a result, profit margins all but disappear, causing Pete and Mike
Koski to consider closing down. But before they do, they consult with their informal
group of advisers including their retired Uncle Frank, who has successfully run several
businesses. Frank spends a day at the wood yard and comes up with these recommendations, which, taken together, put the business solidly back in the black.
Raise prices on kindling 30%. Almost everyone adds several boxes to their order,
but few pay close attention to its cost.
Raise the delivery fee 40%. The super-frugal will borrow a pickup and haul their
own wood, but most others wont notice.
Add $20 to the fee for moving wood from curb or driveway and stacking it next
to the house. Most people do this themselves, but those who cant be bothered
will pay more.
Another place to look to raise prices is for goods or services that, despite
or maybe even because ofthe recession, are in high demand. For example,
a CPA might lower rates for basic tax schedule preparation so as not to
lose business to price-cutting competitors, but raise fees for helping small
businesses prepare bankruptcy-related schedules or deal with IRS tax bills.
Give a Discount for Prompt Payment

Especially when times are tough, many customers will appreciate and take
advantage of discounts for early payment. If you need cash, offering a
discount of 5% or more can make sense for payments on the day goods are
received or services rendered. Even a 2% to 3% discount for bills paid within
ten days can be a substantial motivation to pay a bill PDQ.
Collect Overdue Accounts Receivable

When lots of your customers are past due in their payments, its almost
always as much your fault as it is theirs. Even in a recession, efficient account
management practices should result in most customers paying you on time.
Put more bluntly, canny businesspeople avoid training their customers that
its okay to pay late, by taking quick action to penalize them. If you havent
done this, its past time you started.
Dial for dollars. If you already have lots of overdue accounts, youll need
not only to fix your long-term policies, but also get a bunch of customers to
pay pronto. Especially if you are seriously short of cash, your best bet is to
pick up the phone. Whether you are a consultant calling a late-paying client,
a landscape architect calling a homeowner, a wholesaler calling a retailer, or
a small manufacturer calling a wholesaler, demand to talk to the person who
owes you the money, or in the case of a business, the person with power to
write the check. Dont be bashfulthe delinquent payer absolutely needs
to know that you need a check (or electronic payment) now and in full,
or youll immediately take legal steps to collect. Dont be fobbed off with
excuses or vague promises that youll be paid soon.
Withhold goods or services. If, after several phone calls, the money is still
not forthcoming, what are your realistic options? It depends in part on what
type of business you run and whether the customer needs more of what
you sell. For example, if you produce a highly popular product or provide a
service your customer needs more of, your first step is to put late-payers on
credit holdthat is, dont provide more goods or services until the account
is fully current. The credit hold approach might not work if there are more
local suppliers of the product or service you provide. For example, if yours
is one of several wholesalers that delivers fish to area restaurants and you put
Ahi Bills cafe on credit hold, Bill can buy from one of the other wholesalers.
In practice, however, the other wholesalers are sure to know that he is one of
your longtime customers, suspect that you have put him on credit hold, and
call to check his credit. In short, if Bill is to stay in business he is going to
have to pay you.
Offer a one-time discount in exchange for catching up with back payments.
For example, a consultant, architect, or landscaper might offer a 10% to
20% discount for immediate payment on overdue accounts receivable. To
encourage participation, when providing the carrot, dont be afraid to also
show the stick by threatening to file a lawsuit or to turn the account over to a
collection agency.
Sue, or hire a lawyer. Especially for large overdue accounts, get the
recalcitrant debtors immediate attention by suing in small claims court. In
most states, the limit on claims is $5,000 to $10,000, and you dont need
a lawyer. Or hire a lawyer to collect it for you, either for an hourly fee or a
percentage of the amount collected (pay by the hour if the debt is large and
the debtor is solvent). If you are lucky, a frosty letter or two from an attorney
will shake loose your cash without a lawsuit being filed.
Turn accounts over to a collection agency. For smaller, seriously pastdue debts that youre not interested in taking to court, your best bet is
to turn them over to a collection agency. These agencies normally charge
about 50% of the amount they collect. Talk to local businesspeople to get a
recommendation for an agency with a good reputation for both doggedness
and ethical behavior.
Borrow Money
While getting a traditional loan in this economy may be next to impossible
for small businesses, there are a few other financing opportunities out there.
Consider an Alternative Lender

One innovative new company, OnDeck Capital, offers loans up to $100,000
based on a businesss cash flow and/or credit card transactions. OnDeck
collects the loan repayments by automatically debiting your bank account
for a small amount (typically $100) each day. Although there is obviously a
coercive aspect of this approach, at least it assures that you wont get behind
on loan payments. OnDecks small loans are easier to qualify for than a
traditional loan and more quickly processed, but interest rates arent low
usually 18% to 20%and you still must have sufficient cash flow to repay.
OnDeck requires that business owners sign a personal guarantee, meaning
your house, savings, and other assets are at risk if your business fails while you
still owe them money. For more information, go to www.ondeckcapital.com.
tip
Dont count on borrowing from a bank or investor. Even when times

are good and profits are rolling in, only a small minority of small businesses owners
can raise debt or equity from banks or investors outside their circle of family and
close friends. And when a business begins to lose money, there is close to a zero
chance of finding an arms-length investor. However, the 2009 federal economic
stimulus package provides $730 million to the Small Business Administrations loan
program to stimulate small business bank loans and nonprofit microloans to small
businesses, so credit in this area may loosen up a bit.
Another alternative form of social financing has also developed in the

past year or so: Peer-to-peer lending sites pair up borrowers who list their
loan needs with private investors who are willing to offer loans at certain
rates. The social lending websites getting the most press are Lending Club,
Zopa, Prosper, and Loanio. With the country in such a credit crunch, these
online services may be worth looking into.
Consider Borrowing From Friends and Family

Borrowing from family and friends is sometimes possible, but not often
sensible unless someone you are close to personally has both deep pockets
and business experience. Take into consideration that if you borrow money
from a parent or other close relative, everyone in your family will know
about it and a good many will disapprove, especially if the lender is elderly
and other family members hope to inherit. If you really can repay the loan
promptly and in full, all may be well, but if not, you are at high risk of
becoming the family goat.
If, given these warnings, you still plan to pursue this approach, we
recommend that you present the potential lender with a formal business
plan. It should include a profit-and-loss forecast and a cash flow analysis
that you have already vetted with your advisory board and that clearly
demonstrate how and when your business will return to profit. Assuming
your future business prospects look good, two things may help seal a deal.
First, offer an interest rate that fairly compensates the lender for taking a
substantial risk. Given the rocky economy and the amount of risk involved
in lending to a financially challenged small business, 12% to 16% might
be reasonable (though to keep the IRS happy, the rate should not be much
higher than what a bank might offer you).
tip
Dont be casual about borrowing money. Even if you have known

the lender all your life, prepare a formal promissory note setting forth how and
when the money is to be paid back and at what interest rate. You can download
an appropriate form from Nolos Online Legal Form center at www.nolo.com. Or a
service like Virgin Money can help you create a loan proposal, formalize the loan, and
set up an electronic funds transfer. For more information about formalizing loans
from friends and family, see Business Loans from Family and Friends: How to Ask,
Make It Legal, and Make It Work, by Asheesh Advani (Nolo).
Second, for larger loans, its routine to offer the lender the sweetener of a
small equity stake in your business. Explaining how to do this (typically by
organizing as a small corporation and issuing the lender warrants, which can
be converted to stock at a preset price) is beyond the scope of this book, but
something a small business lawyer can help you with.
tip
Dont be a pest. Somewhat paradoxically, your best chance of success

will likely be to approach friends or relatives who have lent you money in the
past. Especially if you have paid some of it back, these people will already be your
supporters. And your chance of hearing a yes will go way up if you can convince
the potential lender that you wont ask yet again.
Get Money From a Factor for Your Accounts Receivable

Factoring involves selling current accounts receivable to a business (the
factor) that will pay you immediate cash and then collect the debts when
they are due. In a typical transaction, the factor will promptly pay you
60% to 80% of an invoice, with the balance held in reserve. If the factor
collects the debt in full, it will release the reserve, less its fee, which normally
amounts to 1% to 5% of the debt.
Factoring probably sounds good so far, but there are several downsides.
First, factors fees amount to a relatively high interest rate, certainly far
higher than a bank would charge for interest on a line of credit (but because
factoring does allow you to show a lender a stronger cash position, it may
help you retain a line of credit otherwise in jeopardy).
Second, factors normally wont advance money on overdue or otherwise
dicey receivables, including receivables for goods that can be returned for
credit or are perishable or receivables from risky customers. In short, a factor
isnt interested in your credit history (as a bank would be), but in its estimate
of your customers ability to pay. For example, if you are a small clothing
manufacturer who is owed money by Macys, a factor would likely advance
you most of the money due on that invoice, but would refuse to purchase
a similar invoice for goods you sold to several boutiques with questionable
credit histories.
Factoring transactions basically fall into two broad categories, recourse and
nonrecourse. In recourse factoring, the company selling its receivables is on
the hook to repay the factoring company all money advanced, plus fees, if
the customer doesnt pay. In the more common (and expensive) nonrecourse
factoring, the factor assumes the risk of nonpayment.
Factoring has been traditionally used in the garment and other goods
businesses, but today it is also used by architects, contractors, and others in
the construction industry, as well as by trucking and other transportation
businesses. Even service businesses and those awaiting payment on
government contracts are using factors. Simply search online for receivable
factor to find a long list of factors and websites.
Save Your Bank Line of Credit or Promised Financing

Many small businesses have never had a bank line of credit, or if they did,
lost it as soon as their business began to tank. But if yours is an exception
and, despite having financial problems, you are still considered bankable,
chances are you wont keep your credit line much longer unless you act
quickly. Thats because, as you probably know, most lines of credit have what
are called covenantsloan conditions that let the lender cancel your credit
line if your business is out of compliance. The most common covenants
require that you meet or exceed a particular financial ratio designed to
assure the bank that youll be able to repay the loan. For example, banks
typically require that a borrower maintain a two-to-one ratio of earnings

(minus expenses and taxes) to loan principal. Another common covenant
requires a small business to maintain a ratio of assets to liabilities of at least
two to one. In addition, most banks include catch-all language that allows
them to revoke your credit line if they are uncomfortable with your business
prospectsfor example, if there is any material adverse change in your
business.
Most line of credit agreements require that you inform the bank as soon
as you know that you might not comply with a covenant, or if your business
has suffered any material adverse change. It follows that if, for any reason,
you are worried about getting your line of credit renewed, or if you see youll
have a problem meeting your covenants, your best approach is to set up a
meeting with your bank as soon as possible. Along with the usual required
financial reports and accounts receivable and payable schedules, youll want
to present a business plan for the next year with a convincing budget that
shows your business making a profit in the near future. The more you show
the bank that you are actively addressing your profitability problem, the
likelier it is to keep working with you.
For instance, if your sales are down significantly, be prepared to show the
bank that you are making corresponding cuts in costs, such as suspending
employee benefits, making layoffs, eliminating travel and entertainment
expenses, cutting the staff development budget, and so on. It will also be
extremely helpful if you can show the bank that new money is coming into
the business from you or another investor. So if a relative is willing to lend
you $50,000, get this commitment in writing before you sit down with the
loan officer.
Keep in mind that youll need to walk a fine line when discussing your
financial problems. On the one hand, youll want to convince the bank that
you would have met your covenants had your business not been blindsided
by the extraordinary economic downturn, but on the other, youll need to
show that you now have a convincing plan to survive it.
What about the possibility of, instead of talking to your bank when you
first realize that youll fail to comply with a loan covenant, immediately
drawing down the line and using the money to pay your creditors? If your
business is a corporation or an LLC, this is usually a poor idea, because you

will be substituting your personal legal obligation to repay the bank (by
using the credit line) for your business entitys obligation to pay unsecured
creditors. As discussed in Chapter 4, if your business fails, you are personally
on the hook for all loans and accounts you have personally guaranteed, but
not those exclusively in the name of your corporation or LLC.
tip
Protect your bank account. If you owe money to a bank on a loan or

credit line, its often wise to keep your checking and other accounts elsewhere. This is
because the fine print of your loan or credit line agreement probably gives the bank
the right to grab without notice (offset, or setoff) funds in your checking account.
True, this might violate yet another covenant that requires you to keep all funds in
their bank, but if you lose your line of credit, this will be the least of your worries.
What Not to Do
Just as important as trying out the strategies discussed just above is knowing
what to stay away from. You dont want to make matters worse.
Dont Use Merchant Cash Advances

Another type of financing for small businesses that make credit card sales is
known as a merchant cash advance funding. It isnt appropriate when youre
in financial trouble, however. It typically works like this: the cash advance
company (AdvanceMe is the first and most reputable company in this field)
buys your future credit card sales, advancing you a portion of the anticipated
receipts. You authorize the company to automatically take a portion of your
daily credit card sales through an agreement with your credit card processor.
On the plus side, if your credit sales dont end up being enough to pay
back the loan, some advance companies have no recourse against you, as long
as you dont switch credit card processors, because your personal guarantee is
not required. The down side is that cash advance companies charge high fees,
which often work out annually to as much as 25% or even 50% of the value
of each advance.
Paying such high interest usually makes sense only if youre investing the
money in something with a high rate of return, so that you can easily pay
the fees. So you shouldnt go this route to pay regular bills, though it might
make sense in an emergency. But if getting a merchant cash advance is your
only hope of surviving beyond a month or two, its probably time to think
about closing your business down.
Try Not to Max Out Your Credit Cards

If you have nowhere else to get cheaper money, you may be tempted to
borrow heavily against your credit cards. For three big reasons, this is usually
a poor idea. First, interest rates are typically astronomical, as are late fees
and an assortment of other penalties. Second, credit card debt is a personal
obligation, so even if your business is organized as an LLC or corporation, if
it fails, youll be obligated to repay the credit card companies. (By contrast,
unsecured business debts of a corporation or LLC are not your personal
responsibility.) Third, borrowing heavily against credit cards usually means
other strategies to raise cash have failed, a strong signal that your business
cant be saved and you are pushing yourself closer to bankruptcy.
Weigh Borrowing Against Your House

Given the current reality of depressed house prices and tight credit, and
especially if your business is losing money, you may not qualify for a second
mortgage or a home equity loan. But even if you do, think at least three
times before doing so.
Taking money out of a good house to put it into a questionable business
makes sense only if you really have a no-nonsense plan to return your
business to profitability. Especially if your business is a corporation or LLC,
meaning your business and personal debts are separate (see Chapter 4 for
a discussion of the legal status of debts), borrowing against your house
risks taking money out of a relatively safe and legally protected personal
investment to move it into an already troubled business.
If you operate as a sole proprietor or have already personally guaranteed

LLC or corporate debt, you might think it makes sense to borrow against
your house (at least compared to maxing out credit cards), because your
personal assets are already on the hook to pay business debts and the interest
rate will be far lower. But there is a very important potential downside. By
borrowing against your house you are turning an unsecured debt into a
secured debt, which means that, especially in states with almost unlimited
homestead exemptions (Florida, Iowa, Kansas, Massachusetts, Oklahoma,
Rhode Island, South Dakota, and Texas), you are essentially giving up your
states homeowner protections. If you cant pay the home equity debt, you
could lose your house.
Example: Bobbington Glass, a sole proprietorship owned by Tom and Emily Bobbington in Miami, runs into financial trouble. Tom and Emily take out a $25,000
home equity line of credit, reasoning that the interest rate is far lower than it would
be if they maxed out their credit cards and that either way they will be personally
responsible to pay the debt. However, when Bobbington Glass fails six months later
and Tom and Emily file for bankruptcy, the bank initiates foreclosure proceedings
against the house, which is security for the line of credit. By contrast, if Tom and Emily
had borrowed the same $25,000 on their credit cards and then filed for bankruptcy,
Floridas homestead exemption would prevent the bank from taking their house.
(See Chapter 13 for more on how the homestead exemption works.)
C H A P T E R
Minimize Liability for Your Debts

Are You Personally Liable for Business Debts?................................................... 71
Sole Proprietorship or Partnership.................................................................... 72
Corporation or LLC..................................................................................................... 72
Liability for Jointly Owned Debt............................................................................... 74
Cosigners and Guarantors...................................................................................... 74
Spouses.............................................................................................................................. 75
Business Partners.......................................................................................................... 78
What Can Creditors Do If You Dont Pay?........................................................... 79
Secured Debts................................................................................................................ 79
Unsecured Debts......................................................................................................... 82
Special Rules for Leases............................................................................................. 87
Prioritizing Debt Payments.......................................................................................... 88
Payroll Taxes................................................................................................................... 88
Payroll................................................................................................................................. 89
Utility Bills........................................................................................................................ 89
Business Phone.............................................................................................................. 90
Child Support................................................................................................................ 90
Loans for Which Youre Personally Liable....................................................... 90
Court Judgments.......................................................................................................... 90
Secured Loans................................................................................................................ 91
Your Mortgage.............................................................................................................. 91
Vehicle Payments......................................................................................................... 92
Accounts Sent to Collection................................................................................. 92
Business Rent.................................................................................................................. 93
Insurance Premiums................................................................................................... 93
Suppliers Bills................................................................................................................ 93
Credit Cards.................................................................................................................... 94
Estimated Taxes............................................................................................................ 94
Other Business Debts................................................................................................ 94
Staying Out of Deeper Trouble.................................................................................. 95
Dont Try to Hide Assets.......................................................................................... 95
Dont Lie on Loan Applications........................................................................... 96
How to Protect Yourself From Further Personal Liability............................ 96
Sole Proprietors and Partnerships...................................................................... 96
Corporations and LLCs.......................................................................................... 100
chapter 4 | minimize liability for your debts | 71
If you think nobody cares if youre alive, try missing a couple of car payments.
Earl Wilson
nce you have gotten a handle on your cash flow and devised a plan
to get your business at least back to breakeven, its time to think
about the debts that have likely piled up during the period when
costs were exceeding income. Here, we focus on the consequences, both
immediate and long-term, of failing to pay off your debts.
To successfully steer your way to a debt-free existence and keep yourself
out of future trouble, you need to fully understand your liability for debt.
The most important point is that debts fall into different types of legal
categories, meaning that some of your creditors have more rights to collect
and a bigger ability to negatively affect you and your business than do others.
Because you may be up against some lenders with sophisticated financial
knowledge and legal resources, its important for you to understand the legal
status of each and every one of your debts and what each creditors rights are.
Are You Personally Liable for Business Debts?

There is a huge difference between debts that only your business is liable for
and those that you are legally responsible to pay from your personal assets,
such as your personal bank account and your equity in real estate, if your
business cant pay them.
Which debts are you personally liable for? Most important, every business
owner, no matter whether the business is organized as a corporation, LLC,
partnership, or sole proprietorship, is personally liable if the business doesnt
pay the taxes it withheld from employees paychecks. (For more about
why paying these taxes is always your first priority, see Prioritizing Debt
Payments, below.)
For other types of business debts, your business structure and what kind
of contract or purchase order you signed usually determines whether or not
youre personally liable.
Sole Proprietorship or Partnership

If youre operating your business as a sole proprietorship (or independent
contractor), you and your business are legally the same, which is another
way of saying that you personally owe every penny that your business cant
pay. So if there arent enough money or assets in your business to pay its
debts, creditors can, and sometimes will, take your personal assets that arent
protected by state exemption laws. (See What Can Creditors Do If You
Dont Pay? below.)
This is also true for general partnerships, with this added twist: Each
partner is personally liable for 100% of the businesss debts (and any
partner can usually bind the entire partnership to a business deala scary
combination). This means that if there arent enough business assets to pay
the debts, and your partners are broke, creditors can take your personal assets
to pay all of the businesss debts, not just your pro rata share of the debts.
Corporation or LLC
If your business is organized as a corporation or LLC, you and your business
are separate legal entities. As such, you have no personal liability for the
debts of your business, meaning that creditors cant take your house or other
personal assets to pay your businesss debts.
Example: Jeans Book Shoppe, Inc., orders books from 80 publishers and three
wholesalers before the business tanks. Unable to pay its expenses, the corporation declares bankruptcy. The publishers and wholesalers bills are all unsecured debts of the
corporation, and Jean, the corporations sole shareholder, is not personally responsible
for paying any of them. In the bankruptcy, the stores inventory will be sold to the
highest bidder. The proceeds will be used to pay the costs of bankruptcy and the Book
Shoppes creditors, who may be fortunate to receive a few cents on the dollar.
However, because most banks, landlords, and suppliers know about

limited liability, they often do not extend credit to or lend money to a small
business organized as an LLC or corporation without the owners personal
guarantee. If you signed a personal guarantee for a particular loan, lease, or
contract, you promised that you would pay it personally if your business did
not. Put another way, every time you personally guaranteed that you would
repay a debt, you deliberately gave up your limited liability for that debt.
You volunteered to let the creditor sue you to take your personal assets if the
business defaults on the payments.
If you have taken out a loan for a business vehicle or business equipment,
or a bank line of credit, check to see if you signed a personal guarantee. The
same goes if youve leased space.
You may also have given up your limited liability if you were careless
about signing purchase agreements and service contracts. These agreements
sometimes display the personal name of the business owner without the
name of the corporation or LLC. If you signed an agreement in your
personal name and not on behalf of the corporation or LLC, youre
personally liable for the underlying debt, even if it was the suppliers mistake.
If youre not sure whether you have given a personal guarantee on an
agreement or loan, check both the language of the agreement and the
signature block to see whether you signed it in your name or in your capacity
as an owner or officer.
Example: Josephine signs a loan contract as Josephine Smith, CEO of Salt & Pepper
LLC. Only her business is liable to repay the loan. But she signs her business lease as
just Josephine Smith, so she is personally liable to the landlord.
In addition, you may have used credit cards or home equity loans to obtain
funds for your business, which definitely means you are personally liable
for those debts. (You are almost always personally responsible for making
payments on your credit cards, even if they have your business name on
them, under the terms of the application you signed.) Finally, if you secured
a business loan or debt by pledging specific property such as a house, boat,
or car, that property can usually be taken or foreclosed on to pay the debt.
After reading this, you should be able to divide your debts into those you
are personally liable for and those you are not. This is crucial, because if
you are short of cash and fear that your corporation or LLC may fail, youll
want to pay the debts you are personally liable for first. That will give you a
far better chance to keep your house and other personal assets should your
business ultimately fail owing a significant amount of debt.
Example: Greg and Marina were avid coffee drinkers and book lovers who had
always wanted to open a coffee roastery with a cozy caf offering weekly poetry
readings. To get their business started, they file LLC formation papers with the state
and spend $35,000 on a big new roaster that can crank out a thousand pounds of
coffee per day. Unable to get a small business loan, they charge the coffee roaster on
their personal credit cards, figuring they will pay it off quickly with income from the
business. They also sign a two-year lease on a corner building in an artsy neighborhood, for which the landlord required their personal signatures. Next they arrange
for weekly deliveries of beans from a nearby wholesaler, with invoices in the name of
Cozy Roast LLC. They have no money left over to spend on marketing, but hope to
add it to their budget later.
Unfortunately, when they open their doors, crowds fail to appear, and their original sales forecast proves to be too optimistic by half. Five months later, still operating
in the red, Greg and Marina contemplate closing down. If they do, this leaves them
personally liable for their $35,000 personal credit card debt for the coffee roaster as
well as the remaining months on their two-year lease (unless the landlord can rent
it out againsee Special Rules for Leases, below). Because they didnt personally
guarantee or personally sign a contract for the bean deliveries, only the business is
liable to pay the bean invoices (assuming Greg and Marina have properly followed
LLC formalities). If their LLC fails, at least they wont personally owe any money for
the beans.
Liability for Jointly Owned Debt

Debts that you share with another persona cosigner, spouse, or partner
can raise some legal issues, especially if you eventually consider bankruptcy.
Cosigners and Guarantors

Cosigners and guarantors legally guarantee that they will make debt or
loan payments if you dont. Because these are personal guarantees, it makes
no difference whether your business is organized as a sole proprietorship,
partnership, LLC, or corporation.
Unfortunately, even if you were to get out of paying a debtsay you file
for Chapter 7 bankruptcy and get your liability wiped out by the court
your consignor or guarantor would still be legally on the hook to pay it. If
this were to happen, you might not want to stick the cosigner or guarantor
with the debt you just escaped (many close relationships have been ruined
this way). You could legally reaffirm the debt in bankruptcybasically,
promise to repay itand keep making payments after bankruptcy. Another
option would be to make an informal arrangement with the cosigner or
guarantor to eventually repay any amount they pay the creditor. Or you
could file for Chapter 13 (repayment) bankruptcy instead; in that case, the
cosigner would not be called to account until you completed your repayment
plan, three to five years down the road.
Spouses
One spouses liability for the other spouses debts depends mostly on where
you live.
Community Property States

In community property states, generally any debt incurred by one spouse
during marriage (but before separation) is owed by both spouses. Likewise,
in these community property states, all income made by either spouse
during marriage, as well as property bought with that income, is community
property, owned equally by husband and wife. This means that creditors
of one spouse can go after the assets and income of the community (the
married couple) to make good on that spouses debt. It follows that if that
if only one spouse files for Chapter 7 bankruptcy in a community property
state, all of the eligible debts of both spouses will be discharged.
Community and Common Law Property States

Community Property
Common Law
Alaska*
Nevada
Everywhere else
Arizona
New Mexico
California**
Texas
Idaho
Washington
Louisiana
Wisconsin
*In Alaska, couples can elect to treat their property as community property.
**In California, community property laws also apply to registered domestic partners.
Example: Linda runs a fabric store in Houston, Texas; her husband is a local bank
executive. Over the last few years, Lindas store has been suffering from poor sales,
but the recession is the final nail in the coffin, as people all but stop spending money
on customizing their houses. Linda closes her doors owing $35,000 to suppliers,
$15,000 to her landlord, and $10,000 in other invoices.
Because Linda and her husband live in a community property state, these creditors
can sue both Linda and her husband personally to collect the money owed. Linda no
longer has an income to take, but her husbands is significant, and her creditors are
able to garnish $5,000 of her husbands income per month until the debts are paid off.
tip
You can agree to keep property separate. Couples in community

property states can sign an agreement with each other to have their debts and
income treated separately. This can prevent your spouse from being liable for your
business debts. Signing an agreement now wont help your spouse escape personal
liability for business debts that you already owe, but if you believe your business is
viable in the long term, signing an agreement now (and then scrupulously keeping
your assets separate) can protect your spouse from future business debts. See a
lawyer with experience in postnuptial agreements for help in drafting this type of
agreement.
Common Law States

In common law property states, debts incurred by one spouse are that
spouses debts alone. Debts are jointly owed only if they were jointly
undertakenfor example, if both spouses signed a contract requiring them to
make paymentsor if the debt benefits the marriage (for example, the debt
was for food, clothing, child care, or necessary household items). Otherwise,
creditors of one spouse cannot legally reach the other spouses money, property,
or wages to repay a spouses separate debt. However, if both spouses income
has been put into one joint account, a creditor may have the right to take at
least 50% of the money from the joint account to pay a separate debt. The law
of some common law states also provides that if you and your spouse jointly
own property, such as a house, but a debt is yours alone, the creditor cannot
force a sale of the property by attaching a lien to it. As to bankruptcy, if you,
but not your spouse, file for Chapter 7 bankruptcy in a common law state,
only your joint and separate debts will be discharged; your spouses separate
debts would not be discharged.
Example: Will Horton, the sole owner of Horton Rental, rents construction equipment and party furniture and supplies in Albany, New York. His wife Amanda is an
independent jewelry appraiser who makes a good living. After a few years of strong
construction rentals, Wills business drops off steeply as housing starts disappear. Will
markets his party rentals heavily to help tide him over and tries to lower his debt
costs by selling some of the construction equipment that is sitting idle. But after not
being able to pay some of his bills for several months, a creditor is threatening to sue
the Hortons.
Fortunately, because the Hortons live in a common law property state, the creditor
cant sue Amanda and garnish her income. And because the Hortons hold title to
their house in tenancy by the entirety and live in New York, a creditor cannot put
a lien on the house and force its sale as long as Amanda is alive. If Amanda and Will
were to sell the house, however, the creditor would have to be paid off with Wills
half of the proceeds.
tip
Keep whats separate, separate. If you live in a common law state, you
absolutely dont want to have your spouse personally guarantee your business debts.
Unless your spouse cosigns a loan or personal guarantee, your spouse can never be
liable for your business debts in a common law state if you keep your income separate.
Business Partners
All partners are personally responsible for all of the partnerships debts. And
because each partner has the legal power to obligate the partnership, creditors
can come after your personal assets to collect on a debt even if another partner
signed the deal and you did not. If you were to file for individual Chapter 7
bankruptcy, you could get rid of your personal liability for the partnership
debts, but the remaining partners would still be on the hook for 100% of the
partnerships debts, unless they too filed for bankruptcy.
Example: Adam and Steve, acquaintances from a Masters program in geology,
form a partnership to assess and repair damage to California streams. They take out a
$40,000 equipment loan, which Steves parents cosign. Over a few years, they build a
successful business by getting contracts from state and federal agencies.
But when the state suffers economic woes, payouts are frozen for three months,
and 75% of Adam and Steves jobs are cancelled. They try to continue business as
usual, fearing theyll lose great employees forever if they lay them off. But after the
money isnt unfrozen in month four, they begin to cut payroll, sell equipment, and
sublet unused office space. Unfortunately, they are so far in the red by now that they
cant make their loan payments or pay suppliers. With their backs to the wall, they
decide to lay off their entire workforce and hibernate the company (see Chapter 1)
until the government is paying again.
As business partners, Adam and Steve are personally liable for all business debts.
Their main supplier sues over a $40,000 debt, and because there is no money left in
the business, goes after Adam and Steve (and Pam, Steves wife) personally to pay
the debt. Steve has no income now, but Pam does, and the supplier can go after it
because they live in a community property state and Pam is equally liable for the
debt. After getting a court judgment against Adam, Steve, and Pam, the supplier
garnishes 25% of Pams paycheck. Steve and Pam decide to file for Chapter 7 bankruptcy, meaning both spouses debts will be discharged and Pams paycheck will no
longer be garnished. Most important, they can keep their house, since they have only
$75,000 in equity in it, the amount exempt from creditors in their state. (See What
Can Creditors Do If You Dont Pay? below.)
After Steve and Pams bankruptcy, Adam is still 100% liable for the suppliers debt.
Because he owns assets that are not exempt and that creditors may take, such as a
vacation house, he takes out a second mortgage on the vacation house and pays the
supplier. The partners also default on the $40,000 equipment loan, but Steves liability for it was discharged in bankruptcy, making Adam 100% liable for it (along with
Steves parents, who cosigned the loan). Adam refuses to pay, claiming that since he
made good on the suppliers debt, he considers his half of the partnership debt paid.
Eventually Steves parents, the cosigners, pay off the loan rather than risk being sued
and losing their house.
What Can Creditors Do If You Dont Pay?

First, know that you cant be thrown in jail for not paying your debts (with
the exception of back child support if you could pay but dont). And a
creditor cant just take money from your bank account or grab your tax
refundunless you owe back taxes or youve defaulted on a student loan. To
collect a debt, the general rule is that most commercial creditors must first
sue you and win a money judgment (a court award) against you. But there
is a big exception to this rule: Creditors dont have to sue first if the debt is
guaranteed by collateral. Common examples are a car loan where the car you
bought is security (collateral) for the loan, or a mortgage or home equity
loan where the house itself is pledged as collateral (though in about half of
the states, a lender has to go to court before foreclosing).
Secured Debts
Many businesses owe secured debtsbusinesses typically pledge collateral
for credit lines, and business owners often pledge their personal property
for business debts. Lets take a look at how quickly lenders can call in or
foreclose on collateral when a secured debt is not paid.
Secured vs. Unsecured Creditors

A secured creditor is any creditor to whom you or your business has pledged
collateral in exchange for a loan, line of credit, or purchase. Collateral might
be business property, such as inventory and equipment, or your own property, such as your house, car, or boat.
There are also involuntary secured creditorsthose who have filed a lien
(legal claim) against your property because they have a judgment against you
or you owe a tax debt. Either way, if you or the business cant pay back the
debt, a secured creditor can repossess or foreclose on the secured property,
or order it to be sold, to satisfy the debt.
An unsecured creditor is one to whom no collateral has been pledged and
who hasnt filed a lien. Typically, unsecured debts include credit card charges
and amounts your business owes for inventory, office supplies, furnishings,
rent, and advertising, as well as whats owed for services such as maintenance,
equipment repair, or professional advice.
Repossessions
As you probably know, if you miss a payment or two on your car loan (and,
as is typical, the loan was used to buy the car and is secured by the car), the
lender has the legal right to physically repossess the car and sell it to recover
the money you owe, plus the costs of the sale and attorneys fees. To do this,
the lender doesnt have to get permission or a court judgment. Under the
terms of the contract you signed with the lender, a repo man can simply
reclaim the lenders property. (In many states, the lender doesnt have to give
you notice of the repossession; you will just wake up and find your car gone.)
When all is said and done, you will still owe the difference between what the
lender sells the car for and what you owed on the loan, called a deficiency.
Also, the repossession will appear on your credit report for seven years.
Cars are the most commonly repossessed type of property, but if you
borrowed money to buy business equipment or machines and used the
purchased equipment as security, the creditor will have the same repossession
rights. Also, some department store credit cards provide that the creditor
automatically takes a security interest in the property you buy, so if you
dont pay the bill, the creditor might try to repossess the property. However,
because creditors must get a court order to enter your house or business,
repossession of property other than vehicles is rare.
Similarly, with leased vehicles or business equipment, if you miss a lease
payment, the leased property can usually be immediately reclaimed without
a court order.
Foreclosures
If you have a mortgage or deed of trust on your house, or an open home
equity line of credit, you must make payments on time to keep the house.
If you dont, the lender can and probably will foreclose on your house,
because it is collateral for your debt. But foreclosures are not as quick as
vehicle repossessions. In half of the states a lender has to go to court before
foreclosing, and in the other half, advance notice is required from the lender.
Similarly, if you pledge your house as collateral for a business loan or line
of credit and you default on that loan, the lender can foreclose on your
house. (In this situation, the lender must always file a foreclosure action in
court, no matter what state youre in.) To avoid having the lender foreclose,
you must either repay the debt or, if the debt is more than your equity in the
house, at least pay the lender that amount so that it no longer has a reason to
foreclose.
The foreclosure process works differently in different states. In some
states, the lender must file a lawsuit to foreclose on a house (called judicial
foreclosure). In others, it can foreclose on property without going to court
(nonjudicial foreclosure). A judicial foreclosure typically takes several months
longer than a nonjudicial foreclosure (though in California a nonjudicial
foreclosure can take a year or more), giving you time to save some money
and, if necessary, find a new place to live.
If youre behind on your mortgage, you might be able to negotiate a loan
modification with your lender. For example, the lender might agree to add
your missed payments to your loan balance, to stretch out your loan over a
longer term, or to convert an adjustable rate mortgage to a fixed-rate one.
Your other options are selling your home for less than you owe (called a short
sale), returning the deed to the lender (called a deed in lieu of foreclosure),
or refinancing through the Federal Housing Administration (FHA) or the
Homeowner Affordability and Stability Plan, a plan created in 2009 to help
families restructure or refinance mortgages and avoid foreclosure.
resource
Foreclosure information. For up-to-date information about your

options if you are facing foreclosure, see The Foreclosure Survival Guide, by Stephen
Elias (Nolo).
tip
Filing for bankruptcy can delay foreclosure. When you file for
bankruptcy, all creditors, including mortgage lenders, must cease collection activities
and foreclosures. However, the lender can ask the bankruptcy court for permission to
proceed with a foreclosure if youre behind on your payments, so a bankruptcy may
delay a foreclosure only a couple of months. (For more on bankruptcy, see Chapter 13.)
Unsecured Debts
Unsecured creditors such as credit card companies and most trade creditors
must first sue you and win a money judgment against you before they grab
your income and property. This is true whether you are personally liable
for the debt (as is the case for sole proprietors and partners, or because you
signed a personal guarantee for your corporation or LLC) or whether only
your corporation or LLC is liable for the debt.
Typically, however, before seriously considering a lawsuit, a creditor will
try to collect the debt for several months and then turn it over to a collection
attorney or agency, which will restart the process. In some instances the
creditor will conclude that you dont have enough property that can easily be
grabbed to pay off the judgment, and wont bother suing.
For instance, say your house is worth less than you owe on your mortgage,
and your sole proprietorship consignment shop has few business assets and is
doing so poorly that you dont anticipate having more than a few dollars of
steady income that a creditor could grab by ordering the sheriff or marshal
to take money from the business premises (called a till tap). Your creditors,
or any collection attorney or agency your debt is turned over to, may not sue
you because they know its unlikely they could collect the money judgment.
Thats called being judgment proof.
Instead, the creditor may simply write off your debt and treat it as a
deductible business loss for income tax purposes. Typically, in five or six
years, depending on your states statute of limitations, the debt will become
legally uncollectible. (Only a few states, such as Kentucky, Louisiana, Ohio,
and Rhode Island, have longer statutes of limitation, up to ten or 15 years.)
However, you can expect to be sued if there is significant money at stake
and you have valuable personal or business assets (or just business assets
if your business is a corporation or LLC)or if the creditor expects you
to acquire significant assets in the future. For instance, if you are a sole
proprietor and have an advanced degree, your creditor might assume youll
eventually get a decent job and sue you nowand just wait for you to make
some income. (In many states, a court judgment can be collected for at
least ten years.) What might a creditor think is worth suing for? Significant
amounts of cash or accounts receivable, valuable business equipment and
property, and, if youre personally liable for a debt, valuable personal assets
such as jewelry, fine art, collectibles, antiques, motorcycles, expensive
bicycles, boats, or a vacation house.
How a Creditor Must Collect a Judgment

Collecting a judgment is harder than winning it. If a creditor has gone to
court and won a judgment for collection of an unsecured debt, theoretically
the creditor (now called a judgment creditor) will be able to take any cash in
your businesss bank account, your business income, and your business assets
to pay off the debt. If youre a sole proprietor or partner, or signed a personal
guarantee for a debt, the judgment creditor could also garnish your wages
and take money from your personal bank account, as well as your nonexempt
personal property, to pay off the debt. However, the creditor must first locate
the property and then get a court order and pay the sheriff to take it.
Probably the most common collection method is for a creditor to obtain a

writ of garnishment, under which a sheriff could garnish 25% of your wages
to pay the debt (except in Pennsylvania, South Carolina, and Texas, where
garnishments are not allowed). But assuming you are still a self-employed
business owner, garnishing your wages will be pretty difficult since you dont
get a paycheck (unless youre an employee of your corporation). However,
your spouses wages could be garnished to pay your business debts if you
live in a community property state (Arizona, California, Idaho, Louisiana,
Nevada, New Mexico, Texas, Washington, or Wisconsin), assuming your
spouse is named in the judgment.
Often a more effective collection technique (if your business sells goods
or services for cash) is for the sheriff to come to your business and take any
money he can find therein the cash register (a till tap) or on your person.
Or a sheriff could be authorized to take business vehicles, equipment, or
tools of the trade to pay your debts, something that will happen only if those
items are clearly worth more than you owe on them. Its also possible that the
creditor could get a court to order customers and clients to pay any money
they owe you directly to the court.
However, most creditors wont go to these lengths to get your property.
Instead, many will simply attach a judgment lien to any real estate or assets
the business owns (or valuable personal property or real estate that you own,
if you are personally liable for the debt). The lien will allow the creditor to
collect when you sell or refinance the property.
tip
Check to see what liens are recorded against your business. The
Secretary of States office in every state maintains a registry of liens, listing judgment
liens, tax liens, or security interests that creditors claim in your property. You can do
a Uniform Commercial Code (UCC) records search online at your Secretary of States
website to search for your personal and business names to see what liens have been
recorded against you. If you find any incorrect informationsay you have paid off
a debt but it hasnt been reflectedask the lender in question for a UCC release,
something that is required by law.
Wage Garnishment
If you do have regular wages coming in, perhaps from a side job or because
you are an employee of your corporation, your wages can be garnished to
enforce a court judgment. The total amount your creditors can take from
your wages is 25% of your net pay. That limit applies whether you have one
creditor or many. And if your wages are low, there are additional protectionsyou must be left with weekly income equal to 30 times the federal
hourly minimum wage. (A few states have lower limits.) But if you owe back
child support or back taxes, expect to lose a much larger percentage of your
wages50% or more, depending on whether you are supporting others.
Social Security checks, retirement plan proceeds, unemployment and disability benefits, or workers compensation awards cannot be garnished, except to
pay federal taxes or child support (or unless they have accumulated in your
bank account).
Exempt PropertyWhat a Judgment Creditor Cant Take

Though a judgment creditor can usually grab cash from your bank account
or force the sale of most business assets, a judgment creditor cant take
personal property that is legally exempt from creditors. Most states provide
that a certain amount of your personal assets, such as food, furniture,
clothing, cannot be taken by creditors or by the bankruptcy trustee in
bankruptcy court. In addition, most states exempt from creditors:
the equity you own in one vehicle, up to a certain amountcommonly
from $1,000 to $5,000, and
a significant amount of the equity in your houseoften between
$10,000 and $50,000, depending on the state.
resource
Find your states exemptions. For a complete list of exempt property, go

to www.legalconsumer.com/bankruptcy/exemptions and enter your zip code.
Most states also let you keep a couple of thousand dollars worth of business equipment and tools of the trade, as well as money in tax-deferred retirement plans. Also, in most states (except community property states, discussed
above), a creditor cant take property that belongs to you and your spouse if
the debt is in your name only. The practical effect of these exemptions is that
no matter how many debts you have and no matter how many judgments are
entered against you, creditors cant grab much essential property.
Example: For years, Daxs hobby has been restoring classic cars; he owns two himself, a 64 Shelby Cobra and a 59 Cadillac Eldorado. After being urged by his friends
to quit his day job to do what he loves, Dax opens his own shop, which offers custom
auto detailing, paintless dent repair, auto painting, and classic car restoration. He
applies for a business license, rents a small warehouse in an industrial area, buys two
auto lifts, and increases his cache of tools, which was already sizable. To pay for everything, he takes a personal equity line of credit out on his house, after striking out in his
attempts to get a bank line of credit for the business. Unfortunately, almost as soon as
Dax opens his doors, the economy declines, and people cut back on luxury services,
such as regular car detailing, and even dent and ding repair. At the same time, many
classic car enthusiasts are forced to put their hobbies on hold. As a result, Dax doesnt
bring in enough money to cover his costs, cant pay his rent, and goes out of business,
leaving a mountain of debts.
If he is sued or has to file for bankruptcy, here is what he has to lose and what he
should be able to hold on to:
Since Dax lives in California, is married, and has only $60,000 equity in his house
(he owes $300,000 and the house is worth $360,000), he will get to keep his house
(California law exempts $75,000 of equity for families). He will also get to hold on to
his clothing, furnishings, and appliances. He will also be able to keep up to $6,750 in
business assets, if he has fully paid for them and if he continues to use them to make
a living, including tools, equipment, and a commercial vehicle, but the rest of his
business assets will likely be taken. He will be able keep only $2,550 in equity in personal vehicles, so he is likely to lose his classic cars. He also stands to lose the money
in his business bank account, as well as his personal bank account, because he was
a sole proprietor. If he gets a new job, up to 25% of his wages could be garnished. If
Daxs wife brings home an income, 25% of that income can be garnished to pay the
businesss debts, if his wife is listed in the judgment. (If Dax files for bankruptcy, however, the wage garnishments will stop.) Daxs IRA is safe from creditors.
tip
Bankruptcy can get rid of unsecured debts. If you have been sued or
have been threatened with a lawsuit, youre at risk of losing cash or property. If the
majority of your debt is unsecured and you have little chance of paying it off, you
might consider bankruptcy, which can get rid of most, if not all, of your unsecured
debt. For more information on bankruptcy and alternatives, see Chapter 13.
Special Rules for Leases

Back rent is treated like any other unsecured debt, but you are subject
to streamlined eviction procedures if you dont pay. If youre behind
on residential rent payments, the landlord is likely to start an eviction
lawsuit against you within a few weeks. Unless the building is found to
be uninhabitable (substandard or unsafe), chances are youll be ordered
to vacate within about six weeks. A commercial eviction is quicker than a
residential evictionit can be over in just a few weeks.
You can try to negotiate with the landlord to make up unpaid rent over
the next several months, but unless you do this before the landlord files an
eviction lawsuit, normally youll have little chance of success. Your landlord
may be likely to negotiate if lots of properties are vacant in your area. If you
can show that, while your business is short on cash, you have a believable
long-term survival plan, you may be able to get a new lease with lower rent.
Your chances will improve if you can possibly show that you or a private
lender will invest new capital in the business if the lease and other obligations
are reduced. (For more on negotiating your rent down, see Chapter 3.)
If you have to move out when you have time remaining on a lease
residential or commercialyour landlord can sue you for the remaining
months rent. However, in most states the landlord is obligated to try to
rerent the space first to minimize the loss. This is called mitigating the
damages. Chapter 12 has more information on how to get out of a lease
early with the fewest consequences.
tip
Find a new tenant yourself. A landlord who expects to eventually

collect from you all of the rent you owe under the broken lease may move slowly to
find a new tenant. If you help find a new tenant and get the space filled faster, youll
limit your future liability under the lease.
Prioritizing Debt Payments

Now that you have an overview of the legal status of your various debts and
the consequences of not paying them, youll understand why youll definitely
want to pay some debts before others. Yes, ignoring any debt comes with
consequences, but paying some debts is vital to protecting your business and
personal assets. Heres what to pay first.
Payroll Taxes
If you have employees and withhold taxes from their paychecks, get those
withheld amounts to the government on time, every time. It may be
tempting to borrow from these funds, because after you collect the taxes,
you usually have a few weeks before you must deposit them. Dont ever do
it, no matter how behind you are on your bills or how angry your suppliers,
landlord, or other creditors are getting. Heres why.
As an employer, you withhold money from your employees pay to pay
payroll taxes (Social Security and Medicare) and your employees income tax
withholding. If you dont pay withheld Social Security and Medicare taxes
and federal income withholding taxes (called the trust fund portion of these
taxes), you will owe a penalty equal to the entire amount of the unpaid trust
fund taxes, plus interest. Some states impose similar penalties for failing to
deposit state income tax withholding and sales taxes that you have collected.
The trust fund penalty can be imposed on any and every person who
fails to see that the taxes are paid, including all owners and officers of the
company, whether or not they normally pay the bills or monitor finances.
Even directors and minority shareholders can be held personally liable if they
were responsible or partially responsible for deciding to pay other pressing
bills in lieu of the trust fund taxes. Even if your company is a corporation or
LLC, you and your co-owners can be held personally liable for the trust fund
taxes and the resulting penalty.
And thats not the worst part. To pay these trust fund taxes and the
resulting penalty and interest, the feds can seize business equipment, money
your creditors owe to you, and any property you own personally. The IRS
can also garnish your wages (if you receive a paycheck) or pension plan
payments and seize the assets in your individual retirement accounts. Filing
for bankruptcy will not protect you. Finally, the IRS can charge you with
a crime for failing to deposit your payroll taxes. If your business is in such
poor financial condition that you cant pay your payroll taxes, you should
turn to Chapter 12 for information about closing down.
Payroll
Even if you make layoffs, there will no doubt be some employees you need
to keep on to keep the business going. Make sure you continue to pay these
employees wages on time. There are hefty state law penalties for not paying
wages on the day they are duesome states charge a penalty of $1,000 per
employee, per pay period; others charge a penalty of 30 days wages per
employee. And if you fail to pay wages for even a few weeks, the state labor
commissioner can padlock your business. Unpaid wages cannot be fully
wiped out in bankruptcy.
Independent contractors fees do not fall in the same category as wages
(unless the contractors can successfully argue they were employees). Instead,
a contractor has the same legal status as any other unsecured creditor,
meaning that a contractor who didnt get paid would have to sue you to get a
judgment before being able to seize your assets. And if youre organized as an
LLC or corporation, the contractor couldnt grab your personal property.
Utility Bills
You obviously cant run a business without electricity and water. If youre
behind on these bills, your utility provider probably has the legal right to cut
you off without going to court. So if youre going to stay in business, try to
negotiate a payment plan promptly. If you wait until your service is cut off,
youll have to pay a fee to get it turned back on, including, possibly, a large
deposit.
Business Phone
Assuming you use a land line for business and plan to stay in business, this is
another bill that should have priority, so customers can continue to reach you.
Child Support
Failing to pay child support can land you in jail if a court finds you are not
destitute. Your wages or business income can also be grabbed by the state to
pay it, without a court judgment. Whats more, a child support debt never
goes awayit is always collectible, and you cant wipe it out in bankruptcy.
(If you truly cant make your payments, go to court and ask the judge to
reduce your obligation. Thats the only way you can change it.)
Loans for Which Youre Personally Liable

If your business is a sole proprietorship or partnership, youre personally
liable for all debts. But if your business is a corporation or LLC, youll be
personally liable only for loans or agreements that you personally guaranteed.
(See Cosigners and Guarantors, above.) It follows that, to protect your
personal assets, youll want to pay the debts you personally guaranteed before
other unsecured debts, which are obligations of your business only.
Court Judgments
If a creditor has already gone to court and won a judgment against you, the
creditor can pay to have a sheriff seize your property or garnish your wages
(and in some circumstances, those of your spousesee Liability for Jointly
Owned Debt, above). Obviously it makes sense to make arrangements to pay
court judgments before unsecured debts that you havent yet been sued over.
Secured Loans
As discussed above, a debt is secured if a specific item of property (called
collateral or security) is used to guarantee repayment of that debt. If you
dont repay the debt, most states let the creditor take personal property
without first suing you and getting a court judgment. If the property is
something you or your business cannot live without, such as a forklift, truck,
or cash register, stay current on your payments or expect the company to
promptly repossess the property.
Your Mortgage
If you want to keep your house, youll need to keep paying your mortgage
(and second mortgage, if you have one). If you dont, the lender can foreclose
on the house, because it is collateral for your mortgage. And if you pledged
equity in your house as collateral for a home equity loan or line of credit,
youll need to keep current on those payments as well. (However, if there
isnt enough equity in the house to cover the home equity loan, line of credit,
or other second mortgagemeaning that the second mortgage is no longer
securedit might make sense to continue paying only the first mortgage,
because the second mortgagor is unlikely to sue.)
However, if you know you cant afford your mortgage payments, in the
medium term you might be better off selling your home (if you can), renting
a moderately priced place, and using any money left over to pay your debts.
On the other hand, if you cant sell your house for more than you owe and
you cant make the payments, your best bet may be to stay in it for as long as
possible without making payments and use the money you save to pay other
critical bills. Eventually, the house will be foreclosed on.
resource
Help with foreclosure. For information on the intricacies of foreclosure,

see The Foreclosure Survival Guide, by Stephen Elias (Nolo).
Vehicle Payments
If you need a vehicle to continue your business or keep your job, do what
you can to make the payments. Otherwise your vehicle will be quickly
repossessed. But if youre paying for a more expensive car than you need,
consider selling it and buying a cheaper one. This will save you a bundle
in the long runeven if it costs you a few dollars to pay off the difference
between what you owe and what you sell your car for. If your car is leased,
websites like swapalease.com and leasetrader.com may be able to get you out
of your lease and into something cheaper.
If youre already late on loan payments, consider voluntarily turning the
vehicle over to avoid repossessioneven though you will legally owe any
difference between what the lender can sell the car for and what you owed
on the loan. If the deficiency is not too large, try to negotiate with the lender
before you surrender the property, to get the lender to cancel the entire
debtin writingin exchange for your cooperation. But understand that
a voluntary surrender might still show up as a repossession on your credit
report.
Accounts Sent to Collection

After several months of trying and failing to collect a debt, many creditors
turn their debts over to a collection agency, which will immediately launch a
steady stream of scary letters and phone calls. (If you write to the agency and
demand that it stop contacting you, under federal law the collection agency
can no longer contact you, except to tell you if you are being sued.) The next
step could be a letter from a collection attorney or a lawsuit, if the creditor or
collection agency believes you have enough assets to make it worthwhile to
sue you.
Collection agencies often collect a percentage of whatever they recover,
so they are often willing to agree to a cash settlement for less than the
amount owedespecially if they believe that you otherwise plan to file
for bankruptcy. (See Chapter 3 for more information on negotiating debt
settlements.)
Business Rent
If you plan to keep your current commercial space, pay your rent. If you
dont, the landlord is sure to start eviction proceedings against you fairly
promptly. But if you can survive without your commercial space or office by
moving to a much smaller space or even into a spare room in your house,
consider the strategies to get out of your lease discussed in Chapter 12.
Also, remember that, as discussed above, if you move out when you
have time remaining on a lease, your landlord can sue you in court for the
remaining months rent if the landlord is not able to rerent the space.
Insurance Premiums
Premiums should be further down on your list, but you dont want to pile
a liability claim on top of all your other financial problems because your
premises liability or auto insurance ran out and youre not covered for a
slip-and-fall lawsuit or a car accident. (And remember, if you are operating
as a sole proprietor or partnership, the costs of any mishap not covered by
insurance will be a personal debt.) Instead of letting coverage lapse, try to
reduce your premiums by trimming unneeded insurance coverage and raising
deductibles (See Chapter 3.)
Suppliers Bills
If youre a sole proprietor or partner, youre personally liable for suppliers
bills, but a creditor must sue you and get a judgment before threatening
your personal assets. For this reason, suppliers bills generally have a fairly
low priority, unless of course you need to order more goods or supplies from
the same supplier. If your business is a corporation or LLC and you havent
guaranteed suppliers debts with your personal signature, these bills are an
even lower priority unless, again, you need to order from the same supplier.
If you do need to keep ordering goods from a supplier, try to make
payment arrangements with the supplier. If you dont, you risk having them
cut you off, or at the very least require you to pay COD (Theres more on
how to negotiate with suppliers to lower or postpone bills in Chapter 3.)
Credit Cards
Credit card balances are normally unsecured, personal debts, even if the
card is in the name of a business organized as a corporation or an LLC. But
because the creditor cant grab your property without first suing and getting a
judgment against you, and because credit card debt is easily dischargeable in
bankruptcy, credit card balances are a lower legal priority. But remember that
penalties and interest on credit cards add up fast, so unless youre considering
bankruptcy, failing to make at least the minimum payments will quickly put
you in a big debt hole that it will be hard to get out of.
Estimated Taxes
If your business is in the toilet, chances are you can decrease or eliminate
your usual estimated tax payments, if you havent already. How? Most people
base their estimated tax payments on their previous years net income, but
in a financially troubled year, your income is sure to be much lower. As long
as you end up making estimated payments equal to 90% of your income tax
liability for each quarter, you wont be assessed a penalty. If you do underpay
your estimated tax liability, there will be a small penalty, but if skimping on
estimated tax payments allows you to pay other more critical bills, it may be
worth it.
resource
More information on estimated taxes. Go to www.irs.gov and get IRS

Publication 505, Tax Withholding and Estimated Tax.
Other Business Debts

Your lowest payment priority is for run-of-the-mill bills for things like
advertising, entertainment, dues and subscriptions, repairs and maintenance
and, on the personal side, medical bills. Though you may get hit with
late fees if you dont pay, these unsecured creditors have to sue you and get
a court judgment to be able to take your business or personal assets. (See
What Can Creditors Do If You Dont Pay? above.) Plus, most unsecured
debts can be discharged in bankruptcy, if things take a turn for the

worse. Do keep in mind that if you are 30 or more days late on a bill, the
information can go on your business or personal (if youre a sole proprietor
or partner) credit report.
Staying Out of Deeper Trouble

When your business is sliding down and the bills are piling up, its natural to
try to come up with creative methods for paying down your debt, to stay in
business as long as you can. Unfortunately, some of the most creative ways
to pay your bills are also the ones most likely to get you into further trouble.
Heres what to avoid.
Dont Try to Hide Assets

Sometimes, out of desperation, a business owner tries to protect personal or
business assets by giving them to friends and relatives or otherwise trying
to hide them from creditors. Although few small business people have the
knowledge necessary to move cash to an offshore bank account, many try
to hide it in the name of a parent, child, coworker, or friend. Dont do this.
Creditors attorneys are experienced in ferreting out such hidden assets, and
in extreme cases, these tactics can even give rise to civil and criminal charges
of fraud.
In judging whether a particular transaction or transfer was fraudulent, a
court will look at whether the new owner of the property paid a fair price
for it. If you transfer two trucks and a $25,000 bulldozer to your cousin for
$1,000, you are likely to regret it.
Many states fraudulent transfer laws allow creditors to look back four
years to see if you transferred any property to relatives or close business
associates for less than full value. And in case you later file for bankruptcy,
the bankruptcy trustee (the person who will be handling your case at
bankruptcy court) can scrutinize transfers made in the past two years or use
the states longer look-back period.
Dont Lie on Loan Applications

If your business is in serious trouble, you may find yourself frantically trying
to borrow money, and in the process may be tempted to misrepresent your
financial condition. Dont. If, in applying for a loan, you overstate the value
of your assets, inflate your income, or fail to disclose all of your existing debts,
you can be guilty of fraud. And fraudulent debts can haunt you for years,
especially if you later file for bankruptcy. A bankruptcy creditor will be able
to easily compare the assets and income you listed on your loan application
to those on your bankruptcy petition to see whether your loan application
was fraudulent. If the bankruptcy court decides that a loan was obtained by
fraud, it could refuse to discharge that debt. And even if your business is a
corporation or LLC (which would normally protect your personal assets), you
could be held personally liable to repay a loan obtained fraudulently.
caution
There are other donts if youre considering bankruptcy. If you think

you might end up filing bankruptcy, you also will want to avoid missteps such as
paying creditors who are related to you before others, borrowing money from
family and friends, or taking a credit card cash advance to pay your bills. For more
information, see Chapter 13.
How to Protect Yourself From Further Personal Liability

So far, weve talked about what you can to do to deal with debts that you
already owe. Now lets consider what you can do in the future to limit your
personal legal liability for debt.
Sole Proprietors and Partnerships

As discussed earlier, if you are operating as a sole proprietorship or a partnership, you are forever personally liable for all business debts. In contrast, owners of LLCs or corporations are not liable personally for business debts unless
they guarantee them with their personal signature. Because of this advantage,
you may be interested in forming an LLC or corporation.
If, despite your current business problems, you believe your business is
viable in the long term, quickly forming an LLC or corporation will protect
your personal assets, such as your house or your car, from being taken to pay
off new business debts. If you are able to pay off to pay off your old debts
the ones that you incurred while you were a sole proprietor or partnerand
you convert to an LLC or corporation, youll be protected from personal
liability for most new debts.
You cant, however, get rid of personal liability for those old debts. So if
you are considering converting to a corporation or LLC, keep in mind that
doing so wont allow you to escape your personal liability for current business
debts. That means that your past business creditors could still come after
your house, car, and other personal assets if you dont pay your old debts.
In addition, in most states, if you dont pay or settle your old debts before
you form a new corporation or LLCor have the LLC or corporation take
over the debts and pay them in a timely fashionthe creditors of your old
business can get a judgment against the new corporation or LLC and seize
assets of the corporation or LLC to sell to pay the old debts.
resource
How to incorporate or form an LLC. You can form an LLC or corpora

tion almost immediately online. Nolo.com is one of several affordable LLC and
corporation formation services. But first, for more information on the basics of
corporations and LLCs, and which business structure might be best for your business,
visit the section on LLCs, Corporations, and Partnerships in Nolos free online legal
encyclopedia at www.nolo.com/legal-encyclopedia/llc-corporations-partnerships/
index.html.
Once you form a corporation or LLC, you need to notify all of your
suppliers, customers, and clients that your company is now a corporation
or an LLC. It is essential that you send a letter to them saying that you have
changed your business structure and giving your new name (which can be
the same but must include LLC or Inc.). And then you should make a
clear request that they do business with you in your new name from here on.
A sample letter is below.
Letter Announcing a Businesss New Legal Structure

June 14, 20xx
Dear Ms. Tranchez:
Torchlight Productions has recently changed its legal structure from a sole
proprietorship to a limited liability company. The name of the business has
changed to Torchlight Productions, LLC.
The new business has taken over all assets and liabilities of our previous
business, including contracts, orders, debts, and other accounts payable.
There has been no change in the ownership of the company, and there will
be no change in policies or delay in payments. We will be providing the
same fine products and services on which we built our reputation.
Please be sure to pass the word to your accounts payable department and
other relevant departments that we will now do business exclusively under
our new name and that cannot recognize orders, invoices, bills, or any other
business communications that use our former name. Please note that our
address has not changed.
Thank you for being one of our most valued clients. We look forward to a
long and healthy business relationship with you.
Very truly yours,
Emme Lorenz
Torchlight Productions, LLC
Follow Notification and Publication Rules in Your State

California, Georgia, Maryland, Virginia, Wisconsin, and the District of Columbia have a bulk sales law, which applies to companies that manufacture or
sell inventory from stock (and in California, to restaurants). Bulk sales laws
are designed to prevent business owners from evading creditors by transferring their business assets to another company.
The bulk sales law requires you to give your creditors notice that you
have transferred the assets of a sole proprietorship or partnership to a new
corporation or LLC under a new name, and that the new entity assumes
the debts of the prior company. In some states, this notice also must be
published in a local newspaper, recorded in the county land records office,
or sent to the Secretary of State. Your local newspaper or recorders office
should be able to help you with this notice.
To fully establish your new limited liability status, you should now sign
all paperwork, invoices, checks, and contracts in your new capacityfor
example, President of Sidewinder LLC. Also make sure to change all
letterhead, invoices, and marketing material to reflect your new corporate or
LLC name. Keep all new personal and business financial transactions totally
separate, as an essential step to preserving the limited liability that your new
LLC or corporation affords you. For example, all checks should be written
from your LLC account and clearly state you are an LLC or corporation, and
no personal bills should be paid from this account. (Transfer funds from the
business account to your personal account first.)
You should also change the name on your business license, tax registration
certificate, or sellers permit to reflect the new corporate or LLC name.
Depending on your locality, you may be required to apply for other new
licenses and permits under the corporations or LLCs name as well.
caution
Partnerships, beware of tax implications. If you plan to convert a

partnership into an LLC or corporation, things can quickly get tricky from a tax point
of view. While some states provide straightforward partnership conversion forms,
these dont take into consideration the legal and tax ramifications to closing down
an existing co-owned business and starting a new one. As a result, you will probably
need an attorneys help, or at least a consultation with a business accountant or tax
expert, before you convert your partnership. (If youre looking for a lawyer, Nolo.
com features a lawyer directory as a free resource to our customers. You can find
comprehensive profiles of attorneys who handle business, tax, bankruptcy, and debt
issues in your state at http://lawyers.nolo.com.)
Corporations and LLCs

To avoid any possibility that a creditor could later claim your corporation
or LLC is a legal sham and your business is merely a sole proprietorship or
partnership, its crucial to act like your business is now an entity separate
from you.
Follow Corporate and LLC Formalities

The most important rule to follow is to hold and document regular meetings
as required by your corporate bylaws or LLC operating agreement, giving
proper notice to all owners of the meetings. Also be sure to follow proper
procedures on electing officers and voting on other matters.
If you dont follow these formalities, it will make it easier for a creditor to
say that you did not have a real corporation or LLCthat the corporation or
LLC was just a sham to help you defraud creditors and that it was really just
you running the business. (When a creditor makes this claim successfully, its
called piercing the veil.)
For example, if you are having financial difficulties and want to sell off
significant assets or lay off a significant portion of your workforce, you
should call a special meeting of your board of directors, at which you
communicate the details of your financial situation to request approval for
the sale or layoff. Document the directors approval in a resolution and insert
it in the minutes of the meeting.
resource
Information and forms for recording minutes and resolutions. See The
Corporate Records Handbook: Meetings, Minutes & Resolutions or Your Limited Liability
Company: An Operating Manual, both by Anthony Mancuso (Nolo).
Avoid Personal Guarantees

Whether youve just formed your corporation or LLC or youve operated one
for years, remember that to protect your personal assets you must also refuse
to personally sign business contracts or make personal guarantees on leases,
loans, or contracts. If a particular vendor balks at supplying you under these
terms, you can usually find someone else who will work with you, especially
if you establish business credit by paying up front for the first order or two.
To get a bank loan or line of credit, you may not be able to avoid giving a
personal guaranteeunless you can convince the bank that there are enough
corporate or LLC assets to secure the debt. Think twice before taking on this
serious legal burden.
How can you expect suppliers to give you credit terms without a personal
guarantee? You can establish a good business credit record for your corporation or LLC just as you can establish good personal credit. To start, get a
trade line of credit from several suppliers and a couple of business credit cards.
resource
Building a track record for your LLC or corporation. Dun & Bradstreet
offers a program called CreditBuilder that, for a few hundred dollars, helps you
report your payment history to establish good business credit. For more information,
go to http://smallbusiness.dnb.com and search for CreditBuilder.
C H A P T E R
Concentrate on Whats Really Profitable

Getting a Quick Profits Plan on Paper................................................................ 105
Making Money in a Service Business................................................................... 107
Able, a House Painter............................................................................................. 108
Scott, an Attorney for Small Businesses....................................................... 110
Making Money in Retail or Manufacturing .................................................... 113
Business is a good gamelots of competition and a minimum of rules.

You keep score with money.
Nolan Bushwell
ou should be able to state in just a few sentences how your business

makesor hopes to makemoney. The fact that so many entrepreneurs cant do this goes far to explain both why few small companies
are profitable in good times and why so many are subject to quick collapse
when times are bad.
People still in the start-up phase or even those with a business that has
been open for a while and is losing money, tend to be so excited about their
entrepreneurial dreams that they ignore the core question of how theyll turn
a profit. They happily chatter about their ideas, but cant provide income and
expense projections that show how the business will make money. (Ask them
for a dollars-and-cents explanation and theyll think you just havent been
listening, and start all over again to explain their entrepreneurial vision.)
Even in good times, just opening the doors of a shop or service business
and hoping youll sell or repair enough Fiddlyhumps to make a decent living
is almost always a prescription for failure. For starters, you need to know
your costs: how much youll spend purchasing inventory, marketing your
goods or services, paying rent, making service calls, compensating staff, plus
what is likely to be a surprisingly long list of other costs. Only then you can
begin to figure out exactly how many Fiddlyhumps youll need to sell or fix
each month and for how many dollars, so as to cover these expenses and earn
an adequate profit besides.
When an economic meltdown happens, its even more crucial to understand
exactly how you make money, because otherwise you are almost sure to make
the wrong cutback and marketing decisions. Flying blind, youre far more
likely to hit a mountain than a runway.
Example: Leili is a hair stylist who pays $1,200 per month to rent her station in a
nice shop. Before the downturn, she worked 35 hours per week and netted $1,975
before taxes, meaning that she was earning about $56 per hour. But once hard times
hit and people started to cancel and delay their appointments, her sales fell 25%. In
an effort to fill up her chair, Leili considered cutting prices across the board.
chapter 5 | concentrate on whats really profitable | 105
But her marketing guru sister Resa suggested she break down how much she made
for cutting and coloring hair, on an hourly basis. When Leili did the math, it turned
out that she earned just $50 per hour on cutting, which was time-intensive, but $90
an hour on coloring because she could work on other clients while the color set.
Armed with this information, Leili told her sister that since she made so much more
on coloring, she planned to hold a 20%-off color sale for the rest of the year.
Instead, Resa suggested that Leili first do an experiment. For the next month she
should notify her customers that she was discounting color 20%. Then, the following
month she should return color to its normal price while mailing and emailing everyone a recession special of 20% off haircuts. Based on her results, she should then
adopt the better long-term strategy.
In the first month, the 20% color discount produced only a tiny uptick in appointments, meaning that Leili actually worked harder for less total income. But when she
discounted cuts 20%, her volume increased 30% for cuts and 20% for color, meaning
that her income went up substantially.
Leili soon realized that her second plan worked so well because when older
women took advantage of her cut discount, it brought attention to their graying
hair, which they then wanted covered. But when they received an email telling them
they could get a discount on color, they had time to consider that they could do it
themselves for far less.
Getting a Quick Profits Plan on Paper

By now you should have completed your profit-and-loss forecast and cash
flow analysis, which together should give you a good overall view of whether
your business is solvent. In this chapter we want you to adjust your focus
by asking you to grab a paper and pen (or your computer) and on one page
describe which parts of your business still make money, or could make
money if you cut overhead and made some marketing changes.
This will probably turn out to be tougher than you expect, especially if
your business is losing money. To help you, next are some examples of brief
profit statements written by people with small businesses. Dont worry if
you dont fully grasp every detail of each businessthese are back-of-the-
envelope profit forecasts for internal use, not formal business plans to present
to a stranger. And once the profits information is set out, well show you how
each entrepreneur used it to make sensible business decisions.
Theres No Substitute for Doing the Math

Ralph learned this lesson the hard way more than 30 years ago, when thentiny Nolo was invited to participate in a Fourth of July flea market sponsored
by a local consumer-owned grocery store. Nolo set up a booth and sold
damaged and slightly out-of-date books for a dollar or two each, and raked in
money.
That evening, his pockets bulging with bills, Ralph stopped by a friends
house for dinner and described his new vision to increase Nolo profits by
selling books at similar flea markets. One of the other guests, who had
considerable retail experience, started to chuckle. I bet if you added up all
your costs, he said, you worked a long, hot holiday for practically nothing.
To show him exactly how wrong he was, Ralph got out pen and paper and
went to work. In addition to $30 to rent a booth, $10 for supplies to make
signs, and $25 to be included in the flea markets ads and flyers, the largest
cost was paying two Nolo employees (who traded working on July 4 for time
off on another day) to help Ralph set up, stock, and run the booth. And then
there were a few hours of employee time before the flea market to pack up
the books and afterward to unpack the ones that hadnt sold. Add a couple
of dollars for gas and $15 to treat workers to lunch, and it turned out that
Nolo netted only $70. Ralph had traded his holiday for $7 per hour.
Nolo did eventually find a way to get a few bucks out of distressed
merchandise by selling it to remainder outfits, which buy large quantities
of publishers overstock for a few cents on the dollar. (The books end up
on bookstores bargain tables.) Although this approach yields far less per
individual book, selling in bulk with minimal overhead costs means not only
a profit, but also getting to sleep in on July 4.
Making Money in a Service Business

The dollars and cents of service businesses, especially those that dont operate
from expensive commercial space, tend to be easy to explain. When your
overhead is low and the main thing youre selling is time, its not hard to
understand what you need to do to make money.
For example, to earn a good income, an accountant needs only to sell
a reasonable number of hours each year while getting paid promptly and
keeping overhead expenditures under control. And if an accountant does
poorly, the problem can usually be summed up in nine words: not enough
clients buying and paying for enough hours. It follows that to fix things,
the accountant will first want to improve marketing to bring in more work,
and secondarily look at cutting overhead. Similarly, other service providers
without high overhead, whether they are consultants, plumbers, music
teachers, SAT tutors, exterminators, or massage therapists, should quickly be
able to state how many hours of time they must sell at any given hourly rate
to operate a financially successful enterprise.
In some fields, such as making emergency house calls to unplug sinks or
toilets or plucking ducks for hunters, its common to charge by the unit
or job, not the hour. Fortunately, the math is no harder. For example, if a
successful duck plucker cleans and wraps 10,000 ducks per season at $4 each
(before moving on to cleaning salmon for a similar fee), it wont be hard to
subtract the costs of doing business to arrive at a profits figure.
Even if you expand your business by renting more space or buying additional equipment, the math needed to figure out how the business will make
a profit usually wont be much more complicated. And if you hire people to
help, as long as the employees cost can be marked up three to five times, all
should be well.
Here are two quick and dirtybut nevertheless effectiveprofits statements for service businesses. As youll see, each of these entrepreneurs has a
good handle on the dollars-and-cents side of their operations, which allows
them to make sensible cutback decisions when hard times require it.
Able, a House Painter

Here is Ables statement based on what he regards as his normal business over
several good years.
Im a house painter with a three-man crew that I sometimes expand to as many as
eight when Im working two or three jobs at once. My wife Sid works as part-time
bookkeeper and scheduler. To pay her and the crew and cover other expenses,
such as the cost of my truck and equipment, and net at least $120,000 to support
our family, I need to gross close to $300,000 per year. I accomplish this by charging
customers $60 per hour for my crew members and $70 for me. I pay my less-skilled
employees $15 per hour and my highly experienced foreman $24 per hour.
I spend time doing things that dont produce income, such as bidding jobs, maintaining equipment, and taking a vacation, so I bill only about 800 hours of my own
time each year. So, to meet my income goal I need to charge at least 4,500 hours for
my crew. When the weather and the economy are both good, I can do better, meaning Sid and I can earn the $120,000 we need to live on and put money aside as well.
Doing the Numbers in a Good Year

Revenue
Crew (4,500 hrs $60)
$270,000
Able (800 hrs $70)
56,000
Total Revenue
$326,000
Expenses
New Truck
$30,000
Gas
600
Paint and Materials
10,600
Office
18,000
Marketing
5,000
Wages & benefits (bookkeeper)

Wages & benefits (crew)
30,000
105,300
Miscellaneous
2,000
Total Expenses
$201,500
Net Profit (before taxes)
$124,500
Now lets fast forward to the economic downturn. Ables volume falls by
50%, and to get this much work, he has to lower his bids by at least 20%,
meaning that he now charges his time at only $50 per hour and his crews at
$40 per hour. What can Able do to survive? He starts by determining that he
cant solve the shortfall by simply doing more painting himself. Since he is
by far the best salesperson, Able needs to put time into marketing, including
bidding on as many jobs as possible. He also knows he cant afford to cut the
hours of his foreman, even though his hourly rate is higher, because doing so
risks losing his most skilled painter, something that before long would surely
damage his reputation for top quality work. Based on these assumptions,
here is Ables hard-times amendment to his first statement.
To cut overhead, I moved the office into the basement. In addition, I decided not to
replace my truck, and of course I hired less labor because I had fewer jobs.
Doing the Numbers in a Bad Year

Revenue
Crew (2,250 hrs $40)
$90,000
Able (800 hrs $50)
40,000
Total Revenue
$130,000
Expenses
Truck maintenance
$2,000
Gas
450
Paint/Miscellaneous Materials
6,000
Marketing
8,000
Bookkeeper
30,000
Wages & benefits (crew)
51,480
Miscellaneous
2,000
Total Expenses
$99,930
$30,070
Even counting Sids pay for bookkeeping, its obvious that Able and Sid
are now in financial hot water. They have some high personal expenses that
are important to them: Their two children go to Catholic school, and when
times were bright two years ago, they bought a new house with a pricey
mortgage. They realize more changes are necessary.
To try to put our business back on its feet, my first step was to ask my crew whether
they would temporarily work for 25% less. Because they would otherwise be unemployed they agreed, as did my foreman. This let me mail a flyer to my old customers
offering a super deal if they would commit to repainting now. I picked up six new
jobs and put my foreman and two painters back to work full time. This meant Sid
and I now have an income of over $90,000, just enough to pay the school bills and
mortgage if we scrimp on everything else.
Going forward, Sid plants to take a course in color theory and help me with estimating, including leafleting neighborhoods close to where we have a job, offering a
free consultation and estimate. If this works out, I can spend more time painting and
further increase our income.
tip
Employees cost more than you think. If you hire even a few people,
otherwise productive time and energy must be diverted to communication,
coordination, and other management tasks, none of which makes the cash register
ring. Recognizing this, its important that each new employee you hire make a
substantial contribution to your bottom line. If they do, greatyour management
efforts will more than pay for themselves. But especially in bad times, when profits
fall or disappear, youll want to reassess. If an employee doesnt make your business
substantially more profitable, you would do better to stop wasting your own
precious productive hours on managing that person. Better to look at contracting
the task out to someone who does nothing else or concentrate on getting the
maximum possible return for your own time.
Scott, an Attorney for Small Businesses

Scott is a lawyer who specializes in new business start-ups and helping existing
businesses do the legal paperwork necessary to raise money to expand. He also
handles other problems for his business clients, including bankruptcy.
During normal times I try to work a 35-hour week, not counting hours I spend keeping up on my field through reading and attending legal education classes. With five
weeks off each year, this means I have 1,645 hours to sell. I share a nice office with two
other lawyers; my portion of office rent, my one-third share of the salaries for our one
full-time secretary and one part-time paralegal, and my other expenses are about
$100,000. In addition, I spend about $25,000 entertaining clients, taking classes in continuing legal education, travel, and professional publications (books and online materials). Obviously, I have to cover this $125,000 expense nut before I pocket anything.
My goal has been to bill at least 80% of my 1,645 working hours (or 1,316 hours)
at $250 per hour, bringing in just under $329,000. This leaves me with a net of
about $194,000 after covering expenses and any bad debts, which are usually about
$10,000. But because I have a couple of clients with continuing legal needs who pay
up front for my time whether or not they use all of it, these deals net me substantially more than $250 per hour, so my net is actually closer to $224,000.
Doing the Numbers in a Good Year

Revenue
Billable hours/Retainers
$359,000
Total Revenue
$359,000
Expenses
Office rent and secretarial services
Entertaining
$100,000
15,000
Publications, professional dues, classes
5,000
Business travel
5,000
Bad debts
10,000
Total Expenses
$135,000
$224,000
Now lets look at what happened when the recession hit. The first
indication that Scott faced trouble came in the form of a large increase in his
accounts receivables. Many clients who usually paid their bills upon receipt
now paid in 60 to 90 days, and about 15% had stopped paying altogether. In
addition, new or expanding businesses were hard to find, so a good portion
of his business dried up. Suddenly he was billing only 980 hours per year.
When you figured in the bad debts, his expenses had risen, and his net had
fallen to less than $60,000.
Doing the Numbers in a Bad Year
Revenue
Billable hours/Retainers
$210,000
Total Revenue
$210,000
Expenses
Office rent and secretarial services
Entertaining
$100,000
15,000
Publications, professional dues, classes
5,000
Business travel
5,000
Bad debts
27,000
Total Expenses
$152,000
$58,000
Studying these numbers, Scott decided that his major problems, in order
of severity, were not getting paid for hours he had worked, not working
enough hours, and unless he solved the first two problems, too much
overhead. To put his business back on track, he devised this plan:
Send clients a strong signal that bills have to be paid on time, every time.
To kick off his new policy, Scott politely gave all clients whose accounts were
overdue the opportunity to pay promptly in full at a 10% discount (or to call
and arrange a mutually agreeable installment plan). In addition, he began
accepting credit cards, giving clients another convenient way to pay. Next,
for clients who were still in arrears more than 60 days, he began a campaign
of friendly but firm letters and phone calls (and also adopted a policy of
providing no additional services, except as required by bar association rules).
The result was a substantial influx of cash. Finally, when two clients simply
ignored his requests to pay, Scott sent them a letter threatening a lawsuit
(and explaining their right to first go to fee arbitration under bar association
rules). One client paid; the other went bankrupt. Going forward, Scott
also decided that clients who habitually paid late would be asked to pay an
up-front retainer for substantial jobs (a policy that would be sweetened by

offering a 10% discount), with Scott putting the retainer money in a client
trust account until he billed for the work.
Reduce fees 25% for all new work, as a practical way to share his clients
economic pain. To qualify for this recession rate, bills had to be paid within
a week of receipt. In the same letter, he told his clients that he was now
handling business debt problems for clients, including lease renegotiations,
advice on layoffs, debt collection, assignment for benefit of creditor plans,
and business bankruptcy. The combination of these new services and his
lower prices resulted in a 30% increase in Scotts business. In addition, he
joined several online lawyer directories, listing business bankruptcy as one of
his services. This resulted in a steady stream of new clients.
Reduce rent and entertainment expenses. With bad debts reduced and
business on the upswing, Scott felt less need to radically reduce overhead.
But he and the lawyers with whom he shared office space did decide to
squeeze in one more attorney to share the rent and salaries. That reduced
expenses by $25,000. In addition, he cut his annual entertainment budget by
$8,000 and reduced his vacation to three weeks.
Making Money in Retail or Manufacturing

Businesses that carry inventory, such as a retail store, or that buy new materials
or components, such as a manufacturer or publisher, face a tougher task than
do service businesses in understanding how to make money, especially in a
tough economy. It follows that your back-of-the-envelope profit statement will
necessarily look more like the formal profit-and-loss statement and cash flow
analysis we discuss in the appendix. But it should still be possible to demonstrate that you understand how to return your business to profitability by producing a straightforward, albeit slightly longer, profit-and-loss statement.
Unfortunately, most shop owners and small manufacturers are not sure
what it will take to make their enterprises sufficiently profitable. This helps
explain why so many seemingly popular small retailers and manufacturers
come and go, especially in tough economic times. Their owners, it turns
out, never quite understood business basics, such as how much they needed
to mark up their goods at a given sales volume and inventory level to cover
their expenses (rent, salaries, the cost of carrying inventory, and marketing
expenditures to mention a few) and still make a decent profit. When the
economy turns sour, they simply dont know what to do to survive.
Heres one business owner who has a good handle on whats needed to do
to make a reasonable profit: Felice, who publishes regional guidebooks.
My goal is to gross $1 million a year and net a 9% profit, or $90,000. To do this, I need
to develop and maintain a list of 20 core titles that annually sell 5,000 or more copies
each at an average cover price of at least $20.
If I meet that sales goal, my gross is $1 million after wholesalers and retailers take
their 50% cut. The cost to manufacture each book is about $2, or $200,000 per
year, all told. I pay my authors a royalty of 10% of net receipts (10% of $1 million, or
$100,000). This leaves $700,000.
Doing the Numbers

Revenue
Gross sales at retail
$2,000,000
Net receipts
1,000,000
Cost of Goods
Manufacturing ($2 per book)
$200,000
Author royalties (10% of net)
100,000
Total cost of goods
300,000
Gross profit
700,000
Expenses
Rent and utilities
$30,000
Equipment (lease and purchase)
40,000
Book storage and shipping
50,000
Salaries and benefits for 6 employees
350,000
Payments to freelancers
130,000
Miscellaneous
10,000
Total Expenses
$610,000
Profit
$90,000
tip
Good will doesnt count. Often when nave businesspeople pencil out
the dollars and cents of a business, profit turns out to be thin or even nonexistent.
Instead of just facing the truth that without adjustment the business wont work, it
is common to argue that although startup or marketing costs are high, exposing the
business to lots of customers will eventually pay off. Sorry, but business doesnt work
that way. Each business endeavor should make economic sense on its own. And if it
doesnt now, there is little chance things will improve in the future.
If something goes wrong with one part of your retail or manufacturing

businessfor example, sales of new products are disappointingyoull
have a tougher job reducing expenditures than would a service provider.
Of all business expenses, the substantial cost of keeping an inventory of
merchandise is usually the least well understood and accounted for. For
instance, if you typically carry $200,000 in inventory, your profits must be
large enough to cover the cost of tying up this investment, as well as all the
other expenditures necessary to keep the doors open. If you use a bank line
of credit to cover some or all of your inventory investment, the cost just to
finance the inventory might be $10,000 to $20,000 per year, depending on
how fast things sell.
Example: Tamara opened a shop specializing in handmade Southwestern furniture. She located in a large, bright space near the affluent residential area that she
expected to produce the bulk of her customers. Business was good, and for a few
months she believed she was going to be a big success. But then, just about the time
the economy began to turn sour, she looked more closely at her profit-and-loss
statement and found that the cost of buying and maintaining a large display floor
of furniture was gobbling up most of her cash. She was going into the red for several
months of the year. Scared and disappointed, Tamara considered closing the store.
But then one of her advisers had a suggestion. If the cost of keeping a big inventory
was the problem, why not sublease two-thirds of the store and embrace a different
sales model? This time, Tamara would work with just a few high-end furniture makers who were willing to supply her with floor samples of their tables, chests, chairs,
and other items. Customers would then place orders and pay in advance. Free of the
need to pay rent on a large retail space and to tie up cash in inventory, Tamara began
to have continuous, positive cash flow.
tip
Add a service component to a retail business. A struggling low-profit

retail enterprise might be able to save itself by adding a higher-margin services
component. For example, a bookstore specializing in building and design books
could make referrals to highly regarded local architects, contractors, and builders,
for which it would receive commissions. In this business model, the low-margin retail
business would be reinvented to provide a steady stream of customers to the much
higher-profit service business. (For more ideas on creating profits, see Chapter 6.)
C H A P T E R
Innovate on a Shoestring
Invention............................................................................................................................. 120
Copying................................................................................................................................ 123
Serendipity......................................................................................................................... 126
Making Innovation a Continuous Process........................................................ 129
Brainstorm.................................................................................................................... 131
Get Employees Involved....................................................................................... 135
Involve Customers.................................................................................................... 136
Take Time to Think About Your Business .................................................. 138
Choose the Best Ideas to Implement............................................................ 138
Even if youre on the right track, youll get run over if you just sit there.
Will Rogers
ook at a ten-year-old snapshot of Main Street in any American town

or big city and compare it to what you see today. Many of the old
businesses probably no longer exist, and many of the survivors have no
doubt expanded or updated their appearance. Look again after the current
recession has finally ended and you are sure to see that more of the old-timers
have either updated their style and offerings or gone out of business. The
same sort of winnowing will occur on the directory board in the lobby of any
office building.
Where are the missing businesses? A few will have moved, but, especially
when economic headwinds are stiff, the majority will be kaput. Even in
normal economic times, 80% of business start-ups dont reach their fifth
birthday. During dicey economic times, one big reason so many enterprises
stagnate or even flatline can be summed up this way: lack of innovation.
Enterprises that build creative change into their structure are far more likely
to survive a recession than those that look for a recipe for success and then
hope to endlessly repeat it.
The reason innovation is crucial to long-term success in both good and bad
times is simple. To establish and maintain a profit margin robust enough to
survive a business-killing downturn, you need a true competitive advantage.
And if you are smart or lucky enough to accomplish this, you must keep
your competitive edge in the face of rivals who will inevitably try to copy
it and customers whose thirst for the new and trendy will turn yesterdays
brilliant innovation into tomorrows big yawn.
When a small business does well and its product or service is temporarily in
short supply, it will attract competitors. Unless the profitable business quickly
smartens up and finds a way to distinguish itself, these competitors will quickly
find a way to siphon off customers. This is just what happened in the last few
decades to many pioneering video stores, quick oil changers, and photocopy
shops. Businesses that entered these fields early, when the new service was
in demand, often did very well in the short run. But because their business
formulas were so easy to copy and few outlets took steps to distinguish themselves, only a minority survived when deep-pocketed chains flooded in.
chapter 6 | innovate on a shoestring | 119
Competition doesnt always come from big chains. For example, if

you establish a small graphic design business to help businesses lay out
advertising copy, youll be competing with dozens, if not hundreds, of others
who do much the same thing. And especially during a recession, all of you
will be selling your services to business customers, most of whom are very
price-sensitive. So to bring in business and charge the prices youll need in
order to support yourself, your design work must clearly be more desirable
than your customers can buy down the street (or increasingly, on the Web).
For instance, if you are the first local graphics shop to offer a library of
popular art deco design elements, chances are your competitors will quickly
offer similar motifs. To keep your edge, youll need to be ready with fresh
work, perhaps by turning the clock back to the creative design motifs of the
1930s when WPA artists and architects created a unique body of work. Or
maybe youll seek inspiration in wonderful 18th-century Japanese art. Either
way, youll have to constantly innovate.
You might think that the value of building a competitive edge would be
obvious in good times and even more so when customers have a death grip
on their wallets. Think again. It never seems to occur to many entrepreneurs
to look for ways to aggressively outthink their competitors, which is a huge
reason so many never become solidly profitable even in the best of times. For
example, all over America, independent coffee shops, not savvy enough to
give people a good reason to prefer them, struggle for survival in the shadow
of mediocre chain outlets. Similarly, the typical pet food outlet, chiropractor,
sandwich shop, or freelance bookkeeping service doesnt have the know-how
to create and keep a competitive edge over the ever-present herd of similar
businesses. True, because pets and people need to eat, and the IRS and sore
feet are always with us, when times are good these look-alike businesses may
make enough money to survive. But when the hammer of a deep recession
falls, only those that offer customers something extra are likely to prosper.
Fortunately, there are lots of low-cost ways to distinguish your business in
customers minds. Depending on the business, that something extra might
be high quality at a reasonable price, a clear technological edge, an accessible
location, a superior website, or just really friendly, caring service.
The need to innovate never goes away. When you consider how to
reconfigure your business so it will be best positioned to survive, think about
not only whether a particular innovative new direction will be substantial
enough to set you apart from the competition, but also about how you will
be able to extend your advantage over time. And it should go without saying
that it wont be enough to come up with a couple of clever ideas and then go
back to business as usual. Especially if your profits have melted down to the
point where youre not sure your little enterprise will survive, youll need to
build a culture that supports innovation, now and forever.
In my experience, innovation in the small business world occurs in three
ways: invention, copying, and serendipity. Lets examine each to see how it
might help your business.
Invention
Its hardly a secret that Americans love new things. From iPhones and watermiser toilets to plasma 1080p Blu-ray compatible HDTVs and plug-in
hybrid cars, much of our time is spent using tools and toys that didnt exist
a generation or two ago. Its not only big inventions, however, that change
lives and make fortunes. Think about the equipment in todays dental offices
and compare it to what was in use a decade ago. Virtually every tool has been
substantially improved or changed. Interestingly, many of these state-of-theart gizmos were thought up by dentists themselves who thought it was more
fun to invent things than fill another bicuspid.
Similarly, many of the services we now take for granted are either relatively
new or are packaged or delivered in innovative ways. For example, in
contrast to the way they operated a generation ago, most small businesses
now outsource payroll preparation, equipment maintenance, graphic
design, and many other tasks to specialists whose work is better, cheaper,
and faster than could be done in-house. Similarly, 21st-century electricians,
plumbers, contractors, and most other service providers use many tools and
techniques that didnt exist when Bill Clinton was president. A generation
or two ago, hiring a housepainter usually meant living through a month of
having a couple of men hang off heavy wooden ladders, swabbing away with
short-handled brushes. Today the combination of lightweight ladders and
scaffolding, power sanders, fast-drying wood-fillers, and paint sprayers means
the same job can be done in a week.
When goods or services are improved or replaced, someone always makes
money. Much of the profit usually falls to those who quickly figure out a way
to market the new product, service, or business method. For example, when
easy-to-customize modular storage systems were first developed to organize
closets and garages, interior designers who quickly embraced these exciting
new tools charged hefty fees to customers determined to improve on closet
designs that had changed little for several centuries.
Like art or poetry, eureka breakthroughs either occur or they dont
there is little most of us can do to turn ourselves into an Edison, Bell, or
Shockley. But fortunately, to prosper in the small business world, you dont
have to invent a palm-size camcorder or underwater telephone. In fact, most
profitable innovations consist of combining or connecting two or more fairly
mundane things. For example, in the early 1990s, a tiny website dedicated
to buying and selling used items figured out how to combine the fun of a
local swap meet or garage sale with the global connectivity of the Internet.
Starting with the sale of a broken laser pointer for $13, eBay, now one of
the worlds most valuable corporations, was born. Similarly, Amazon.coms
patented one-click shopping helped it create a hugely successful business
selling a huge variety of merchandise.
In your own neighborhood, many service businesses probably now
provide traditional services in ways so efficient and attractive that even in
recessionary times, their customers stick by them instead of going to their
price-cutting competitors. For example, several independent optometrists
and eyeglass shops now work together, so in one stop you can have your eyes
checked, order new high-quality and high-fashion glasses or contacts, and
have them ready in 24 hours, with the further assurance that adjustments
and minor repairs are free forever. An estate planning lawyer we know has
given up her traditional office-based practice and switched to making house
calls, an old-fashioned service that her clients, many of whom are elderly,
find highly desirable.
Businesses are especially likely to profit from innovations that are congruent
with powerful long-term trends, such as renewable energy sources, organic
food, health-enhancing exercise, and recyclable packaging, to mention just a
few. If your plumbing business goes green, in the sense that you emphasize
low-flow toilets, showerheads, and more efficient hot water systems, you
should easily set yourself apart from the half-dozen Roto-Rooter, Mr. Rooter,
Zap Rooter, and AAA Rooter businesses in your area.
Example: Poster Compliance is a California company that provides attractive
state-specific laminated posters to employers, who are required by law to post
certain information about wages and hours, health and safety law, workers compensation, and so on. Faced with lots of competitors, Poster Compliance set itself apart
by developing a line of posters using recycled paper and soy ink. In just a year, the
green posters increased Poster Compliances market share by a hefty percentage.
Many new enterprises turn in a profitable new direction when someone

gets mad at how traditional enterprises operate and decides there must be
a better way. It might be as simple as becoming disgusted with the quality
of the coffee in local restaurants and figuring how to serve a tastier brew.
As you sip your morning latt at Starbucks, Peets, or an independently
owned purveyor of excellent coffee, it may seem like this hugely profitable
innovation was a no-brainer. Not so. If you are old enough to remember
how bad most American coffee tasted 20 years ago, youll understand just
how much insight and determination was necessary to create businesses that
really can serve a great cup. A local tile shop, which sells beautifully designed,
handcrafted tile, got started in large part because its owners were frustrated
with the unimaginative selection available at local building supply outfits.
Example: The partners in a small architectural firm, BTAssociates, are fed up with
competing with dozens of other firms for every residential and small commercial
job. To learn about a hot new field, they volunteer to design an emergency response
center for their county, at no cost. When the center, which combines lightweight
design with the strength and flexibility to withstand almost any conceivable disaster,
as well as a NASA-like dedication to the optimum use of the latest communication techniques, wins several design prizes, BT Associates is quickly able to parlay its
experience into a national leadership role in this specialized but growing field. They
begin to land a substantial percentage of the jobs they bid on all over the country.
Even when a local firm can use its political connections to beat them out, it often
contracts with BT Associates for lucrative behind-the-scenes design help.
Copying
In big-business doublespeak, copying the ideas of other businesses is called
benchmarking, something that all major corporations routinely practice.
For example, the owners of virtually every large entertainment and sports
complex in America have for decades sent managers to Disney World to look
for people-handling practices they can beg, borrow, or benchmark. Because
most of Disneys business practices are right out in the open, learning
from and even copying them is not only smart and cheap but, as long as
competitors dont try to borrow the Mouse, Duck, or other copyrighted
characters or patented inventions, is perfectly legal. It should come as no
surprise that Disney itself has borrowed innovative ideas from many other
entertainment venues.
Copying is a particularly great way to innovate in the world of small
business, especially when times are tough and you need to change or die.
America is a big place, and in many fields there are so many small operations
that it can take years for best practices to permeate a whole business segment.
For example, if you run a struggling childrens clothing store in Omaha,
you may be able to check out a dozen similar operations in California and
come away with several innovative business ideas no one in Nebraska has
yet stumbled onto. Similarly, if you own several bagel shops in Seattle, you
would be nuts not to check out the New York bagel scene when visiting the
East Coast. And if you pick up a couple of good ideas, you would really be
meshugeh if you didnt quickly adopt them.
Example: Trina owns a small teashop on the outskirts of Austin, Texas. The recession has tightened the pocketbooks of her largely retirement-aged clientele, and her
once-popular gathering place is barely hanging on. While visiting a cousin who has a
toddler in Oakland, California, she is taken to TotnTalk, a combination daycarecoffee shop where harried mothers have a place to meet friends and socialize while
their offspring happily play in a play area overseen by a friendly teenage babysitter.
The lightbulb goes on over Trinas head as she sees a way to convert her dying teashop
into a popular gathering place for the many growing families in her area.
Borrowing the best practices of others should be a part of every businesss

ongoing innovation plan. Because its free and easy, you may already do
it on an informal basis. But to improve your chances of success, start a
systematic study of excellent businesses in your field, particularly those that
are not in your immediate area. Staying clear of local competitors will avoid
unnecessarily angering them and at the same time force you to explore
beyond the familiar, increasing your chances of discovering a breakthrough
business model.
To find businesses good enough to serve as role models, talk to suppliers
and other knowledgeable people who work in a different geographical area.
For example, if you run a small ad agency in Bangor, Maine, that is struggling
to survive because many of your customers are cutting their ad budgets, you
might call several business acquaintances who use similar agencies in the midAtlantic states. Ask them for the names of three excellent local ad shops in
their area. If they cant help, maybe they know someone who can. Once you
get a preliminary list, do some more checking (looking at websites can tell you
a lot) to shorten it to a few successful businesses that are most like yours.
At this point, youll need to decide whether it makes more sense to call the
other business, explain what you are doing, and suggest sharing best practice
information, or to anonymously study their operations. Depending on a
number of factors, including whether you can arrange an introduction and
how transparent the business is, either approach can work. Obviously, its a
lot easier to learn a lot about a deli by walking in the front door a few times
than it is to figure out what makes an ad agency tick by schmoozing with the
receptionist.
Establish a separate notebook or computer file for every business you
study, dedicating a section for each key business area you want to study.
Depending on the business, this might include signage, marketing, staffing,
website design, key products, and delivery methods. For example, if a

business you study apparently gets lots of calls because of a super-clever
yellow pages ad, you want to capture that information in your notebook so
that you can design an equally compelling ad.
Example: After working several years as an electrician, Maureen, who is excited by
the aesthetic and energy-saving possibilities of new lighting systems, opens Maureens Full-Service Lighting with an electricians business built in. Her idea is to give
do-it-yourself remodelers a one-stop way to buy new lighting systems and get them
installed. Although in her city there are plenty of lighting retailers and electricians, no
other business has efficiently merged the two. In large part, this is because lighting
stores are afraid to offend electricians, who are themselves wholesale customers as
well as a source of customer referrals.
Maureen is convinced that given time, her customers will be so enthusiastic about
her operation that they will refer others. She concedes that she may alienate some
independent electricians, but believes most of them already buy cheaper generic
products at big box stores. Maureen reasons she will gain far more than she loses
by funneling lighting purchasers directly into her own installation business. And she
hopes that once she gives these customers quality service, they will call her when
they have future electrical needs.
But just a few months after Maureen opens, local businesses announce major
layoffs, and sales are far slower than her business plan predicted. She begins to worry
that, despite her innovative approach, she wont have the financial wherewithal to
survive until her new concept has a chance to prove itself. To help her decide what to
do, Maureen recruits an advisory committee chaired by her Uncle Jimmy, an investor
who retired early with a big nest egg. Although Jimmy and the others are impressed
with Maureens business plan, their concern is that its not innovative enough in
these bad economic times. Jimmy wants Maureen to take the time to study some
highly successful lighting shops to get ideas. Jimmy gets on the phone, calling lamp
manufacturers and wholesalers who do business across the country.
He learns that the hottest lighting retailers all have one thing in common: they
have fully embraced green lighting. Jimmy buys Maureen a plane ticket, and in a
week they visit five lighting stores in four states, all of which concentrate on energyefficient fixtures. Convincing Maureens advisory committee, Jimmy proposes that
Maureen start featuring green products that will save big on the cost of electricity.
Maureen enthusiastically agrees and immediately sets about remaking her shop to
emphasize energy-saving products plus educational materials on using them. When
all this is in place, she installs a bright green awning with her new name, Maureens
Energy-Saving Lighting and in smaller print, Electrician on Duty. Because Jimmy
believes Maureen now has a concept that will thrive during hard times as well as
good, he lends enough money to bring her dream to reality.
Serendipity
Way back in the 1950s, in his groundbreaking book Innovation and
Entrepreneurship, legendary business thinker Peter Drucker pointed out
that many profitable innovations result from accidental or unexpected
breakthroughs. He meant the kind of thing that occurs when you set out
to develop a better variety of easy-to-remove packaging tape and end up
inventing a revolutionary kind of wallpaper that both sticks tight and is easy
to peel off the moment you get sick of it. Whats so special about Druckers
insight? After all, from the discoveries of penicillin and saccharin to the
inventions of nylon and Velcro, its obvious that chance plays a significant
role in finding new ways to do things.
Drucker really gets interesting with a second and more telling point: When
businesses accidentally stumble onto a hot new product or service, even
one that could give them a more competitive advantage, they often fail to
recognize it or even actively suppress it. That is, they keep fooling around
with the tape and stick the wallpaper in the trash.
Example: Leo and Stan are longtime partners in the Arrow Glass Co., a nothingspecial glass supplier. It sells hundreds of types of glass to contractors for use in
residential and small commercial construction projects, and also caters to do-it-yourselfers. A few years ago, more and more people began asking Arrow for several types
of plastic, particularly for newer, unbreakable burglar-deterring types that could be
substituted for window glass. At first, Arrow sent these people elsewhere. Finally,
after turning away more and more business, Leo and Stan began stocking a few of
the most commonly requested types of window plastic, keeping them in an unused
area behind the stairs they not-so-privately referred to as the Plastic Hole.
When plastic sales immediately turned out to be solidly profitable, helping Arrow
to have its best ever year, Leo and Stan were delighted that they finally had the financial wherewithal to expand and improve their facility. They bought and remodeled the
next-door warehouse, which let them more than double their selection of glass. Despite the huge increase in floor space, they left the Plastic Hole in its same dingy spot.
Were Leo and Stan obtuse? No question. Unfortunately, they were also
typical. Like most business owners, they were slow to recognize and even
slower to embrace an accidental business breakthrough. Doing so would have
meant fundamentally changing their original mindset, which is never easy.
Think about the small enterprises you patronize. How often does your
drycleaner, plant nursery, or hair salon change the way it does business? If
the answer is somewhere between rarely and never, you can safely bet
that the business is guilty of ignoring and probably even suppressing new
information, and as a result is sailing so aimlessly through the recessionary
storm it is in danger of sinking. A more nimble competitor will surely
appear, embrace the new concepts, and quickly grab market share.
Here are several more examples of businesses that are ignoring information
they should be embracing to improve their competitive position:
A struggling small-animal veterinarian who frequently gets calls from
concerned pet owners after regular business hours, but doesnt look into
hiring another vet to run an evening clinic.
A certified public accountant specializing in income taxes, who, despite
being asked questions almost daily about planning to limit estate tax,
never reorganizes his business to provide customers helpful information
and nonlegal services on this topic.
A copy shop on a congested street that doesnt institute a free pickup
and delivery service or otherwise improve access despite the fact its highvolume customers constantly complain about parking and ticket hassles.
A consultant who helps city and county governments plan police, fire,
and other public safety buildings but turns down requests to help plan
newly popular disaster-response centers because they are outside her area
of expertise.
A haircutting salon, in a city that is fast becoming the home for

thousands of Southeast Asian immigrants, that doesnt seek out
haircutters who speak one or more of the newly common languages.
A store selling teak garden furniture and expensive knickknacks for house
and garden that is repeatedly asked where tools can be sharpened, but
fails to start a sharpening service.
Poor babies. By not gathering and acting on the information their
customers are thrusting upon them, these businessesall of which surely
have lots of competitorsare turning their backs on ways to improve their
profitability.
But if a successful business you know has recently made positive changes to
the way it looks, what it sells, or how it interacts with its customers, chances
are its owner has learned to make smart use of new informationand to
constantly improve the companys competitive position.
Example: Madge opened a gift shop, Something Special, in a small university city in
the Midwest. Selling a wide variety of items, she barely broke even her first year. Then
when the economy tanked and sales dropped, Madge, a single mother with two teenagers to raise, decided to put up a going-out-of-business sign. But while the sign was
on order, a customer came in and bought almost $1,000 worth of Native American
crafts that were displayed on a couple of shelves at the back of the store. When the
customer also asked to be alerted when the next shipment came in, Madge reflected
that sales of such artwork had been fairly profitable from the start and other people
had made similar requests.
After checking to be sure no one else in the area had captured this niche, Madge
decided to store her going-out-of-business sign for a few months while she converted
half of the store to North American Indian arts and crafts. She helped her new emphasis along with a marketing campaign featuring programs and workshops hosted
by many of the Native American artists and a website built by her tech-savvy son.
Soon, Something Special was special enough to succeed despite the recession.
In the big business world, innovation is often the product of many

years of expensive researchthats what it takes to produce new drugs,
computer chips, and more powerful, longer-lasting batteries. Fortunately,
the information necessary to innovate in the small business world is usually

far more available. Indeed, for the business owner with an open mind, good
ideas that can be implemented at a reasonable cost are available everywhere.
A great example of how to improve a business by paying attention to
unexpected information involves the Holiday Inn in Cumberland, Maryland.
As reported by Associated Press writer David Dishman, for years this motel
bore the heavy burden of being built hard against a railroad line. When the
hotel wasnt full, desk clerks, fearing that guests would be bothered by the
65 noisy trains that clattered past each day, assigned guests to the quieter
rooms closer to the unpleasant highway. Then one day a train enthusiast
contacted Sales Director Karen Twigg to ask how much extra it would cost to
book a room facing the tracks. Twigg could have politely said they were the
same price, accommodated the mans request and gone on with her routine.
Instead, she quizzed the caller about why he wanted to overlook the trains and
found out that he was a train freak. Realizing that he wasnt the worlds only
train enthusiast, Twigg decided to see whether the Holiday Inn could profit
from her new knowledge. She did this by starting a promotional campaign
aimed at train buffs: Make tracks to stay with us. This message was a big
hit, and train-loving travelers from all over the world booked track-side rooms
with a view of all those locomotives pulling their loads in and out of the CSX
switching yard and maintenance shops.
Now take a moment to think about your business. Especially at a time when
every sale is precious, do you have the innovative mindset to recognize and
profit from valuable new information? Tempted to answer Yes? No problem,
as long as you can name three trends in your field and what you are doing to
raise your profits (or stem your losses) by taking full advantage of them.
Making Innovation a Continuous Process

If the innovative ideas you introduce turn out to be on target, and you run
your business competently, chances are youll survive tough times. Your
long-term task is to keep innovation happening, so that aggressive (or even
desperate) competitors dont figure out a way to catch up to or leapfrog your
new approaches.
This isnt easy. As the owner of a small business, you will be pulled in many
directions every day. Customers must be satisfied, employees organized,
supplies ordered, and bills paid, to mention just a few necessities. And in the
midst of all this, you must still plan to improve your business at a time that
sales are hard to come by and profits are meager. You might think the biggest
problem is having time to come up with creative ideas, but the opposite
can just as often be true. For some entrepreneurs, ideas are as plentiful
as pumpkins in October; its picking the best ones and carving them to
perfection thats difficult. And once each is implemented, you also need to be
able to track its success or failure. Youll never have time to nurture the best
ones if you arent equipped to recognize and shuck off the losers.
When thinking about how to improve your business, start with three
key principles. First, if your business has been successful in the past, and
especially if it is still at least slightly profitable, youll want to improve it
incrementally, not fundamentally try to reinvent it. This way, you both
minimize the possibility of jeopardizing your success while at the same
time take steps to extend your entrepreneurial edge and protect your profit
margins. For example, suppose your small software company has had a
profitable specialty in designing database software for lumberyards. When
the recession hits, orders decline 15%. It probably doesnt make sense for you
to try to apply your innovative inventory-tracking ideas to retail stores or
other businesses you dont fully understand. Better to focus on new features
that will make a new release of your software so essential to your struggling
lumber industry customers that they will buy it even when money is tight.
If your bottom line is in the red, youll want to innovate more boldly;
if the business you have now is failing, your best hope is to quickly and
fundamentally change it. If you are right, your new ventures will produce the
added income you need to survive. And if your idea doesnt work, you wont
be any worse off.
Third, whether you decide to make incremental or fundamental changes,
focus on the real needs of your target market, not on your own hopes and
dreams. When askedand its always wise to askcustomers often request
the most basic improvements, not clever breakthroughs. For example, a lawyer,
house remodeler, or landscaper who adopts a policy of returning all phone
calls within three hours may do more to please customers and clients than
they would if they developed a laundry list of new services. Similarly, a coffee
shop that serves better grades of coffee and tea may score more points with
breakfasters than if it went to far more trouble to create a whole new menu.
Example: Madge, the woman who was smart enough to turn her failing gift shop
into a successful purveyor of Native American arts and crafts, distributed a questionnaire to a number of her best customers requesting feedback as to how she
could better serve them. Several suggested she add folk art from other parts of the
world, including Nepal, Tibet, South East Asia, and Central America. Worrying about
spreading herself too thin, Madge nevertheless decided to expand her inventory to
include folk art from all the Americas. Although doing this required renting a small
adjoining space, Madges new initiative was profitable from the start.
Fortunately, most innovative ideas are freeso you should be gathering

as many as possible. And because business-changing ideas rarely show up
on schedule or in easy-to-recognize ways, bringing as many as possible to
the surface will take both creativity and stubbornness. For example, if you
operate an organic grocery, youll want to encourage the high school kid who
uses your cute little wheelbarrow to move heavy orders to customers cars
to tell you if customers frequently ask where they can buy one. This doesnt
mean youll ultimately decide to sell wheelbarrowsjust that you want to
capture this information.
Here are some suggestions that may help you design an informationgathering system.
Brainstorm
Brainstorming sessions with people who are worried about your shortterm prospects and care about your long-term success can be very useful.
Depending on the size and sophistication of your business, participants
might include the members of your advisory board, an investor, family
members, key employees, and contractors. You might possibly include a
supplier you need to reassure about the businesss viability. Most of these
people will have ideas to improve your business. Some will be wildly
impractical, others far too costly, and one or two just plain kooky, but there
are likely to be at least a few excellent ones.
Groups of from six to eight peopleten at mostwork best. Arrange to
get the participants together in a quiet place for several hours. To make sure
everyone is well informed about your business, provide in advance financial
projections, marketing information, and other helpful background materials.
Prepare by placing an easel holding a big pad of white paper at the front of
the room with an important question written at the top using a dark marker.
Something like How can ABC Ventures quickly increase profitable sales?
works well. Designate as facilitator someone who can write clearly, has a
good sense of humor, and is comfortable in front of people. Its often best
if you dont assume this role. Your presence at the front of the room might
intimidate some participants and keep them from offering suggestions theyre
afraid might be seen as criticism.
The facilitator, acting as master of ceremonies, should begin by making
it clear all ideas are welcome and that there is no such thing as a stupid
suggestion. Its also a good idea if the facilitator coaches people to be
brief, explaining that the exercise works best if you first collect as many
ideas as possible without evaluating them. Later, you can discuss the most
viable ones. For example, if you operate a suddenly lagging solar hot water
and photovoltaic cell company, the first person might say Advertise in
the PennySaver, the second Offer summer discounts, the third Pay
salespeople bigger commissions for larger orders, and the fourth Work with
lenders to make it easier for homeowners to finance installations.
No matter how seemingly silly, boring, or counterproductive an idea may
at first sound, the facilitator should record it without argument or editing
(except to summarize long-winded statements). Again, a big key to freeing
people up to tap into their creativity is to convince them there really are
no bad ideas. For example, if someone who works at one of your moneylosing greeting card shops starts to explain why she thinks it would make
sense to also run a takeout coffee bar, dont laugh and ask for a more serious
suggestion. Just write on your white board sell coffee. Who knowsif
there isnt a place in the neighborhood where customers can get a decent
latte, a card and coffee shop might just work. Once participants trust that
all contributions really are welcome, its likely that suggestions will come fast
and furiously. After half an hour, your sheet might look something like the
one below.
How Can ABC Ventures Become Profitable?

Sell goods at costmark up services.
Pay employees sales commissions.
Provide free customer parking.
Raise starting payretain worker loyalty.
Deliver on Sunday.
Target marketing to affluent young adults.
Improve the website.
Sell coffee.
Provide a money-back guarantee.
Deliver in the evening.
Stay open Sunday.
Buy XYC Inc.
Advertise in Spanish.
Search for strategic partners with money to invest.
Open two more locations.
Sponsor kids sports teams.
Recruit workers of all racial backgrounds.
Create a clever yellow pages ad.
It usually takes less than an hourand sometimes less than 30 minutes

to extract all of a groups good ideas on a particular subject. Especially if
things are going well, youll want to give people a short break and then ask
them to consider a second question. This time youll probably want to focus
on a narrower issue, again giving the group as much useful data as possible.
For example, if your spa offers a number of different massage and exercise
packages, and you want ideas on how you can better market the most
profitable ones, youll want each participant to have information about your
sales volume by spa package, profit margins for each, hours of peak usage,
and so on.
Depending on your business, here are some areas you might want to probe:
How can we identify our best potential customers?
Once identified, how can we find more of them?
How can we encourage our satisfied customers to tell others about us?
How can we encourage customers who have disappeared to reappear?
What additional products or services can we introduce?
How can we better distinguish ourselves from our competitors and let
their customers know whats special about us?
How can we increase sales at popular times?
Example: Mark quit his job as a psychologist to open Bright Spot, a plant nursery
specializing in roses and Japanese maples, a narrow focus he believed would give
him a competitive edge over his generalist competitors. But after 18 months, it was
clear that Bright Spot was in serious financial trouble. In tough economic times, not
enough people were willing to pay a premium for its specialty products.
On a Monday at the end of the summer, when the business was closed, Mark
convened a meeting of his family, his business advisers, and his three key employees.
He asked for honest feedback as to whether Bright Spot had a future or whether he
should put it out of its misery and go back to talking to depressed 18 year olds.
After a half an hour, in which the participants searched for something positive to
say about Bright Spot, Marks scrawny 15-year-old son put a positive spin on his summer, saying Dad, I know were losing money, but Ive gained ten pounds and really
bulked up carrying all those bags of dirt.
Sara, one of Marks advisers, asked about the dirt. It transpired that customers
in the big new subdivision north of town couldnt seem to buy enough dirt to mix
with their hard-as-rock clay soil. When the group looked into the profits of dirt and
other soil amendments, they concluded that Bright Spot might have a future if it
turned the large fenced area behind the nursery into a dirt yard. To accomplish this,
Mark ordered truckloads of different types of soil and piled them high and made
a deal with Fred, a guy with a dump truck, to do deliveries. When the new service
immediately proved popular, Mark added various types of mulches and landscaping
products, such as ornamental rock, and even oversized iron garden sculptures. In a
few months, Bright Spot was profitable.
Chances are your brainstorming sessions will produce at least several

excellent ideas you havent already thought of. If you are lucky, youll get
one that truly improves your business. But its also possible that your
brainstorming group wont produce ideas that are likely to substantially
improve your prospects. If you assembled an able, energetic group, this
might be a signal that the foundational concept behind your struggling
business needs rethinking.
Get Employees Involved

Your employees undoubtedly know a great deal about your business. And
many of them probably care nearly as much about its success as you do. In
addition to including key employees in your brainstorming sessions, here are
some efficient ways to solicit their good ideas.
5/15 reports. Periodically ask everyone in your company to spend no
more than 15 minutes writing down their suggestions for improving the
business. You, in turn, should be able to read each report in five minutes.
Reports can be kept confidential if the writers want it that wayotherwise,
share the ideas with everyone.
Notebooks. Give every employee who deals with the public a notebook
(paper or electronicit makes no difference) and ask them to keep track of
all customer requests and suggestions.
Email conferences. If your business has an internal email system, establish a
new-idea conference where employees can post and read suggestions. To keep
things fresh, its best to time-limit each conference. For example, on April
1, you might ask employees for their ideas on improving customer service,
giving them a week or two to respond. On May 1, you could ask for ideas
about new products and services.
How to Encourage and Reward Employees Good Ideas

To encourage employees to stay interested in generating ideas to improve
your business, and at the same time avoid jealousy or the feeling that one
employee may be claiming too much credit, its a good idea to do three things:
Publicly recognize the person (or people) who contribute a good idea.
Make sure everyone in the company knows, by making an announcement
at a company meeting or sending a company-wide email.
Spread the credit around as widely as possible. For example, if someone
in your warehouse figures out a better way to track inventory, you might
celebrate by taking the hero of the day and a group of coworkers to lunch.
Of course, you will also want to remember the clever employee when its
time for raises or promotions.
If your budget permits, establish a bonus pool. Make appropriate awards
monthly or quarterly. For example, if your monthly bonus pool were $500,
one month you might award all of it to the two employees who developed
a plan to cut $15,000 in costs. The next month, you might make three
different awards to people who suggested innovative ways to market a
new service.
For good ideas on how and why to establish a bonus pool, grab a copy of
Ideas Are Free: How the Idea Revolution Is Liberating People and Transforming
Organizations, by Alan Robinson and Dean Schroeder (Barrett-Kohler).
Involve Customers
If yours is an established business with repeat customers or clients, these
folks almost surely want to tell you things. Too bad that so few businesses
encourage them to do so. Many businesses actually find ways to resist or
reject customers good ideas.
Example: Craig, a long-time member of a local gym, overheard the manager talking with a contractor about the layout of a new stretching room. The conversation
was in a public space, so Craig politely asked if the new room could contain wider
mats. When the manager didnt seem very responsive, Craig pointed out that big
men like himself who didnt easily fit on the existing mats used two mats so as not
to bump neighboring stretchers. Craigs point that small mats actually resulted in
fewernot morepeople using the stretching space was so right-on that several
other members immediately spoke up to agree. After listening for a very short time,
the manager interrupted to say that the size of the mats wasnt his decision, but he
was pretty sure the owner would buy more of the small ones.
No big deal, you may be thinking. After all, most people wont switch
health clubs based on the size of their mats. Dont be so sure. If a competing
exercise facility advertised a new yoga, Pilates, and stretching area, it might
siphon off a fair number of customers who were tired of being ignored.
Not only is it wise to listen to good ideas your customers bring to you, it
also makes sense to solicit them. Depending on your business, there are a
variety of appropriate ways to ask for feedback. Traditional methods, such
as asking interested customers to submit a brief questionnaire online, by
dropping it in a box, or by mailing it back in a postage-paid envelope, often
work well. But youll want to reach out to customers who dont normally
volunteer suggestions. One way to do this is to give them a little advance
thank-you present. A home repair contractor who sends a measuring tape
along with the feedback form is sure to receive more forms back.
Its a mistake to ask for suggestions unless you are prepared both to
implement the best ones and tell your customers you acted on their
feedback. If you take those two steps, youll not only increase customer
satisfaction (the exercise mats really are wider), but will also reinforce the
trust you want them to place in your business (customers will feel greater
involvement with and loyalty to a business that pays attention to them).
One good way to let people know that their suggestions arent being
ignored is to periodically list ones you have implemented. For example,
when the customers of Pams independent drugstore stuffed her new
suggestion box with requests that she carry more naturopathic remedies, she
not only established such an area, but created a small display area next to
the suggestion box listing this suggestion and a number of others she had
implemented. She also put this information on her website.
Take Time to Think About Your Business

Although its always rewarding to get your employees and customers involved
in suggesting ways to improve your business, its at least as important to
engage the creative juices of your single most important worker. Thats you
just in case you have been too busy lately to remember.
Your first thought may be, Oh, no. I already obsess about my business. The
last thing I need is to spend more time worrying about it, especially now that
the bad economy threatens to strangle it. The truth is that even if your business is a mighty success, you do need to think about how you can apply new
and innovative information to keep your edge and stay ahead of competitors.
Fortunately, done right, this is very different from lying awake at night replaying familiar problems and hassles for the 200th time. Just the opposite; to
open your mind to fresh ideas, you need to put day-to-day hassles aside.
You may already have your own favorite method of brainstorming.
Whether it involves going for a jog or a bike ride, listening to music, or
picking the brain of a creative relative or mentor, the key is to make enough
time to do it on a regular basis. Allowing yourself to be too busy or too tired
to think creatively is always a mistake.
Although its particularly hard to step back when business is bad and you
are almost frantic to reverse the slide, taking a few days or even a week off is
an excellent way to make time and energy to think about strategic issues. You
may be thinking, I havent had a decent vacation in yearsthere is just no
way I have the luxury of taking time off during hard times. Think again. A
person too busy to take a couple of days off is almost always so overextended
that turning around a poorly performing business will be impossible.
Choose the Best Ideas to Implement

Especially when a business is in financial jeopardy, choosing the best from a
basketful of innovative ideas is no easy task. But in a world where ideas are
cheap, time short, and implementation often expensive, you might have only
one chance to get it right.
One good way to start is to systematically rank ideas by awarding points,
on a one-to-five scale, to the ones that best fulfill your key criteria. For
example, if your primary goal is to reach out to more customers, you would
give the most points to ideas calculated to do that. The second step is to
adjust your rankings based on how much each idea costs. One excellent way
to do this is to double the point total of ideas that can be implemented at the
lowest comparative cost while halving the points of the most expensive ones.
Because you never really know which ideas will work until you try them, its
usually wise to try as many of the top scorers as possible.
Lets take as an example Amos, who was laid off from his job maintaining
computers at a large corporation. He decides to accept his fathers offer to
take over the familys barely profitable Reliable TV Repair business to see
whether he can breathe some life into it. He uses several methods, including
a brainstorming session with employees, a supplier, and his dad, to come
up with new ways to achieve his four big goals: increase sales, improve
marketing, improve customer access, and introduce new services. To decide
which to implement first, Amos creates the following grid:
Improve
Marketing
Improve
Customer
Access
Introduce
new
services
Total
Change name to emphasize 2

big-screen TVs &
computers
Paint the truck
Stay open longer hours
Make weekend house calls
12
Fix and troubleshoot

computers
12
Idea
Increase
Sales
His final step is to factor in how much each idea will cost to implement.
Realizing that painting the truck will cost very little, and that adding the
words Big Screen and Computers to the Reliable name will also be
cheap and easy, he decides to double the points for these. And although hell
obviously have to pay employees to make house calls on the weekends, he
concludes that even with cutting the total points on this one from 12 to 6,
going forward with it makes sense. After all, if new business doesnt justify
the added costs, he can pull back. Now the totals look like this:
Change name
Paint truck
Stay open longer hours
Make weekend house calls
Fix computers
Not surprisingly, based on these results, Amos decides to add computer

repair services, make weekend house calls, repaint his truck and change the
name to Reliable Big-Screen TV and Computer Troubleshooting. But until
he can make a decent profit, hell have to put keeping the shop open longer
hours on hold.
C H A P T E R
Identify Your Customers

Aiming at the Bulls-Eye............................................................................................... 142
Filling in Your Target..................................................................................................... 145
Start With Your Current Customers.............................................................. 146
Need................................................................................................................................. 148
Price.................................................................................................................................. 148
Access.............................................................................................................................. 149
Experience.................................................................................................................... 149
I dont know the key to success, but the key to failure is trying to please everybody.
Bill Cosby
hen business slows precipitously, lots of entrepreneurs spring into

action, trying to drum up more business. They run a print ad
here, buy a radio spot there, and distribute leaflets everywhere.
This sort of frantic marketing probably wont work for at least three reasons.
First, it costs too much. Second, a scattershot approach wont reach enough
of your core customers. And third, it will divert you from following the lowcost focused marketing initiatives that can succeed.
Before you can develop a sensible marketing plan, or plan what products
and services to offer, you first must take the time to identify your most likely
customers. Too many entrepreneurs overlook this step, at their peril. This
chapter will help you do it. (After youve done this, check out Chapter 8 for
ways to develop low-cost marketing strategies to reach these customers.)
Aiming at the Bulls-Eye

Some businesses start the process of identifying their best customers by
hanging an oversized target on the wall at a brainstorming session. In a
process that is well described by Cheryl Woodard in her book, Starting &
Running a Successful Newsletter or Magazine (Nolo), publishers typically
begin by listing their most likely subscriber groups near the center of the
bulls-eye. Pretty good prospects go into the middle rings. Those who just
might subscribe are relegated to the outer circles. For example, the publishers
of a home furnishings magazine might list people shopping for a new house
near the bulls-eye, the soon-to-be-married in the next ring, and those whose
kids have just graduated from collegeand may have a few extra dollars
to refurbish the housein an outer circle. Similarly, the publisher of a
consumer product guide might be eager to reach reference librarians who are
regularly consulted about how to find consumer information, and less eager
to market to college students, many of whom are still trying to perfect the
art of asking their parents for more money.
chapter 7 | identify your customers | 143
Targeting your best customer prospects in this way makes great sense,
especially when times are tough and you desperately need to reach more
customers at an affordable cost. For instance, if your small dental lab is
struggling to make ends meet, you would want to list near the center of your
target the specific dentists or groups of dentists you believe are most likely to
patronize you. Only then does it make sense to take the next step of reaching
out to explain to them why your business offers a superior value.
Especially if you market to different customers for different reasons,
filling in your target can be more difficult than you might first imagine. For
example, if classes at your aerobics and dance studio are half empty, you will
want to identify more folks who you are pretty sure will enthusiastically don
their leotards for your master classes, as well as those you hope to coax into
your early morning weight-loss sessions and the hopeful parents who will
bring their budding ballerinas to your after-school session.
Unfortunately, many businesses have only a hazy idea of who their customers are and how best to reach them. They follow the open-the-doors-andhope-for-the-best marketing approach, which of course goes far to explain
why so many underperform in good economic times and fail during bad ones.
For example, a new restaurant might place a few ads in free local
newspapers, do some leafleting in neighborhood office buildings, place
an early-bird special sign in the window, and buy into several two-for-one
coupon books. A couple of these initiatives might make sense if they were
part of a coherent marketing plan aimed at budget-conscious diners who
live or work close to the restaurant. But in the absence of such a focused
plan, this approach is likely to do more harm than good. For example, if the
restaurant owner hopes to attract a more affluent dinner crowd later in the
evening, two-for-one deals and cut rates to early diners are likely to amount
to a kiss of death, because many upmarket customers equate low prices
with poor quality. Given the fierce competition in the restaurant business
during times when people cut back on eating out, only establishments that
first clearly identify their prime customer base and then develop affordable
marketing strategies to reach them will have much chance of success.
It might sound easy to identify your most likely customers, but many small
business ownerseven those desperately motivated to increase salesdont
do it well. Take a look at Hillary, the owner of Happy Pup, a day care service
for dogs. When asked to identify her marketing target, she says:
We market to busy working people with dogs.
Sound pretty good? In fact, this statement is so vague as to be all but
useless as a marketing tool, because:
The great majority of working people cant possibly afford Happy Pups
rate of $25 to $40 a day.
Just because a dog owner works doesnt mean someone else in the family
isnt available to care for Bingo.
Old dogs (or just plain mellow ones) may be content to stay home alone.
Other dog-sitting services are availablewhy should dog owners choose
Happy Pup?
Asked to try again, Hillary comes up with this more detailed profile:
Happy Pup concentrates on affluent working people who want to provide the
highest quality of care for their active dogs.
Because this statement takes into account the owners ability to pay and
their desire to give their dogs excellent day care, its a big improvement. But
several crucial targeting factors are still missing. As you may have guessed,
Hillarys biggest omission is her failure to consider location. Assuming most
people wont drive more than five to ten miles out of their way to drop off
Sassafrass, its obvious that Happy Pup should concentrate its marketing
efforts on affluent owners of younger dogs who live or work fairly close to its
facility.
And what about owners who are highly focused on their dogs well-being?
If Happy Pup really does offer superior care, shouldnt Hillary also look for
owners who care about things like the amount of staff attention, exercise,
and playtime their dogs will receive?
After thinking about these additional factors, Hillarys third effort goes
like this:
Happy Pup markets to affluent working people who live or work within five
miles of Rose & Vine streets in Kansas City, and who want to provide their active
dogs a clean, nurturing environment emphasizing play and exercise.
Hillary had little chance of creating a coherent marketing plan before she
figured out who to aim it at. After a little disciplined thinking, her chances
of success went way up.
w
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Example: Here is a marketing target for an accountant who specializes in providing

services to authors, musicians, inventors, and others who make their livings selling
intellectual property.
Filling in Your Target

Now its your turn to identify your most likely customersthe groups near
the center of your businesss bulls-eye. Take a deep breath and be ready to
focus on this exercise for as long as it takes.
To start, get out a big piece of paper, draw a bulls-eye, and list your
most likely customers closest to the center. If possible, get help from your
advisory board and employees. At this stage, dont complicate the exercise by
simultaneously trying to figure out how youll market to them. No question,
as discussed in the next chapter, thats crucialbut for now, just identify
the groups or individuals who are the most likely to buy what your business
sells, and be ready to explain why each of these groups should prefer your
products and services.
Start With Your Current Customers

No matter what your field, when you create a marketing target for your
business, the words current customers should almost always be listed near
the bulls-eye. Thats because with very few exceptions, such as businesses that
market to tourists or help people with one-time problems (divorce and tubal
ligation come to mind), your existing customers are the easiest to reach.
It might seem obvious that the customer list of a successful business is a
golden asset, but many if not most small businesses all but ignore it. Instead
of extending great offers to existing customers and developing additional
products and services theyll appreciate, they concentrate their marketing
efforts on the more difficult task of finding new customers.
Whats the best way to determine whether your current customers are
interested in additional products or services? Simple: Ask. If you stay in close
communication with your customers and make it easy and fun for them
to tell you about their needs and concerns, they will. Business owners like
accountants, architects, or Web designers who work with a relatively few
customers can often best do this in person. Businesses with larger customer
rosters will find it more convenient to periodically email customers a short,
easy-to-fill-out form asking for suggestions about new and improved services.
(To say thanks in advance, always include a small present such as a coupon
for a free or discounted product or service.)
Example: When her jack-of-all-trades dad died, Mandy stepped in and took
over his business, which did snow removal, yard maintenance, and even pumped
out vacation-home septic tanks in a resort area. One day she got a call from Janet, a
customer whose main home was in a city several hours distant. When she next cut
the lawn, could Mandy please take some cat food with her and feed the feral cat that
was living under the porch, Janet asked?
Not only was Mandy happy to do this, she was even happier to prepare a questionnaire to all her customers, asking them whether there were additional things
she could do when she visited their properties. When quite a few responded yes,
Mandy developed a service she called Property Check. For a modest fee, she would
work with the homeowner to develop a list of things for her to check on regularly.
Each time Mandy visited the property, she promptly emailed to the owner a list of all
items checked and any problems discovered. Before long, Property Check became so
successful that Mandy hired an assistant to drive the honey wagon and concentrated
on developing more new services for absentee owners.
Here are just a few examples of businesses that profitably target existing
customers with new goods or services:
A dentist who, after fielding a number of questions from patients with
snoring and other sleep problems, sends an email to all patients asking if
they are interested in solutions to sleep-related problems. When 30% say
yes, he pursues the continuing education programs necessary to provide
the service.
A used bookstore whose business has sagged since Amazon and other
websites began selling used books creates a marketing target with existing
customers near the center. Then, after doing in-depth interviews with a
number of them, the bookstore decides to carry about 750 new books,
including bestselling biography, science fiction, mystery, and cookbooks.
Displayed in the window and on attractive racks near the front of the
store, these new books are immediately popular with existing customers
who occasionally splurge on a new title or purchase them as gifts. And
they do wonders to bring passersbya market that retailers always want
to targetinto the store.
A restaurant in a popular vacation area identifies tourists as one of its
three key types of customers, along with middle-income local residents
and police, fire, and medical workers from a nearby public security and
hospital complex who live and work within three miles. Reasoning that
it has only a short time window to sell more to tourists, the owner fills an
underused space near the cash register with locally produced mustards,
jams, hot sauces, and other gourmet specialty items. The products are
sold individually and also in boxed collections ready for mailing. Just
produce your credit card and the recipients address, and the restaurant
will do the rest. The program is so popular with visitors who want to
send something home from the area that the restaurant sets up a website
to handle repeat orders.
Need
People who have a pressing need for your goods or services, even if that need
is occasional or intermittent, are obviously more likely to patronize your
business than those who dont. For example, when a tooth hurts you need a
dentist, but when your car is dusty you can either leave it in the rain, wash it
yourself, or patronize a car wash.
Its important to approach the concept of need through the eyes of your
customers. For people with disposable income, need can be a subjective
concept: I need the latest iPhone. I need to have my hair highlighted every
six to eight weeks. I need to play golf at least once a week. Of course, when
thinking about need, price can dictate whether that need is negotiable
whether it falls into the must have or really want category. One segment
of the population needs luxury goods only if they believe they are getting a
relative bargain.
Example: Jan and Lance operate Rose Beauty Supply, a big-city shop that specializes in selling high-end beauty supplies at discount prices. Identifying middle- and
upper-income women who feel a need to be well-coiffed on a daily basis as their
broad customer base, Jan and Lance decide to aim new marketing at women who
work in their areas several museums and many nonprofits, reasoning that many of
these women have upscale tastes, but limited budgets.
Price
Who will be attracted to your price point? In some marketsdiscount
haircutting or fast food, for example)people often make purchasing
decisions based on a low price. And in every market segment, there are lots
of bargain shoppers.
However, in some areas, people are more likely to patronize the business
they believe provides the best value, regardless of price. In an affluent
neighborhood, for example, a shoe store that sells well-made but higherpriced shoes will do better than a low-cost competitor, and the dry cleaner
considered the most trustworthy in town is typically seen as providing a
better value, though it charges more than its competitors. Even in hard
economic times, plenty of people have money. But to part with it, especially
for upmarket products and services, they need to be sold on qualities such as
reliability, durability, and lasting value.
Are you targeting bargain shoppers or affluent customers? Its hard to
do both. It just might save your business to improve the quality of your
goods or services and to target more upscale customers who have more
discretionary income, especially in tough times. Sophisticated customers who
perceive that you offer a more valuable product or service are far more likely
to stick with you and to sing your praises to others.
Access
If cost and quality are equal, customers usually follow the path of least
resistance, patronizing easy-to-access businesses and avoiding those that
are tough to get to. Thats why many customers can be targeted around
convenience factors like free parking, home delivery, and evening hours.
Online shopping also provides quick, easy access to goods, especially for
people who work on a computer much of the day. The success of Amazon
and other online retailers should offer all the proof you need.
Example: Catch & Release, a retailer of fly fishing gear located in a small city near
several famous fishing rivers, decides to target customers outside the area who they
hope will buy online and pay premium prices for top-end, often handcrafted equipment. To offset the inconvenience of shipping time, they offer free two-day shipping
on every order over $100. To the owners surprise, 30% of website orders come from
people who live within 30 miles of their shop, many of whom had not previously
been customers.
Experience
As you develop your marketing target, its often useful to think about
potential customers in two broad categories: people who have had experience
with businesses like yours (sometimes lots of it), and those who are new to
the field. In some fields, this doesnt apply; for example, if you operate a midpriced shoe store, all of your potential customers will have patronized similar
businesses and will have a pretty good idea of what to expect. By contrast, if
you recently started an upscale vintage clothing boutique in an area where
shopping for used clothes has always meant going to Goodwill or the church
jumble sale, many of the people you hope to attract will never have shopped
at a store like yours.
Youll have a different job targeting and satisfying newbies as opposed to
experienced customers. For example, if you recently opened the third Indian
restaurant in your area, obviously you want to target people who already
know and like Indian cuisine. But if yours is the first Indian restaurant
in town, youll want to target people who have experienced Indian food
elsewhere as well as adventurous diners.
If you havent thought about potential customers in this way, you may
wonder whether it is easier to convince the uninitiated to try something new
or to market to a group of experiencedand possibly jadedconsumers.
There is no one answer that applies to all businesses, although in a recession
when people become more cautious, youll probably do better trying to
attract more customers who are already knowledgeable about what you sell.
Even so, in some instances it may make sense to target groups of experienced
and novice customers as long as you understand that doing so will require
different marketing strategies.
Coffee is a field where this has been famously done. Thirty-plus years
ago, Americans drank uniformly terrible coffee, whether they bought it
in cans and made it themselves or ordered it at restaurants. Only a few
coffee drinkers who had spent time in Europe and the Middle East, where
coffee quality was far higher, even knew what they were missing. Then,
specialty coffee stores that sold richer, more varied coffee and coffee drinks
in European-style shops began to pop up. One of the first was Peets, a tiny
Berkeley, California, company. Like Peets, many of these shops started in
college towns, where they were supported by people who had experienced
quality coffee while traveling. At first, they didnt reach much beyond their
small audience of coffee aficionados. But then, Starbucks and other large
chains entered the market, successfully targeting and reaching out to the
broad middle class.
Rounding Out the Target

Sandy, a fast-pitch softball coach, opens a batting cage to teach hitting to preteen and teenage players. With softballs growing popularity, Sandy believes
she will soon be able to quit her day job. And sure enough, during the prime
spring months, more girls try to book lessons than she can accommodate.
But as families cut back on spending and many of her students change their
focus to soccer, the flood of students slows to a trickle. On a Tuesday evening
in October, she is lucky to give two half-hour lessons.
To attract more off-season students, Sandy decides to engage in a marketing
campaign, a subject about which she knows next to nothing. When she first
tries to describe her target audience, the best she can come up with is girls
and young women age eight to 18 who want to play better softball and who
live within 20 to 30 minutes driving distance of my facility. Realizing that she
has merely described her existing marketthe one she already knew wasnt
producing enough year-round businessshe resolves to do better.
After much thought and consulting a college softball coach friend, she
enters the following in her targets inner circle: serious players age 12 to 18
who play tournament softball on club teams, who live within an hour of
my facility, and who play, or hope to play, high school or college ball. This
is a narrower focus, but Sandy concludes that these young women are so
motivated to improve their skills that if she can reach them and their parents
with the message that she can help polish their skills to college scholarship
level, she will fill up her cage year round.
Sandy also makes several other entries close to her bulls-eye. One is for
high school and club softball coaches who may want to rent her cageor
the extra space in the back of her facilityby the hour during bad-weather
months to run their own hitting clinics. Although renting space is primarily
a strategy to reduce overhead, Sandy realizes that it is also a great way to
meet and work with people who might refer her new students. Finally, Sandy
lists young baseball players in one of the outer rings of her target. She isnt
sure high school boys will take hitting lessons from a woman, but she thinks
younger ones with slugging older sisters might. And if they do, and noticeably
improve their performance, their friends will follow.
C H A P T E R
Dont Waste Money on Ineffective

Marketing
Market the Right Products or Services to the Right People................... 154
Short-Term Money-Makers................................................................................. 156
Long-Term Outreach............................................................................................... 157
Dont Spend Big Dollars on Advertising............................................................. 158
Ask Long-Term Customers for Support.............................................................. 161
Encourage Customers to Recommend Your Business................................ 163
How to Get Positive Word of Mouth............................................................ 163
Asking Customers to Recommend You....................................................... 166
Use Paid Listings Effectively...................................................................................... 167
Market on Your Own Website................................................................................ 169
Hold a Trying to Stay in Business Sale............................................................. 172
If you hype something and it succeeds, youre a genius; it wasnt a hype.

If you hype something and it fails, then its just a hype.
Neil Bogart
hen hard times cause widespread unemployment, millions of

financially pressed Americans look for less expensive goods
because they have to. Bargain hunting also becomes fashionable
for the affluent. Fashionistas who have never walked through the door of
a consignment store suddenly become recessionistas who think its cool
to shop there. This means that retailers who sell luxury goods need to hype
their goods in terms of long-term value, practicality, and durability. Its not
enough to just be cool and expensive.
While this national penny-pinching mood lasts, your business has little
choice but to embrace it. Get in tune with tough times by offering customers
a steady stream of good deals. But do it in a way that still lets you make
a decent profit. The best way is to embrace clever but cheap marketing
campaigns designed to attract both existing and new customers.
Market the Right Products or Services

to the Right People
No matter what high-energy, low-cost methods you select to promote your
business, to succeed you must point them at those most likely to patronize
your business. (Chapter 7 discusses how to identify your best potential
customers.) Once you identify your target audiences, you can think about
the goods or services they will be most likely to buy.
Go with your winnersyour most popular and profitable products or
services. Too many inexperienced entrepreneurs crush their hopes for survival
by pushing less desirable products they are simply trying to get rid of. They
feature the wrong goods or servicesitems that used to sell well, but are
now fading, items someone mistakenly ordered too many of, or a service
that has such low mark-up that selling lots more of it wont produce enough
profit to justify the effort. They seem to believe that discounting things no
one wants to buy will somehow make them money. Its a little like a baseball
chapter 8 | dont waste money on ineffective marketing | 155
team that uses its best giveaway to put more fannies in the seats of a mostly
empty stadium on a Tuesday night to see a lousy team. Far better to use the
collectors item baseball cap to try to add 10,000 people to an already threequarters full stadium for a Saturday game against the Yankees.
For some types of businessesfor example, a hardware store that sells
to casual consumers, serious do-it-yourself remodelers, and contractors
targeting and ranking customers and the products each group is most likely
to buy will require engaging in a fairly complicated, data-heavy process. For
others, including consultants and other businesspeople who provide a niche
service to a relatively small clientele, it will be as easy as listing the names
of a relatively few customer prospects and the services or products that are
popular with them.
Once you have identified your target groups of customers and what they
are most likely to buy (and are sure youll make a profit if they do), you are
ready to adopt a marketing plan designed to quickly reach more of them.
If your potential customer universe is relatively smallfor example, youre
an accountant who specializes in helping authors and musiciansyour best
approach is probably a personal marketing effort. If half a dozen literary
agents represent most of the well-known authors in your area, getting to
know the agents and educating them about your expertise would be a good
start. After all, a prominent literary agent who appreciates that you are fully
current on the tax ramifications of the ways royalty deals are being structured
in a recessionary environment (and even better, if you are available to
advise the agent on structuring deals) is in a great position to recommend
you to others. Similarly, local publishers and support groups for inventors,
musicians, and writers are excellent venues through which to get the word
out to many potential clients.
If your potential customer universe is bigger and more diverse, consider
broader and less personal ways to market your goods or services. Because in
a recession, businesses typically need to raise cash fast as well as secure more
long-term customers, here are suggestions for both short- and long-term
initiatives.
Short-Term Money-Makers
Theres nothing wrong with trying the staples of business: sales and special
offers. Everybody likes a good deal.
A weekly sale featuring an item that will bring in customers likely to buy
other more profitable services.
Example 1: A struggling dry cleaner institutes a series of weekly specialssleeping
bags, formal wear, quilts, and drapes. Many of the people who respond to these offers also bring along the rest of their accumulated dry cleaning, and the cash register
begins to sing.
Example 2: A jeweler offers to replace two watch batteries for the price of one. A
fair number of customers who show up with a handful of stopped watches also bring
along jewelry in need of repair, something the jeweler makes a good profit doing.
A reciprocal discounting program conducted in partnership with nearby
high-quality businesses. This can also help build community among neighborhood businesses, something that may lead to other benefits down the road.
Example: Seven neighboring stores on University Avenue (a book shop, a bakery, a
shoe store, a print and framing shop, a wine bar, and a clothing store) print up an attractive flyer featuring 20% off discount coupons for all seven stores. Buy something
at one of the stores and you get a coupon redeemable within 24 hours at any of the
others.
A letter to long-term customers asking for support at a difficult time,
including a discount coupon (see Ask Long-Term Customers for Support,
below, for a sample letter). Theres no shame in letting loyal customers know
that your business needs more support to survive.
A recession special to reconnect with customers or clients. If you can
email your customers, your costs will be very low.
Example: A lawyer, architect, electrician, hair stylist, or other service provider offers one-third off normal hourly rates for 90 days as a thank-you for support during
tough times.
A leaflet program, featuring an attractive offer, left at homes, businesses, or

under the windshield wipers. But be sure your flyer is well designed and easy
to read, and presents your business as reliable, established, and dedicated to
providing quality goods or services. You want your flyer to stand out from
the many cheap leaflets that dont inspire confidence.
Example: Jackson Plumbing, a relatively new company in need of customers,
leaflets 300 houses offering to fix one leaky faucet for $40 and each additional one
for $20. Twenty homeowners immediately call, delighted that Jackson is not charging
the usual $90 just to show up. And once the faucets are fixed, half a dozen hire Jackson to do larger jobs. The next week Jackson leaflets 300 more houses with similar
positive results.
A free class or a series of classes designed to quickly expose your business to
many potential customers.
Example: Chloes Yarn Shop offers free knitting classes three mornings per week.
When the classes immediately fill up with people wanting to learn how to make
low-cost gifts, Chloe expands to a five-day schedule and gives every novice a 10%-off
coupon redeemable on any purchase of $50 or more.
Long-Term Outreach
Dont forget, in your understandable desire to drum up some quick profits,
that you need a strategy to help your business do well over the long haul.
Here are some ideas for establishing your businesss identity.
Sponsor an event to get your name out in the community. For example, a
sporting goods store sponsors a 50K bike ride, providing hand pumps and
water bottles with its name on them, donating the entry fees to a local food
bank, or a fish restaurant cosponsors a Sustainable Seafood Day, providing
food samples in exchange for great press coverage. Especially when money is
short, youll want to look for events where your businesss positive energy can
make a substantial impact at low cost. Because sponsoring and organizing an
event can take more money and time than you have to offer, your best bet is
to take part in an event someone else is organizing.
resource
Headlining your own event. For good advice, see Event Marketing &
How to Successfully Promote Events, Festivals, Conventions & Expositions, by Leonard
Hoyle (Wiley).
Help nonprofit causes to bring goodwill to your business. For example, a
landscape architect leads a nonprofit effort to restore the towns neglected
rose garden. A plant nursery sells vegetable seeds and baby plants for 20% off
to anyone who promises to donate at least one third of their garden crop to a
homeless center.
Support the arts. A downtown restaurant might offer to display local
artists works on its windows and walls, to help sell them. The art is chosen
by a group of judges headed by the curator of the nearby university art
gallery, at a well-attended competition. In the process, the restaurant cements
its reputation as a cultural hangout.
Get the media to publicize your business for free. Setting yourself up as
an expert in your field can bring mentions in the media for you and your
business. For example, a general contractor who runs a house inspection
business self-publishes a small book covering the 20 most likely hidden
problems, how not to get ripped off on repairs, and how to make technically
easy but labor-intensive repairs on a self-help basis. Widely distributing
his book for free through real estate offices, lenders, and at several annual
homebuyers fairs, it helps establish his expertise with local media outlets,
where he is regularly interviewed and quoted. Or he might offer to write a
monthly column for the local paper, featuring tips for homeowners.
Dont Spend Big Dollars on Advertising

When sales drop, lots of business gurus urge small business owners to
increase advertising. And when advertising often turns out to cost more than
it brings in, many actually recommend increasing it again. Bad idea.
There are two huge drawbacks to spending money on conventional
advertising, including radio and TV spots and scattershot newspaper
ads. First, your recession-battered small business desperately needs to

hoard its cash for more immediate needs. Second, but just as important,
relying on advertising as your main way to attract business risks stifling
more imaginative initiatives that can attract more long-term customers
at a far lower cost. Much like giving a teenager a big allowance and then
wondering why she doesnt get a job, once the monthly ad buy is made, too
many business owners fail to work hard to get the word out in other ways.
Why should they bother? Their ads are already out there attracting all the
customers they need, right?
Unfortunately, its rarely that easy, even for large businesses with huge ad
budgets. And its virtually never a winning strategy for small outfits with
very limited marketing budgets, especially in tough times, when the media is
already overloaded with the big guys 40%-off deals.
Example 1: Ted is an early retiree lucky enough to have received a generous
severance package from his former employer. With money in his pocket and his kids
grown, Ted fulfills his lifetime dream of opening a small bookstore, Academy Books.
After two years of barely breaking even, the local economy nosedives, and Academy
begins to lose money. In an effort to attract more customers, Ted signs a contract
with a weekly newspaper to run a display ad in the next 12 issues. When he writes
the check and hands over the simple ad copy, Ted feels goodhes taken a big step
toward turning his failing shop around.
After two months, as the economy further weakens and Academys sales continue
to drop, it becomes clear that the ad isnt producing enough customers even to pay
for itself, let alone help Academy sell enough books to earn a profit. But when Ted
calls the newspaper to express his concern, Joy, the salesperson, says that ads work
best when they run for an extended period and that she also thinks Teds copy needs
more zip. So with Joys help, Ted designs a flashier ad, signs a second contract, and
continues to hope for the best. When sales improve only slightly, Ted begins to worry
that hell soon need to close Academys doors for the last time.
Now lets give Ted another chance.

Example 2: This time, instead of buying advertising, Ted adopts a number of
low-cost marketing techniques designed first to bring in badly needed cash as fast as
possible and, second, to build Academys long-term roster of loyal customers. Ted,
after doing the customer targeting exercise in Chapter 7, defines his customer base as
truly dedicated readers who live within five miles of his shop. Here are the marketing
initiatives that Ted adopts:
Save Academy Books. Ted gathers a group of regular customers (a librarian,

teacher, two authors, a readaholic business owner, and the deputy mayor) who
have deep roots in the community and who will commit time to seeing that
Academy survives. Forming Save Academy Books, this group sends letters and
emails to all past customers telling them that Academy needs their immediate
support to avoid closing. In addition, the volunteers hold a well-promoted press
conference to get this message out to the wider community via the media. Fortunately, because many media people are readers, the story runs in more places
than Ted expected. When book buyers flood in, Ted realizes Academy has the
cash to implement the rest of his plan.
Weekly readings. Academy starts a weekly series of readings with local authors. In addition to announcements in Academys regular email newsletter and
in-store signs, Ted sends invitations to each authors one hundred nearest and
dearest friends, relatives, and workplace colleagues. This guarantees that the
events are successful and that lots of potential new customers visit Academy.
The readings prove so popular that Ted arranges for the local public radio station
to tape them and replay them on Sunday evenings.
Discount coupons. Academy works with neighborhood businesses (a coffee
shop, restaurant, hair salon, and others) to displays Academys bestsellers in their
shops and to give customers a 15% off coupon redeemable at Academy that
same day. (Ted first planned a 10% off coupon good for a week, but decided that
impulse shoppers would probably buy promptly, or not at all.) Ted gives everyone who buys a book at Academy a discount coupon for the other businesses.
Lending library. Ted borrows an idea from the 1930s and starts a fee-based
lending library focusing on bestsellers, for which there is always a long waiting list
at the library. He charges $3 per week. Ted rents the typical $25 hardcover book
15 times and then puts it on his discount table for $7.50, meaning he eventually
takes in $52.50 for a book that cost him about $12.50. More important, the program brings more people into Academy, many of whom eventually buy books.
Obviously, there are lots of differences between the marketing approaches

in these examples. But most importantly, in Example 2, Ted uses his energy
and common sense to design low-cost ways to let readers in his target group
know about his business, while in Example 1, he simply pays the local
newspaper to put his ad in front of a big audiencemany of whom simply
arent interested in buying books.
tip
Advertising can boomerang. Because most consumers quite sensibly

have a negative attitude toward advertising, ads may discourageor even drive
awaycustomers. Imagine you spot a new restaurant that looks so inviting that
you consider booking a table when your in-laws are in town. A few days later you
receive a card deck in the mail that includes discount coupons for rural home sites,
a backyard spa, a car repainting service, and two-for-one meal offers from several
restaurants, including the one you just discovered. Is your first thought Hooray, I
can get a great deal at a terrific restaurant? Or are you more likely to decide to pick
a different eating place?
Ask Long-Term Customers for Support

Its far easier to get existing customers to purchase more than it is to find new
ones. If you can motivate your long-term customers to both increase their
purchases and recommend your business to others, youll be well on your
way to survival.
So in a recession, when everyone spends less and even many longtime
customers disappear, your first marketing task is to recover them. The
simplest and most effective way to do this is by a personal communication.
Although its tempting to ask for support via a low-cost email, most
community-based businesses will get better results from a personally
addressed letter (or if your customer or client list is short, a phone call).
Using the mail also allows you to include an attention-grabbing discount
coupon, something that might not work as well when part of an email.
Asking for Support? Youre Not Alone

As reported in The San Francisco Chronicle (October 16, 2008) here is a letter
written by Wilkes Bashford, owner of an upscale clothing store (oops, haberdashery), to his longstanding customers. Bashford included a Friends of
Wilkes certificatein other words, a discount coupon.
Dear Friends,
Many people currently greet me with the question: Hows business? My
honest answer has to be challenging. In 42 years in business, the current
situation is unique, hence the purpose of my corresponding with you. I am
taking this unorthodox approach because we need your support.
While a number of you have continued to shop in your normal manner, others have withdrawn. Obviously for some this is a necessity. My appeal is to
those folks who are in a position to continue to shop with confidence, and I
urge each of you to do so.
The fall 2008 clothing for both men and women is exceptional. Our very
professional sales staff would love to work with you on your wardrobe in any
manner that meets your needs and desires.
Having been part of the San Francisco business and cultural scene for 41
years, with a dedicated and loyal staff, I feel a strong responsibility for their
security. Your continued enthusiastic patronage is essential to this goal and
deeply appreciated.
Please use the Friends of Wilkes certificate below and visit us soon and often.
With warm wishes,
Wilkes
Example: John and Phillip run J&P Mobile Dog Grooming in an outer suburb.
Having recently expanded to two vans and a small office in town, John and Phillip
are stunned when the recession hits, business drops 40%, and they lose a small bank
line of credit. To try to prevent their business ship from sinking, they send a handaddressed, first-class letter to the 200 people who have used their services, frankly
explaining that they are in short-term financial peril and asking for support. They
include 33%-off pet grooming coupon. The response is fast and positive, bringing
enough money to allow John and Phillip to downsize their business, which includes
selling their new van at a slight loss (but still being able to pay off the loan) and
negotiating their way out of the office lease by paying three months additional rent.
Now back working out of their house and driving their five-year-old van, John and
Phillip generate a decent profit. They write a second letter thanking everyone who
supported them and including another discount coupon, many of which are also
redeemed.
Encourage Customers to Recommend Your Business

Think about how you and your family decide where to buy goods and
services. For example, what process did you go through the last time you
chose a house painter, gardener, lawyer, or dentist? Also recall the last few
times you went out to eat or attended a movie. Well wager that in many,
if not most, of these instances, the recommendation of a trusted friend or
acquaintance, not an ad, helped inform your decision.
Well also bet that another source of the information you used to make at
least some of these purchasing decisions came from media people you trust.
For example, you might have picked a movie or restaurant in part because it
got high marks from a critic you respect, or called a contractor whose name
appeared on a respected local consumer groups approved list.
It should help reinforce this point if you make a mental list of five local
small businesses you respect and regularly do business with, and then ask
yourself how often you recommend each, or at least tell someone that
you patronize them? If your answer is regularly, its obvious that these
businesses are doing so many things right that you, and probably many other
satisfied customers, promote them for free.
How to Get Positive Word of Mouth

Because positive word-of-mouth is such an important source of new customers, lets review the short list of key business attributes that reliably generate it.
Quality. Providing truly excellent goods or services that are at least a cut
above those provided by competitors.
Easy access. With todays busy, almost frantic lifestyles, customers still seek
out convenience over price.
Example 1: Claire, whose New Dawn dry cleaning shop is located on a crowded
city street with inadequate parking, suffers a 30% decline in business when local
unemployment spikes. But despite this setback, when an old gas station a few blocks
away comes up for sale, Claire taps her savings, gets a loan from her uncle and buys
the property cheap. Redesigning New Dawn around easy customer access, Claire
sets up a drive-through system that lets customers pull within a few feet of the front
door. Backed by her well-staffed service counter, this means a typical customer is in
and out in less than three minutes. When another local dry cleaner with poor customer access closes, Claires sales return to and then exceed historical levels.
Example 2: Ivan, a mobile knife sharpener who brings a large, fully equipped van
to businesses and other venues where people can conveniently get their knives
sharpened, has a big competitive advantage over shop-based competitors. Reasoning that when times are tough, people eat at home more often and need his services
more, Ivan hires high school kids to leaflet local neighborhoods offering to make
house calls whenever neighbors can gather ten or more knives for sharpening. The
result is that people who want a few knives sharpened call their neighbors to collect
enough to schedule Ivan.
Cleanliness. A small, but nevertheless significant, slice of the public makes
purchasing decisions primarily on how clean a business is. For example, we
have several friends who wont patronize a good-sized list of local restaurants
because they arent spotless. Similarly, a member of one of our families
always buys gas from the company she believes has the cleanest restrooms.
Fortunately, insisting on the highest standards of cleanliness doesnt cost
much, and immediately distinguishes your business from its many sloppier
competitors. Its an easy way to create a marketing edge.
Example: Ramon inherits the Snack Shack, one of a dozen look-alike take-out restaurants along a slightly seedy commercial strip next to a popular beach resort. With
tourism down, the Snack Shack is barely breaking even. Relying on his business-savvy
sister for help, Ramon closes the business for two weeks while he paints, polishes,
and refurnishes, so that now everything from the building, to the sign, to the chairs
and umbrellas out front, to the immaculate uniforms of the servers, is white with
red trim. Changing the name to Dog-On-a-Stick, the business reopens with just ten
items, including corndogs, fresh lemonade, fruit smoothies, and fresh vegetarian chili.
Ramons business quickly improves, driven mostly by locals, who are pleased to see
a clean and fun, kid-oriented new business in their area. They not only try it, but talk
about it in very positive terms.
Stylishness. We humans are a fickle bunch, easily and endlessly impressed
by the new and improved. From store windows, waiting areas, and conference rooms to signs, stationery, and websites, update your businesss displays,
logo, and dcor on a regular basis. Dont put this off because business is poor.
Instead, if, in the middle of a recession you surprise customers with a bright
new look (that doesnt cost too much), youll stand out.
Helpfulness. Customers want to know how to use your goods and
services efficiently. The more honest, easy-to-understand information and
handholding you provide, the more likely they are to recommend your
business to friends and acquaintances.
Example: Johns Plant Nursery offers free Saturday morning classes on how to grow
abundant vegetables. Sallys otherwise similar nursery doesnt. Virtually everyone
who comes to one of Johns classes tells someone else about it. As a result, John sells
three times as many vegetable plants as Sally.
Unique knowledge. Knowing more than your competitorsand
convincing customers and potential customers that this is trueis an
excellent way to get your business positively talked about.
Example: Jen, a Korean American, opens a website, Seoul Now, aimed at providing
up-to-date information about Koreas capital city to Western business travelers and
tourists. Relying on relatives, friends, and a network of young commentators in Seoul
to post up-to-the-minute information, Jen is able to make her site fresher, more
exciting, and hipper than her competitors, something that is noted and talked about
on a number of travel-oriented websites and is even noted in several Korean guide
books. The happy result is that Korean hotels, restaurants, and other businesses that
cater to Western visitors buy enough advertising space on her website to make it
profitable.
Extras. Make yourself stand out by doing a little something special for your
customers every now and then. For example, an insurance agent who sends
clients a birthday card might also enclose a free smoke alarm battery.
Customer recourse. Customers want to know that they are in good hands.
Telling them early and often that should anything ever go wrong, they
can rely on your no-hassle money-back guarantee is one excellent way to
accomplish this. For example, we have friends who will buy electronics only
at Costco because Costco is known for accepting returns of products that
break, even years down the road.
Asking Customers to Recommend You

If your business does all or most of the things on the above list pretty well,
chances are you have earned a good reputation with your customers. Now
that times are tough and you need every bit of help you can get, you are in
a great position to ask your customers to help you gain new ones. In the
section above, we discussed how to ask customers for their own support.
Fortunately, its only a small additional step to ask them to send their friends.
Here are some suggestions.
Let customers help their friends. Send a letter or email to all your
customers, not only asking them for support, but also to recommend you to
friends. And of course include discount coupons.
Example: John and Phillip, the mobile dog groomers we met earlier, not only send
a discount coupon along with their letter requesting support from their existing
clients, but include three more coupons with the added request that they be passed
along to the recipients dog-owning friends.
Ask for prospects. Personally ask your truly enthusiastic customers if

they will supply a list of their friends and give you permission to write or
email them using the customers name. And again, dont forget to enclose a
discount coupon.
Be generous. Especially when times are tough, customers appreciate and
talk about a good deal. For example, if your garage provides a free oil change
or car wash as part of every service appointment, your customers will tell
others.
Be appreciative. Acknowledge your customers recommendations and
referrals. A personal thank-you is best, but if thats not practical, a note
or email will suffice. Consider adopting a system to reward customers for
recommending others. Depending on your field, this could be a thank-you
gift, a discount on future services, or even cash.
resource
More on advertising and marketing. Nolo publishes an inspirational

little book called Marketing Without Advertising, by Michael Phillips and Salli Rasberry,
that has an expanded discussion of advertising and its alternatives. Like all Nolo
publications, its available at Nolo.com. Or check it out of your librarythat way your
marketing efforts will be off to a truly cost-effective start. Also check out the Guerrilla
Marketing series written by Jay Levinson and others, especially Guerrilla Marketing
(Mariner Books), Start-Up Guide to Guerrilla Marketing (Entrepreneur Press), and
Guerrilla Marketing on the Internet (Entrepreneur Press).
Use Paid Listings Effectively

Some types of paid listings, including those in the yellow pages, in the
services section of a penny-saver newspaper, and in special-interest media,
such as publications and websites aimed at parents, sports enthusiasts, or
dog lovers, can be effective at letting people know about your business. The
thing that distinguishes paid listings from conventional ads is that listings
are narrowcast to people already looking for your product or service, not
broadcast to a general audience, as is the case with most newspaper, radio,
or TV ads. Listings work precisely because, unlike conventional ads, they

dont try to reach a broad audience, but instead aim for placement where
motivated customers are most likely to discover them.
Example: For a fee, lawyers can post profiles on Nolos online lawyer directory.
Lawyers do it because they know that more than a million monthly visitors come to
Nolo.com for free legal information. It stands to reason that many of those visitors
will be interested in professional help.
Here are some places where listing-type ads may work:

Single-interest websites where goods and services are listed by category or
keyword.
Publications or websites of nonprofit organizations or other groups
popular with people you want to reach. For example, if youre a child
care provider, it would make sense to place an inexpensive notice in the
monthly newsletter published by a working moms support organization.
Publications aimed at tourists, if your business caters to visitors.
Sometimes this involves buying a small listing or ad in a specialized
publication distributed at airports, hotels, and tourist attractions, but
often its possible to get your message distributed to a wide audience for
free as would be the case if, for example, you are able to get your gayoriented club listed in the gay/lesbian section of a popular travel guide.
Special interest journals. For example, an architect who specializes in
designing fire stations might place a small monthly ad in journals read by
city, county, and state planning officials.
A yellow pages ad. Although yellow pages use is in fast decline as people
increasingly search for goods and services online, its still a good idea for
local service businesses to buy a small ad. But keep it small. Costs are
high, and some potential customers instinctively distrust businesses that
buy big ads, believing that money spent on hype wont be available to
provide superior goods or services at reasonable cost.
Dos and Donts of Writing a Listing Ad

If youre writing a small ad to appear in a penny-saver publication, one
approach is to promote your business primarily on the basis of cost, featuring
a bargain price and further sweetening the deal by offering a dollars off
coupon.
There is no question that in hard economic times, many consumers look
first at cost, so this approach will probably attract some new business. But
in both bad and good times, most consumers understand that you get what
you pay for. So its generally better to list a fair price and emphasize reliability,
high quality, and trust. Youll make a decent profit, and you wont have to cut
corners. Here are some suggestions on what you might want to include:
How long you have been in the business.
Your relevant education and experience.
That you provide references on request.
That your business is family or locally owned.
That you guarantee your work.
That you can respond to customers needs on a priority or emergency basis.
Market on Your Own Website

Whether you sell fishing charters in San Diego, cater weddings in Brooklyn,
or sell baby gear in Peoria, you absolutely need to market your services or
goods online. Existing customers should be able to find your well-designed
and informative website with just a couple of clicks. And ideally, people who
are looking for the service or goods you offerbut have never heard of your
businessshould be able to find it.
At a minimum, your website should do three things:
Give an accurate description of your business and how to best access it via
phone, fax, email, and in person. If appropriate, include hours of operation,
driving directions, and parking information.
Tell people whats special about your business. Provide enough wellpresented information (including photos) about who you are and what
you do that potential new customers will prefer your business to your
competitors.
Give helpful, consumer-oriented information about your field. The goal
here is to provide potential consumers with helpful, objective information
so that theyll understand that they are in good hands and go forward with a
purchase.
Example: Terry operates Terrys Appliance Repair Center in Harrisburg, Pennsylvania. When business drops during the recession, Terrys first thought is to increase the
size of her yellow pages ad. But then, on the advice of her tech-savvy son, she decides
to spend a smaller amount creating a simple but easy-to-find website, listing access,
price, and warranty of service information. When, within weeks of publication, Terrys incoming calls increase 20%, she adds a Troubleshooting Your Problem section
to the website, focusing on the most common appliance defects and how much its
likely to cost to fix them. This results in another significant jump in calls and emails.
When Terry asks new customers how they found her, their typical response goes
something like this: When my washing machine broke, I googled washing machine
repair Harrisburg and found your site. The fact that your website had lots of material
about washing machine problems, and when it makes sense to just buy a new one,
impressed me. I also liked that you have been in business for 12 years, return all calls
the same day, and guarantee your work.
If youre new to the world of online marketing, here are the basics of
creating a website. First, youll need a domain name (your address on the
Webfor example, www.nolo.com) and a hosting company (also known as
an ISP) to broadcast your website from its servers. A number of Web hosting
companies provide both of these services for $10 to $30 per month. (Google
web hosting to see a long list.)
Second, you need to create your website, which consists of putting relevant
information about your business onto your Web pages. One approach is
to buy website development software, such as CoffeeCup, FrontPage, or
Dreamweaver, and do the job yourself. (For a great book on developing a
website yourself, see Create Your Own Website, by Scott Mitchell (Sams).) But
since this involves a time-consuming learning curve, you may find it makes
more sense to concentrate on your business and hire a reasonably priced local
developer to create a website for you. A third alternative is to create a simple
site by using the site builder service offered by a Web hosting company, such
as homestead.com or web.com.
Once you get your site up and running, you want customers to be able
to find it. With so many websites out there, its easy to get lost in the sea
of results that Google spits out. If your business is unique in your area (for
example, the only riding stable in town), you may not need to worry about
customers being able to find you with Google, but most companies should
take steps to bring customers to their site.
There are a number of things you can do to improve your sites findability
and the amount of traffic that comes to your site. This process is called
search engine optimization, or SEO for short. The main things any SEO
consultant will tell you are that to bring people to your site, you need to use
the phrases that people use to search for your products and services (these are
called keywords). For example, if you fix cars, you want to make sure that
you use the words auto repair in the title of each of your Web pages and
several times on each page. (You can use Googles keyword tool to find the
most searched for keywords for your business.)
A good way to make your business stand out is to include relevant
contentthat is, information about your products or serviceson your
website. For instance, if you run a bed-and-breakfast in Vermont, you might
write an article or two on what to look for in a B&B, the best places to see
Vermont foliage, how to dress for winter weather (including an automatically
updated weather widgetwhich you can get for free on the Internet), and so
on. If you have extra time and energy, consider starting a blog to write daily
or weekly posts on relevant topics, or open a Twitter account to microblog
about interesting tidbits.
This just scratches the surface of SEO, which has become a burgeoning
industry in the last few years. If you want help, a local website developer
should be able to do a decent job. If you are in a highly competitive field,
such as a dentist or veterinarian, also look at joining a directoryusually a
cost-effective approach to improving your Google ranking.
resource
More information on effective websites. Especially if you want to

create a full-blown e-commerce site designed to attract more than local traffic, see
The Small Business Start-Up Kit, by Peri Pakroo (Nolo). It has an excellent chapter on
building a website, optimizing it so that search engines list your site first, and driving
traffic to your site.
Use Email Marketing

Whether or not your business has a website, you can use email to stay in
contact with your customers. For example, you can easily and cheaply send
out valuable information to customers who have signed up for your emails
(post a simple sign-up sheet at your business, and let visitors sign up on your
website). News about sales, schedules of events, and helpful tips about your
area of expertise are all excellent ways to remind customers that you exist. For
example, a tax accountant might inform clients about likely changes in the
tax code and things they may want to do now to minimize next years taxes.
To get started, youll probably want to hire an email marketing service
provider to help manage your email lists (youll need to maintain a list of email
addresses and allow people to change their email address or unsubscribe by
sending you an email or clicking a link). An email marketing company can also
help you develop a marketing campaign by providing HTML templates and
actually sending out your messages. For more on this, see Permission Based
E-mail Marketing, by Kim MacPherson (Kaplan Business).
Hold a Trying to Stay in Business Sale

If, despite all your cutbacks and seat-of-the-pants marketing efforts, your
business is sinking to the point that you are considering closing down, your
last best marketing hope may be a Trying to Stay in Business Sale. Thats
right, instead of a Going Out of Business Sale, reverse the order. That way, if
it turns out that you have more loyal customers than you thought, youll let
them help save your business instead of mourn with you over its death.
Obviously, how you conduct your sale will depend on your business,
but the most important elementspreading the word as far and wide as
possiblewill always be the same. If you can, put off your close-down date
long enough to allow for distributing signs, flyers, and mailings and, if your
business is well-known in the community, media outreach to let customers
know that this is their last chance to support you.
As always, be sure you know how you make money and dont deeply
discount so many items that you dont make a profit. For example, a lingerie
store that makes 70% of its profit on bras, including sports bras popular with
the patrons of two nearby fitness centers, might fill its windows with deeply
discounted negligees but lower bra prices only 10%.
Example: Emily runs a neighborhood toy store called Mrs. McKeevers that,
because of its convenience and responsiveness, has managed to survive in the
shadow of the big box retailers for three years. But now, with customers budgets
stretched, sales are down 30%, and Emily is about to close the door for the last time.
But she decides to make a last huge effort and announces a two-week Trying to
Save Mrs. McKeevers sale. She puts signs in every window, sends her teenage kids
up and down in front of the store wearing Save Mrs. McKeevers sandwich boards,
and mails a postcard to everyone on her mailing list. Helped by front-page coverage
in the local free newspaper, the response is enormous, as hundreds of people realize
that the entire community will be weakened if the store closes.
With enough cash in her checking account to make it through the next few
months, Emily asks several of her most enthusiastic and locally well-connected
supporters to serve on a Save Mrs. McKeevers committee to help her come up
with a long-term survival plan.
C H A P T E R
Handle Layoffs FairlyAnd Keep Your

Best People
Making a Wise Layoff Plan......................................................................................... 177
Come Up With a Plan to Shrink Your Business ...................................... 177
Decide How Much to Cut.................................................................................... 178
Eliminate Jobs You Dont Need or Cant Afford....................................... 178
Dont Discriminate Illegally................................................................................. 178
The Logistics of a Layoff.............................................................................................. 179
Get Senior People on Board and Pick a Day for the Layoffs ............ 179
Prepare Final Paychecks, Recommendations, and Severance.......... 180
Break the News All at Once................................................................................ 182
Secure Your Computer System Before Employees Pack Up.............. 183
Hold a Company Meeting................................................................................... 183
Keeping the Great People You Hire...................................................................... 185
TreatAnd PayPeople Fairly......................................................................... 186
Dont Lose Your Sense of Purpose................................................................... 188
Communicate Early and Often......................................................................... 188
Appreciate Your Employees................................................................................ 189
Lead, Dont Dominate............................................................................................ 191
Credit Is CheapSpread It Around................................................................ 193
Dont Forget to Be Positive.................................................................................. 195
Drive a Modest Car.................................................................................................. 197
I not only use all the brains I have, but all I can borrow.
Woodrow Wilson
specially if payroll is your biggest expense, when your business is

struggling you may find yourself looking at laying off employeesa
dark day for any small business owner. Letting people go is always
hard. Keep in mind, though, that your employees understand that layoffs
may be necessary when times are tough. After all, they read the newspapers
and see the stories of layoffs in businesses that range from small local
factories to multinational companies.
If you have been in business some time, it may help to remember that over
the years youve provided employment for lots of people, some of whom
moved on when they found a better opportunity. The fact that forces outside
your control are now causing your business to contract doesnt make you
a bad employer or a bad person. The longer you resist or delay necessary
layoffs, the more you put at risk your business and its ability to provide jobs
in the future.
Employees dont ask for lifetime employment. What they do have a right
to expect is to be treated fairly and respectfully. You cant make layoffs easy,
but you avoid making them unnecessarily painful. This chapter talks about
how to let people go in as fair and humane a way as possible.
When youre focusing on employees you are going to lay off, its easy to
neglect the rest of the crew. But morale suffers from a layoff, so its extra
important to acknowledge and appreciate the employees who stick with you.
You dont want to lose your best people, especially when your business is
struggling and you need every advantage you can get. To ensure their loyalty,
you need to make sure you conduct yourself as a team playercut your own
perks and salary first, demonstrate respect for the judgment of coworkers,
and lead by example. Owners who rule by edict, reward themselves
excessively, and dont pull a fair share of the load end up squandering their
most valuable resources.
chapter 9 | handle layoffs fairlyand keep your best people | 177
tip
Cut pay and hours first. Before you lay anybody off, youand your
spouse if he or she is on the payrollshould cut your own pay. If you can afford to,
cut at least 25%. Also look at cutting the salary of higher-paid employees and reducing everybodys work week. Salary and hour cuts rarely reduce overhead enough to
cope with a precipitous drop in income, but they might reduce the number of painful layoffs you must make. (For more on making wage and hour cuts, see Chapter 3.)
Making a Wise Layoff Plan

Unfortunately, its easy to mishandle the layoff process so thoroughly that
you all but assure your business will continue to decline. The most common
mistake is to initiate layoffs without first adopting a systematic plan to shrink
the business.
Dont hand out pink slips in a panic. If you do, youll create chaos, with
employees being laid off or kept based on all sorts of faulty criteria, including
family relationship, friendship, how needy you think a particular employee
is, and on and on. Fortunately, the right approach to making essential layoffs
is not difficult, but it does require you to put aside emotion and follow a
logical step-by-step process.
Come Up With a Plan to Shrink Your Business

You need to cut your expenses until they match your reduced income projections. This might mean cuts across the board or severing an unprofitable part
of the business. For example, if you are running both a wholesale and retail
operation and both are suddenly operating in the red, you may decide to jettison the less successful one and put all energy and resources into the other.
However you focus your cuts, come up with a dollar amount that you need
to trim from payroll.
Decide How Much to Cut

Your layoffs must eliminate the positions not needed to achieve your new
slimmed down financial plan. For instance, if you are suspending new
software research and development, you can eliminate a certain number of
programmers and project managers.
Thats the (relatively) easy part. If you still need to cut more expenses, and
those cuts must come in the form of jobs, youll have to figure out what jobs
your company can live without.
The conventional advice is that its less demoralizing to employees to have
one big layoff than a series of small ones. In other words, toss away your
rose-colored glasses and cut heavily, so that youre sure you wont have to do
it again. You dont want employees constantly nervous about their jobs as
they watch coworkers leave one by one. Theres obviously much truth in this.
But knowing and caring about your employees as you do, your instinct is
probably to cut the minimum number of jobs required by your new toughminded recession business plan. Fine, as long as employees understand that
although you hope to avoid more job cuts, they might be needed. Show
them how the business is doing and how much revenue you need to bring in
each month, and let them know that if the revenue targets arent hit, more
jobs might have to go.
Eliminate Jobs You Dont Need or Cant Afford

Although your focus should be on eliminating jobs, you may want to
do some shifting of job responsibilities. If you find that an employee in
a position slated to be cut is more efficient and qualified than someone
occupying a position you plan to keep, make the substitution.
Dont Discriminate Illegally

It is illegal to make employment decisions based on age, gender, race,
disability, religion, national origin, or any other legally protected category. So
make sure you dont discriminate (or that it appears you are discriminating)
for an illegal reason. Normally in layoff situations, where you first identify
job slots that you can eliminate and then cut the people occupying those
slots, youll have little to worry about, because youll likely end up laying off
people of different ages, genders, race, and so on. But if after making your
list, you find that most people on it are, say, women over 40, rethink your
plan or talk to an employment lawyer. Otherwise you may open yourself to
an age discrimination claim.
Example: Because sales have dropped, Acme Lumber decides to cut ten of its 30
employees: three from the office, four from the lumber shed, and two drivers. Three
of the employeestwo men and one womanare over 50, two are African American, and one long-term employee uses a wheelchair. There are seven men and three
women in the group, and their average age is 40, which more or less mirrors Acmes
overall gender and age makeup. If Acme acts based on a logical plan to cut tasks and
retain people with the most needed skills, it should have no concerns that any of
these employees can succeed with a discrimination claim.
The Logistics of a Layoff

If you are laying off just a couple of employees, youll want to do it yourself,
as informally and kindly as possible. The same is true if you are laying off
a relative, friend, or someone who has been with your company for many
years. But no matter how low-key your approach, be sure to have the final
paycheck ready, including accrued vacation pay. And dont forget to ask for
keys and company credit cards to be returned, to turn off employee email
(and disable passwords), and to change the building alarm codes.
If youll be laying off more than about five people, youll want to follow a
more structured approach. Here is an outline of a sound layoff protocol you
can modify to your needs.
Get Senior People on Board and Pick a Day for the Layoffs
Meet with any senior managers to make sure they are fully in the picture and
understand (even better, fully agree with) your plans. Include your human
resources person or bookkeeper who will handle the necessary paperwork, if
you have one. All these people must commit to 100% confidentiality.
Choose a day where all senior managers will be in the office to break the
news to the laid-off employees. Contrary to advice you may read elsewhere,
we dont believe that there is a magic best day. Pick a day when the maximum number of people youll be letting go will be in the office. Choose a
time that lets you give departing employees a couple of hours to leave the
building, and still leaves you time to gather remaining staff for a company
meeting to help restore morale.
caution
If youre laying off a large number of people, check into notice

requirements. If you have only a few employees, you arent required to give
employees any notice before closing. But in some states, such as New York, when 25
or more employees are laid off, 90 days notice is required, in some circumstances.
And in any state, under federal law, employers with 100 or more employees are
required by law, in some circumstances, to provide 60 days notice. Check with your
states labor or employment development department to find out if your state
requires a certain amount of notice.
Prepare Final Paychecks, Recommendations, and Severance

Have your bookkeeper prepare final paychecks, which should include pay
for the entire final day plus all accrued vacation. Some states require you
to pay employees their final paychecks on their last day; others on the next
scheduled payday or within 72 hours. To be sure you comply with your
states law, it makes sense to give employees their paychecks on their last day.
In addition, some states require you to pay out accrued but unused vacation
days on the last day, something that is more efficient than trying to do it
later. Almost all states have penalties for not paying wages when duewith
some charging $1,000 per employee, per pay period, and others exacting a
penalty of 30 days wages per employee not paid on time.
Also prepare a polite letter of recommendation for each departing
employee, giving dates of employment, duties, and a general statement of
approbation. Your employees will appreciate your courtesy, and it may make
the day go more easily for all. Even if you are laying off a worker who fell far
short of the ideal, dont include anything negativejust limit this letter to
dates of employment and duties.
If you plan to grant severance pay (see Pay Modest Severance If You
Can, below), prepare a separate check to be given to the employee in
exchange for agreeing not to sue you over the termination. Youll need to
prepare an appropriate release to have the departing employee sign. State
law requirements differ somewhat in this area, so you should consult an
employment lawyer about the release, especially if you suspect an employee
might sue.
Pay Modest Severance If You Can

No law requires you to pay laid-off severance to employees, unless youve
promised it (in your employee handbook or an employee contract, for example). But if you can pay modest severance without putting the survival of
your business at serious risk, its a good idea for several reasons:
Departing employees will feel more respected and be far less likely to badmouth you to others.
Continuing employees will see that even when your business is in the dumps,
you are going the extra mile to be fair. As a result, they are more likely to put
their shoulders to the wheel.
When times eventually improve, you may want to rehire some of the people
you have laid off, which will be far easier to do if they see you as a fair
employer.
Youll feel better about yourself.
How much severance you pay is up to you. Obviously, you cant absorb a
hefty hit to your bottom line. Typically, small businesses already in severe
economic distress cant afford to pay more than a weeks pay for each year
served, with possibly an extra week for people who have worked one year or
less. But to avoid claims of discrimination, be sure to be consistent in how
you pay severance, using an objective formula to calculate it.
Break the News All at Once

On the appointed day, if you have enough managers, have them meet
with each departing employee at, say, 9:45 a.m. to give them the news
personally. Then at 10 a.m., have the managers escort the employees to a
private meeting room or, if necessary, your office. If you fear an employee
might become violent, arrange for appropriate help to be standing by, as
unobtrusively as possible.
tip
Take care with off-site employees. If any employees who are on the
layoff list are working remotely or are out of the building for some other reason,
come up with the most efficient and sensitive plan to notify them. Do it personally if
possible and by phone if absolutely necessary. Dont use email.
Start the meeting by briefly explaining the economic necessity that requires
the layoff. Because people will likely be shellshocked and unable to absorb
lots of information, keep it brief. For example, if your business just lost a
$200,000 contract and the bank is threatening to pull your line of credit
if you dont quickly cut expenses, its enough to say just that. Dont forget
to thank the departing employees for their hard work and, if you feel its
appropriate, apologize for the fact that economic necessity has forced you to
cut such loyal people. Then tell people that in the envelope in front of them,
theyll find their pay through today plus accrued vacation. At this stage, if
you have a human resources manager, or failing that, an office manager, you
may feel that its less embarrassing to all to step out of the room, leaving the
details of collecting keys, signing releases, and answering practical questions,
such as eligibility for health coverage under COBRA, to someone else.
While the departing employees are still in the conference room, send a
short email (or otherwise notify) all continuing employees of whats going
on and ask them to attend a company meeting later the same day. Your
email should simply say that the difficult economic times have forced you
to reduce overhead and cut the number of employees. It should include
all employees on the layoff list, thanking them for their hard work and
dedication. Thats itleave the longer explanation for the company meeting.
Secure Your Computer System Before Employees Pack Up

While laid-off employees are in the meeting room, have whoever handles
your computer system disable the computers of any laid-off employee who
has enough knowledge to destroy or steal data or crash your network. If
a departing employee wants to remove personal files from their computer
while packing up, you can have someone sit with them while they do so.
Departing employees should be given an hour or so to pack up and be out
of the building. Its polite to have boxes at the ready and to allow coworkers
to help them pack. But in a couple of hours, everyone should have left. If
you havent already done it, make sure all computer access passwords and
codes have been disabled.
Hold a Company Meeting

The same day, if possible, convene a company meeting and explain what
happened and why. The more honest and up front you are, the more youll
be respected. This is not a time for an in-depth PowerPoint about financial
details, but a few slides illustrating your businesss financial situation might
help. Below is a sample presentation you can modify to fit your needs.
Sample Layoff Statement at a Company Meeting

Six months ago, Acme Lumber was doing well and we had lined up funding
to expand. Then the economic roof fell in. Sales are down over 30% compared
to last year, meaning that we are losing money. And last week, because a new
housing subdivision was cancelled, we lost a $200,000 contract. That made
our bank warn us that our $500,000 line of credit would be pulled if we dont
quickly return to profitability.
Unfortunately, to address these issues, today we were forced to lay off
ten good workers. It pained us to have to say goodbye to our friends and
colleagues, and we feel badly that economic necessity forced us to take this
step. Even allowing for severance payments, this will save us $500,000 in the
next calendar year. We are also taking other steps to get us back in the black.
Heres our plan:
1. My wife and I have each cut our pay by 40%.
2. Effective today, all employees making more than $30,000 will
experience a pay cut. The cut will start at 4% for the next $10,000 and
scale up 1% for each $10,000 over that, meaning that the one person
making over $90,000 will take a 9% cut. We estimate that these cuts will
save about $100,000 in the next 12 months and allow us to keep two
more employees than we could otherwise. In addition, starting next
week, everyone will work a 4 day week, which will save another 10%
of our payroll costs. Ill do everything in my power to end these cuts
and return your pay to its former level as soon as possible. But please
understand I cant do that until Acme is solidly profitablesomething
that may take an extended period of time.
3. We are cutting every possible expense and have already made cuts
that will save us $100,000 over the next year. We plan to sell one of our
trucks and a loader to reduce our lease costs.
Probably the first two questions youll want answered are have we cut
enough to make Acme profitable, and will there be more job cuts?
Sample Layoff Statement at a Company Meeting, contd

The answer to the first question is a qualified yes. If sales dont drop
further than we anticipate, we should be able to avoid additional layoffs.
But remember, times are tough, and even though we are stepping up our
marketing efforts in a dozen ways, no one can know whether sales will get
worse.
Now, as to our immediate financial future. We think these cuts will give
our bank confidence to stick with us and not pull our line of credit. But if
not, Ann and I will invest our $250,000 in savings in Acme and mortgage
our house if necessary. In short, well do everything in our power to keep
this wonderful business going so that it will be still here when the economy
eventually begins to expand, construction gets going again, and there is
money to be made.
I appreciate the hard work and loyalty of each and every one of you, and Ill
email you once a week about how things are going. Are there any questions?
Keeping the Great People You Hire

You may think that when unemployment is high and companies are laying
people off right and left, motivating your continuing employees to stick with
you and work as if their hair is on fire should be a breeze. But if employees
who have already had to stomach pay cuts fear that your business might fail
or that more layoffs are likely, theyll be quick to jump to any job that looks
more secure. If your post-layoff workplace is poorly functioning, tense, and
joyless, they are likely to leave even faster.
In good times or bad, your business will suffer if you dont keep the loyalty
of your best employees. Just as it takes many small business owners three to
five years to really hit their stride, top-notch employees, even those who can
do skilled work from their first day, become more valuable every month they
work for you. Long-term workers build a valuable mental database of useful
information about your products or services, customers, coworkers, and
suppliers. If they move on, you lose everything they know.
For example, at Nolo we hire legal editors, most of them lawyers who can
explain legal rules in plain English (a rare combination), to edit and often
write our new books. Even though we use a rigorous screening and testing
process to hire highly skilled people who can immediately do good work,
weve found that, on average, it takes about 18 months before a new editor
can do the job without at least some mentoring from a more senior editor.
It takes even longer for a new editor to acquire enough knowledge about a
wide range of Nolo products to catch up with their more experienced peers.
It follows that Nolo has a huge interest in hanging on to people who go
through this extended apprenticeship.
To fully appreciate how valuable it is to keep good employees for as long
as possibleespecially during hard times when you have no time to train
replacementsthink about your own relationships with local businesses.
If youve been dealing with the same competent person year after year, its
frustrating when that familiar face (or even familiar voice) is replaced by a
less experienced one.
So how do you go about keeping productive employees working for you
as long as possible, when your business is shrinking and you may even have
imposed pay cuts? Start with a simple fact: If your employees feel fairly
treated under the circumstances and believe you have set a course to outlast
the economic downturn, they are far more likely to stick by you.
TreatAnd PayPeople Fairly

Fairness is the best one-word prescription for keeping employees loyal
to your business. Workers who believe your business can be trusted to
treat them equitably are likely to be loyal; those who feel they are in
untrustworthy hands are almost sure to move on. This goes double when
times are tough, unemployment is high, and your business is obviously
struggling. Loyalty often has less to do with the size of your employees
paychecks than it does with their belief that you will do everything possible
to protect their job, not just toss them overboard on the first stormy day.
What is fairness in the workplace? Basically, that your business uses
objective criterianot whim or piqueto hand out rewards and
punishments. Put another way, it means that your business establishes and
follows a set of employment policies that are understandable, consistent, and

evenhanded. For example, if you lay off a long-term, experienced employee
but keep your lazy cousin, you risk convincing everyone in the company that
despite your rhetoric about fairness, you cant be trusted. But if you adopt
a merit-based system of promotion and stick to it, even though it means
your cousin is asked to leave, you go far toward reassuring all employees
that they will be treated fairly. True, your aunt may snub you at the next
family gathering, but thats a small price to pay to run a business that your
employees will respect and stick by.
When it comes to wages, most employees use three factors to judge
whether or not they are being fairly treated.
How much similar jobs in your area pay. Especially for highly productive
people who receive just a few dollars per hour over minimum wage, its
essential to pay slightly more than your competitors do. Especially when
times are tough, you dont want to lose the best of those understandably
penny-conscious employees because they can earn an extra 30 cents an hour
down the street. Unfortunately, most small employers never grasp this lesson,
paying the industry standard to the sales clerk who works twice as fast as the
norm. Again, its far better for employee retention, overall productivity, and
workplace happiness to reward your most productive employees.
How much others with comparable skills are paid in your company. Your
employees will have no trouble accepting substantial pay disparities as long
as in their eyes they reflect real differences in skill, training, seniority, and job
responsibilities. But dissatisfaction will quickly surface if employees conclude
that one person or group receives substantially better pay or perks for no
honest business reasonor worse, for a bad reason. This is not the place
to tackle the details of complicated pay equity issues, such as differing pay
rates for different departments, individual vs. across-the-board raises, and
overtime for some job categories and not others. But it is important to grasp
just how essential it is even for employers with just a handful of employees to
create logical, understandable, and defensible pay policies and modify them
only when objective new factors require it.
How much the bosss pay and perks are. Especially when you are asking
your employees to work extra hard in an economically fraught environment,
its crucial that you not offend them by exempting yourself from your
austerity program. (More on this in Chapter 10.) And unless you are happily
married to your bookkeeper, dont think you can pay yourself lavishly or
reward yourself with secret perks and keep it secret.
Dont Lose Your Sense of Purpose

Employees of successful small businesses are almost always imbued with
a strong sense of purpose. It doesnt matter if you make or sell booties,
bibles, or bagpipesthe key is to imbue your company with a commitment
to excellence, something that is especially important to maintain when a
business is struggling financially. There are several tried-and-true methods
to help your employees believe in the value of their work. But no amount
of cheerleading will work unless they really see that you run a high-quality
operation. For example, if you claim your caf serves the freshest baked
goods in town, but now that sales are down you occasionally slip a few
day-old muffins in with todays batch, youll begin to alienate your own
employees.
If you do run a quality operation, helping your employees create and
participate in a larger vision will go far toward cementing their loyalty.
No question it can be tougher to do this when you are fighting for every
dollar, but its not impossible. Were reminded of a veterinarian who not
only ran the cleanest, most efficient animal care operation in town, but
even when business flagged in an earlier recession, actually carved out the
hours necessary to allow employees to participate in a variety of free animal
rescue and support activities. As a result, the vet attracted a terrific crew of
employees, people who were so pleased to be part of a committed business
that many of them stuck around for years.
Communicate Early and Often

When people have been laid off (or if employees expect them to be), many
of your employees will be fearful. Will they be laid off next? Will the
business be sold? Declare bankruptcy? Its no secret that if allowed to fester,
these kinds of worries can have a seriously negative effect on your business.
Productivity drops when people are distracted and anxious (or spend work
time on online job sites), and your best employees may leave for what they
perceive to be greener pastures.
To counter this, you need to honestly communicate how the business is
doing, whether the news is good or bad. We hope you made a good start
when you laid people off, when you explained to everyone the economic
facts you faced. Now you should follow up with a weekly finance report.
Dont give employees just a bunch of raw financial numbers and hope
they make sense of them. Also give them the context that will let them
understand exactly how your business is coping with the downturn, and tell
them everything you are doing to increase sales.
Example: You own the Continental Diner, a busy urban eatery with 20 employees.
When the recession takes hold, business drops 25%, and you lay off five employees,
explaining that Continental is losing money. You inform employees that you and
your husband, who manages the day shift, have cut your salaries by 35% and loaned
Continental $50,000 to catch up on past-due bills. You also explain that after slashing
all discretionary expenses, Continental still needs to take in $20,000 per week to break
even. If this can be achieved, you believe Continental can ride out the recession.
Each Monday you tell employees how much you took in the week before, explaining why you missed or exceeded the goal. You thank employees who work extra hard
or come up with clever ideas to bring in more diners, making it clear that all ideas
are welcome and valued. Who knows, it might be the newest busboy who comes up
with the cant resist special that has customers lining up to get in.
Appreciate Your Employees

Its simple, really: Employees strive to do better when they know their hard
work and creative contributions are noticed. This is even more important
when business is grim and you are asking everyone for a little extra. In this
context, those employees whose good work isnt acknowledged are likely to
conclude that there is no point in busting their butts.
So whether you have five, 55, or 105 employees, develop an employee
appreciation program. To make sure your program will be welcomed by
your employees, its best to create it with their input. If you dont, you risk
adopting a plan that will be ignored or resented. For example, if your wellmeaning plan to pay bonuses to salespeople who bring in new business is
regarded as a cynical ploy to make your overworked employees put in extra
hours, youre unlikely to achieve your objective.
Example: When Jans cardboard box company is hit hard by the financial meltdown, she decides that a great way to incentivize sales reps to bring in more business
is to create a salesperson-of-the-quarter award and give the winner a trip for two to
Hawaii. Consulting no one, she calls a company meeting and proudly announces the
detailed rules of this new program. But Jan doesnt realize that her rules favor the
three salespeople with the best territories, and in consequence angers several others
who work in less productive areas and see the whole program as a backhanded way
to criticize them, and maybe even to set them up to be laid off. Even worse, Jan fails
to create a parallel award for the office staff and other support personnel who process the orders, ship the goods, collect the bills, and do other essential work, making them feel that their work isnt important. And finally, at a time when everyone
is worried about layoffs, employees see a trip to Hawaii as an expensive and even
insulting boondoggle.
Fortunately for Jan, after the meeting, a longtime employee marches into her office
to forcefully explains that everyone, save the three already highly compensated salespeople, is offended by her plan. Reluctantly acknowledging her mistake, Jan cancels
the program and sets up an employee committee to recommend a way to use the
same amount of bonus money to provide incentives to everyone. To Jans surprise,
the committee proposes that whenever the entire business exceeded its quarterly
sales goal, $1,500 be used for a dinner party at a nice restaurant to which everyone
in the company is invited. Especially during the gloom of the recession, these events
turn out to be so welcome that everyone, from the senior employees to the high
school kid who helps with filing, begins paying close attention to weekly sales totals.
When thanking people for good work, be as inclusive as possible. Dont

recognize or reward just the most visible person or even the person who
has led a particular effort. Acknowledge everyone who contributed to the
good work you are recognizing and honoring. For instance, in the example
above, the thing that really made Jans second reward program fun was that
it included everyone, even the high school kid, who proudly brought the
boyfriend she normally complained about.
Finally, during tough economic times when everyone is forced to pinch
pennies, its best to keep your appreciation efforts simple, sincere, and cheap.
Many rewards programs are designed (or at least seem that way) to influence
or even manipulate employees future behavior, rather than to simply
acknowledge their good work. Often a public thank you at a company
meeting or via email, or a pizza celebration lunch for everyone, is more
welcome than a more complicated system.
resource
More on rewarding employees for good work. 1001 Ways to Reward

Employees, by Bob Nelson (Workman), provides a comprehensive list of awards,
rewards, and other techniques to let employees know that their contributions are
important. Few of them will fit your business exactly, but reading this little book
should jump-start your thinking.
Lead, Dont Dominate

Everyone associated with your enterprise will be happier and your business
more productive if you are a frugal, hardworking leader, not a privileged
dominator. American traditions are democratic and majoritarian, not
autocratic and imperious. At all levels of our society, leaders who work hard
and are in touch with ordinary people command loyalty and respect.
If your employees regard you as a decent humanand not just the big
bossthey will be far more willing to share their thoughts about how to
improve the business, something that can be crucial to your survival in a
severe downturn. No doubt many of their brilliant ideas wont be. But after
you put aside those that are self-serving, have already been tried and found
wanting, or are just plain nonsensical, you are likely to find a few good ones.
And its very possible that an engaged employee who is genuinely concerned
about the future of your business will come up with a true gem, something
so valuable that it will make listening to dozens of mediocre ideas more than
worthwhile.
Treat all ideaseven ones that are obviously nonstarterswith respect.

Employees who see others suggestions belittled or dismissed will be unlikely
to make their own. You also need to develop a process to capture good
ideas. (How to do this is discussed in detail in Chapter 6, which deals with
innovation.)
Example 1: Liam answers the phone and schedules service calls for Goodlight, a
local electrical contractor. Because he talks to customers all day, Liam learns a lot
about their needs and desires and sees that Goodlight is out of touch with some
significant new developments in the marketone of the reasons business has been
falling off recently. Liam considers talking to his boss, Peter, about how introducing
two new services might really kick up profits. But Peter barely seems to have time to
nod hello. And when Liam hears through the grapevine that Jen in customer service
was laughed at when she tried to suggest changes in the phone system, Liam decides
not to bother.
Six months later, when a competitor, Hi Tech Electric, opens, Liam applies for
and receives a job at considerably higher pay, in part because at his interview, Mia,
the owner, is impressed by his innovative ideas. Mia immediately introduces Liams
new services, which, because of their hefty profit margins, result in solid profits for
Hi Tech. A few months later when hard times hit and Goodlight cuts back, Hi Tech
remains profitable and gains substantial market share. Mia not only gives Liam full
credit within the company, but also a meaningful raise.
Example 2: Now lets imagine that, despite Goodlights success, Peters personal style
remains a little more homespun. Not only is there a suggestion box in the employee
lounge, but also a display recognizing the best suggestion of the previous month. The
day after Liam has his big idea, he drops it in the box. The next day, he encounters Peter
helping repair a door on one of the delivery trucks. Peter invites Liam for coffee and
asks him to present his idea in more detail. Impressed, a few days later Peter convenes
a meeting with several key employees to which Liam is invited. The result is that
Goodlight introduces what turns out to be two highly profitable new services. Peter
significantly raises Liams pay and gives him a small bonus. A few months later, when
the recession hits and profits in the traditional lighting business disappear, its the new
services Liam suggested that allow Goodlight to avoid major layoffs.
When implementing new ideas, be sure you include key employees in

the process, instead of handing down the law like Moses. New policies and
procedures carried out with the input of the people who will have to cope
with them day to day are not only likely to be more successfulbut they
are far less prone to be sabotaged. Remember, employees who dont buy into
new way of doing things can always find ways to subvert them.
No question, especially when money is tight and time short, its easier and
certainly quicker to issue an order or impose a decision than it is to listen,
reason, and help build consensus. But especially when unpopular cutbacks
are in the offing, its essential to establish and respect a consensus-building
management structure. Or put another way, a business that your employees
view as being all about you wont be as successful as will one your employees
see as also being about them.
Were not suggesting that you make your workplace a perfect democracy
where all decisions are equally shared. Leaving aside the fact that its your
business and you have the biggest financial stake in its success or failure,
it simply takes too long for everyone in the kitchen to discuss how much
sugar to put in the brownies. Although a few cooperatively run businesses do
well, we suspect their success has come despite the fact they elevated 100%
democratic decision making to a first principle, not because of it. Far better
to run your enterprise with a strong purposeful center at the same time you
invite and respect employees opinions and treat them with dignity.
Credit Is CheapSpread It Around

Hogging credit for the businesss achievements is a huge and common faux
pas of small business owners. Just as professors are sometimes guilty of
putting only their names on research done largely by their graduate students,
owners of small enterprises are far too prone to act as if they alone made
the business a success. Few things are more disappointing and insulting to
employees who have worked hard and creatively to help build the company.
Try to foster a culture in which leaders go out of the way to acknowledge
everyones contributions. If this means that your company meetings
sometimes sound like a roll call of every employees achievements, so much
the better. People work more creatively when they know their efforts are
acknowledged and appreciatedespecially when, in a recession, they are

asked to work harder for less pay and benefits. Here are just a few ways to
foster this attitude:
Recognize hard and creative work throughout the companyat company
meetings, through companywide emails, and at parties. If your warehouse
crew ships a big order in record time, everyone should hear about their
great job.
Share kind words from outsiders with everyone. If your business gets
written up in the paper, or an employee does something newsworthy,
email the story to everyone and tack up the clipping on a bulletin board
people will see. If your customer service or sales people get compliments,
forward them to everyone in the company. At Nolo, if a customer says,
Your book on immigration law saved me $10,000 and my sanity. Were
it not for you, my parents never would have gotten their green cards,
everyone in the company is thankedwhich is as it should be.
When a perk pops up, let the people whose work was instrumental in
making it happen reap the rewards. For example, when the Nolo website
was nominated for a prestigious Webby Award for best Law/Government
site, the hard-to-get tickets to the awards ceremony were offered first to
the Noloids who worked on the website day to day, not senior managers.
(We won, by the way.)
If a customer admires your work, mention everyone who helped. If
someone worked long hours making your productwhether its a report,
a set of drawings, or a custom cabinetlook great, acknowledge that
person, preferably in front of the pleased customer or client.
Its crucially important to encourage a culture of we, not me. If, when
the limelight goes on, you can learn to step aside and nudge someone else
forward, thats a good start. But to really help people feel appreciated, youll
need to go beyond fancy words and employee of the month type programs
to show people you really do value them. In addition to paying decently,
rewarding superior work, and providing good benefits (especially health
care for all employees), adopting a simple stock option or other employee
ownership plan can be the best way to literally put your money where your
mouth is. That way your employees really do know that your business is
about them, not just you.
tip
Thanks can be as important as money. No question, paying people

fairly is a key way to retain their loyalty (see Chapter 9 for ideas on keeping
employees). But compensating people decently, or even giving them a welcome
bonus or raise, isnt a substitute for publicly thanking them. When business hits a
downturn and you must ask employees to give up perks, benefits, and even pay,
thanking them early and often is even more important.
Dont Forget to Be Positive

When money is short and you are chewing the insides of your cheeks with
worry, its easy to transfer your grim mood to your employees. If you do,
your employees are in turn likely to transfer it to your customers, never a
wise move when you desperately need them to purchase more.
To avoid creating business-killing gloom, you must understand how
actually encouraging workers to enjoy themselves can be a powerful
motivator. Consider the mood at Southwest Airlines, one of the worlds
most profitable air carriers, to that at United, a company that staggers from
bankruptcy to bankruptcy. In addition to charging low prices and providing
reliable, if somewhat Spartan services, Southwest is surely the worlds largest
corporation that actually encourages its employees to enjoy themselves.
Flight attendants joke around, ticket agents dress up in holiday costumes,
and even pilots have been known to tell one-liners. How effective is this
unique company culture? Almost alone among all the worlds major airlines,
which are constantly beset by strike threats from angry unions, Southwest
enjoys relatively harmonious relations with its employees and consistently
operates in the black.
Because workplace environments vary so much, the best advice is probably
just to find simple ways to let employees enjoy themselves, and then get
out of the way and let it happen. Start by loosening up a bit yourself. For
example, if on St. Patricks Day, you promote a green food potluck brunch
and come dressed as a leprechaun, people will likely get the idea.
Here are a few ways to establish an upbeat workplace tone.
Food. Sharing food is probably the most basic way to build community. If
you occasionally bring in some treats (homemade is best), others will, too.
Be sure that when this happens everyone in your business has a few minutes
to enjoy the gift. If this means that its your turn to spell the person who
answers the phone, do it with a smile.
Birthdays. Families celebrate one anothers important milestones.
Businesses smart enough to treat the people who work for them as part of
a workplace family do, too. Keep a calendar of employee anniversaries and
remember to do a few little things (balloons and a cake may be corny, but
they always work) to honor major milestones.
Hats, shirts, and other tchotchkes. At Nolo we have a long tradition of
occasionally giving employees Nolo T-shirts, baseball caps, coffee mugs, and
other little gifts. You can always tell that the general mood is good when you
see people wearing them around the building.
Wall decorations. Taking the trouble to put framed prints or other tasteful
decorations on the walls is a great way to tell both employees and customers
that you take pride in your workplace. This costs a few dollars, but is well
worth it in many ways. For example, if an impressed visitor tells your
employee, Wow, its really nice here, youre lucky to work in such a cool
place, obviously you have received a huge dividend on your investment.
Parties and picnics. Now and then its a great morale-builder to invite
everyone to an off-site social event. There are many ways to do this, from
the ubiquitous summer picnic and winter holiday party to all sorts of less
common events. For example, at Nolo we usually hold an annual Play Day.
We close the entire business on a weekday and go to a local park to hang out
with each other (no spouses or kids) and play wacky games.
Other events. Nolo once had a Pet Parade in the parking lot as part of
a lunchtime potluck. Everyone was invited to show off their pets, which
included dogs to doves to cats to iguanas. Of course, there were goofy prizes
for stupid pet tricks, pets that looked most like their owners, and so on.
A three-legged tortoise won a prize for jumping over a three-foot barrier.

(Well, okay, we waited for ten joke-filled minutes before going along with
her owners claim that she only performed at midnight.) And weve held notalent shows and encouraged every ham in the company to participate. A
big favorite was a chorus line of body-part wigglersemployees who could
twitch ears and noses and turn double joints inside out. Were sure you get
the idea, so well spare you the details of our Halloween party, holiday gift
exchange, and other events, some of the best of which are spontaneous.
Drive a Modest Car

In the United States, the embedded class and caste structures common in
many other nations are largely absent, and even the rich often claim to be
part of the middle class. Still, many affluent people buy Armani suits and
Gucci bags and other expensive things they dont need, in part to signal
that they are somehow above the herd. This desire to one-up the Joneses is
so much a part of our national psyche that advertisers repeatedly depict the
smug suburban homeowner who buys a new car and then sits back to watch
the neighbors seethe with envy. Exaggerated? Certainly, but nevertheless we
all notice the kind of cars our friends (and especially our foes) drive, how
fancy their houses are, and whether they adorn themselves with expensive
clothing and jewelry.
It isnt just social acquaintances who notice how you spend money. Your
employees and those who do business with you also pay attention, especially
when a business experiencing recession-driven cutbacks foots the bill. If you
wear designer clothes, drive the biggest Beemer, and have your business pay
your country club dues, youll not only find yourself short of loyal employees, but also risk offending your banker, key suppliers, and customers, who
sooner or later are likely to figure out that they are paying for all those perks.
The more ostentatious you are, the more harshly you are likely to be
judged. Should you doubt this, ask yourself which of the two business
owners briefly profiled below is more likely to be popular with coworkers:
Fred. Flies first class, drives a big Mercedes paid for by his business,
wears a $3,000 watch, and owns lots of flashy electronic toys and topof-the-line sports equipment that he constantly flaunts. He also uses his
business credit card to eat at pricey restaurants and makes no secret of

how much he spends on exotic vacations.
Fredericka. Flies coach, drives a Honda Accord that she pays for herself,
wears a sensible watch and wedding band, and golfs at the local public
links. She eats wherever the food tastes goodcharging it to the business
only when strictly appropriateand keeps how much she spends on her
holidays to herself.
If your answer is Fred, go buy that 12-cylinder Jaguar you have been
lusting for. Even in todays dire times, if you work very hard, treat your
employees well, and have a bit of luck, you may overcome the resentment
your showy behavior is sure to engender. If your answer is Fredericka, youre
already on the right track toward understanding why it makes sense in the
recessionary workplace, to quickly dial back any ostentatious habits.
Now lets add a few facts. Assume that Fredericka takes home a larger
paycheck than Fred does, and that she quietly spends some of her money on
luxuriesa second home in the mountains, foreign travel, and a rare book
collection. Who wins the popularity contest now? Again, its Fredericka,
something that wont change as long as Fred drives that big company-owned
Benz and brags about flying to Bermuda for a golf weekend. Conspicuous
consumptionnot financial successis what rankles.
But who, you ask, would flaunt wealth while their company was struggling
even to survive? Well, you might remember that the first time the heads of
the Detroit automakers went to Washington DC to beg for bailout money,
they traveled by private jet. Newspaper stories detailed how GMs Rick
Wagoner and Fords Alan Mulally treated themselves to a long list of luxuries
even while lobbying Congress for taxpayer moneyand usually went on to
note that up to a million people could lose their jobs if all three American
car companies failed. If Wagoner and Mulally had flown coach, we suspect
Congress would have been more sympathetic to their argument. (When they
went back a second time, they drove.)
The same thing happens at small companies. Just walk around any business
park or commercial neighborhood until you find a perfectly detailed, new
luxury car in a reserved parking spot next to the front door. (Given the large
percentage of self-important business owners, this shouldnt take long.) Hang
around for a few minutes until an office or service worker enters or leaves
the building, and say something like, Cool car, huh? Chances are good the
person will make a sour comment about the boss. And why not? Especially
when times are hard, and layoffs are routine, its no fun to work for someone
whose car cost three times your yearly pay.
Years ago when Jerry Brown was governor of California, he insisted on
driving an old Plymouth and living in a budget apartment instead of the
governors mansion. This is overkill. Like the citizens of California, many
of whom eventually concluded that the Doonesbury comic strip had a point
when it called Brown Governor Moonbeam, your employees want and
expect you to act like the boss, not an entry-level employee. There is no need
to buy your clothes at Goodwill, work in a broom closet, and drive a used Kia
to work to send a message that you know times are tough. Here are a few tips:
Choose an appropriate office and furnish it in a businesslike way. Save
the oriental carpet, fancy furniture and TV-stereo combo for your living
room. If you already have these perks, raise a few needed dollars by
selling them.
Share administrative help with others as needed. If you have a largely
unneeded administrative assistant whose main job is to pick up your dry
cleaning and make you feel important, put him to work at a real job or
lay him off.
Park in the lot or garage with everyone else, not in a CEO slot next to
the front door. If parking is tight and others have reserved spaces, you
obviously should, too, but if you are often out of the office, consider
sharing with another employee.
Roll up your sleeves and participate in periodic workplace cleanup efforts.
Get your own coffee and snacks. If you insist, people will probably
fetch and carry for you, but every one of them will think less of you for
making them do it.
Use equipment such as computers and phones that are appropriate for
the work you really do. Get rid of TVs, game consoles, and other toys.
Always address and refer to employees by their names. Never use
disrespectful terms like sport, stud, honey, or babe.
Suppose now youve looked over this list and are chagrined to say that
your behavior has been needlessly ostentatious and possibly even insulting.
No worriesas long as you change it quickly, firmly, and sincerely, youll
regain your employees respect. Especially if your business is facing financial
difficulty and you are asking others to make sacrifices, lose your fancy ride
(yes, even if you paid for it), your club memberships, your upscale lunches,
and whatever else sets you apart from the people you are trying to motivate
to work harder.
C H A P T E R
Dont Work Too Much

The Importance of a Sane Schedule..................................................................... 203
The Danger of Burnout.......................................................................................... 204
Keeping Your Priorities Straight........................................................................ 207
How to Work Less and Make More...................................................................... 208
The Power of Delegation...................................................................................... 208
What Do You Do Best?.......................................................................................... 210
How to Delegate....................................................................................................... 211
10
Success has made failures of many men.

columnist Cindy Adams
hen your business is struggling, nothing could be more obvious

than the fact that you need to put in more time to straighten
things out, right?
Wrong. Its at least as likely that people who regularly work overly long
days will be less successful than those canny enough to keep their work and
personal time in better balance. In a world full of cheap labor but short on
intellectual capital, it rarely pays to try to substitute hours for smarts.
Its hard, though, to get past this enduring American folk myth that
successful businesspeople spend every minute working. Virtually every
article or book profiling a successful entrepreneur prominently mentions
how hard the person worksroutinely, 60 or 70 hours a week. Especially
when times are tough, such super hardworking owners are frequently
pictured as sacrificing heroes. But in good times and bad, loads of prosperous
entrepreneurs work far less. The American media has committed itself to the
notion that going without weekends is a key to attaining richesand people
who dont conform to this stereotype simply dont get profiled. Recognizing
that, we suspect many savvy businesspeople exaggerate how hard they
work. If so, they are part of a long tradition. Ben Franklin admitted in his
autobiography that he regularly left a candle lit in his Philadelphia print shop
so passersby would think he was toiling into the wee hours instead of, in fact,
being snuggled cozily in bed.
Although there can be all sorts of reasons why a particular business owner
chooses to work too much, in a recession surely the biggest reason is that
owners assume that there is a direct relationship between the number of
hours worked and money earned. Its not true. Profits flow from businesses
that cost-effectively meet their customers needsnot because a desperate
entrepreneur works until midnight seven days a week. No question, when a
business is caught in an economic downturn, and especially when key people
have been laid off, there are times when you need to work extra hours.
But the long-term solution to the problem is to work smarter, not to burn
yourself out with 15-hour days.
chapter 10 | dont work too much | 203
Example: Cecilys interior design business suffers as the hard economic times
worsen. Trying to outwork the problem, Cecily begins submitting bids on more and
more jobs, even highly unlikely ones, in a desperate effort to keep her office open
and her staff paid. Only when her husband and children go into total revolt about
never seeing her does she finally admit she is working more and more for less and
less. Laying off her staff and closing her office, Cecily decides to work from home,
bidding on only the most likely jobs.
She also partners with a local furniture shop to provide free, in-store 45-minute
consultations, two mornings each week. After of each consultation, Cecily gives each
person a brochure listing reasonable prices for a menu of additional design services.
Many self-helpers who see just how talented Cecily is during the free consultation
hire her for additional help. Although her new business isnt as profitable as the old
one was in boom times, it puts groceries on the table and lets Cecily spend time with
her family.
The Importance of a Sane Schedule

It should go almost without saying that working too many hours for too
long is bad for your health and the well-being of your familytwo things
you absolutely need to nurture to have a chance to thrive when the economy
finally recovers. Many overworking, and as a result, overstressed, business
owners say they would love to work less, but argue that they cant because
they absolutely know that without their 60-hour weeks they would quickly
go broke. Even in a tough economy they are almost always wrong.
Its our experience that owner overwork is actually a big reason why a
potentially successful business closes. If you can scrape by only because you
lay off key employees and work 60 to 70 hours per week yourself, you need
to face the fact that your business is not financially viable. You are not really
in business at all. Instead, you have hired yourself, at a rotten wage, to do a
task no one values enough to allow you to generate a decent profit.
Fortunately, even when the economy is tanking, in most instances
overwork isnt necessary. Businesses that really meet customers needs offer
many opportunities for an owner to be more productive in less time. By
learning to concentrate on the activities that count most, most entrepreneurs

can achieve the same results in up to one-third fewer hours.
The Danger of Burnout

Most well-run small businesses become more profitableoften far more
profitableas they age. True, an economic downturn can temporarily
interrupt this steady growth trend, but its nevertheless important to realize
that if you make good decisions, an economic downturn of a year or two
wont derail long-term success. In fact, because an extended recession will
flush out weak competitors, once it ends your business is likely to quickly
grow larger and more profitable.
In short, growing a successful business is like running a marathon, not
a hundred-yard dash or even a mile. To go the distance, you must adopt a
work schedule that lets you pace yourself. Many new small business owners,
especially those who face a profit-killing recession, fail to understand this and
as a result burn themselves out and quit, in some instances just when their
businesses are poised to make good money.
Example: Sal and Patricia, each a 30-something mother of young children, open
Z-Pot, a business that imports and wholesales large glazed pottery planters from
Southeast Asia, and immediately begin making a solid profit wholesaling their
unique wares to about 25 nurseries and half a dozen indoor garden shops. In addition, they open their own retail outlet to profitably dispose of overstock and slightly
damaged goods.
But two years later, the economy turns down, and Sal and Patricia have to lay off
a couple of employees and begin working much longer hours themselves. On top
of their family responsibilities, this leaves both women feeling exhausted and even
depressed much of the time. Patricias husband, whose own career teaching at a university is going well, begins to strongly suggest that their family life would improve if
Patricia sold her share of the business and stayed home with the kids for a few years.
Not wanting to give up Z-Pot, but recognizing their problem, Sal and Patricia
decide to close their retail operation, negotiate their way out of the store lease, and
concentrate all their energy on the core wholesale operation. Although they miss the
additional income, they both appreciate the extra time.
And then an exciting thing happens. Because Sal, who no longer has to worry
about the retail shop, has time to do more marketing, and because a competitor goes out of business, Z-Pot is able to land several large new nursery wholesale
accounts. In addition, to get rid of dinged-up inventory, Sal and Patricia hold their
first annual three-day blowout sale. To create a come-and-get-it sale frenzy, they
mark some pots down to their cost, but they also mix in plenty of pots at a decent
markup. The sale brings in enough cash to catch up their accounts payable and put
some money in the bank besides.
Now working reasonable hours, Sal and Patricia are content to keep overhead low
in their smaller operation so they stay in the black. They both know that when the
recession ends and sales jump back to historical levels, Z-Pot will be positioned to
achieve significant profits.
Working a reasonable schedule, with the occasional week or two off, lets
you stay focused and interested in your work and attack your responsibilities
with drive and enthusiasm. Of course, occasionally youll need to work extra
hours. But if you do it for an extended period, your sense of personal wellbeing begins to erode, your families happiness declines, and your quality
begins to drop off.
Maybe you are now thinking something like this, Id love to work a
40-, or even a 50-hour week, but if I do my business will surely go under.
Perhaps, but when we look around at friends whose small businesses have
done extremely well over a number of years, we see no one who consistently
works more than a 50-hour week, and many who average fewer than 40.
The few who regularly put in ten-hour days compensate by working fewer
days per week or taking at least a months annual vacation. In other words,
virtually every successful small business owner we know has adopted a
work schedule that provides them time to have a life. And it doesnt seem
like a particularly lazy or pampered groupthese people seem to reflect an
important entrepreneurial truth: In fat or lean economic times, the ability
to create a business that effectively and profitably meets the needs of its
customers, not the determination to work long hours, is the key to success.
Interestingly, many successful people say that although they do not put
in six 13-hour days every week, that doesnt mean business isnt on their
minds. Several report coming up with their best, most creative business ideas
when theyre swimming laps, tossing a Frisbee to the dog, or just taking a
walkaway from the emails, phone calls, meetings, and other distractions
that crowd days at the office, store, or factory. One friend puts it like this,
Busy workdoing any one of thousands of little tasks at the officedoesnt
improve anything important about how my business operates, certainly
not its profitability. Just the opposite. To have time to focus on important
initiativesmost importantly, how to better meet the needs of my
customersI must take the time to think, something I simply cant do well
when Im tired.
Dont Get Lazy

Although working too hard is the more common situation, the flip side
working too littlecan also lead to problems. If during earlier times you got
used to being comfortably solvent, you might have transformed from hardworking ant to showboating butterfly almost without realizing it. Now that
your business has hit a rough patch, what do you do?
It is easy to understand why you wanted to take a little time to flit among
the flowers, golf balls, sailboats, or motorcycles. But understandable or not,
going walkabout for any extended period is always a mistake. Few, if any, of
your employees who have worked so hard to help your business succeed
will have a similar opportunity, and many will almost surely resent you. And
especially during hard times, youre courting disaster if you withhold your
attention at the same time key employees become disaffected.
If you no longer want to stay involved in the day-to-day management of
your successful business, you may be able to reduce your managerial role by
delegating, while concentrating on another important part of your business,
such as new product development. But if there really is no part of your
business that truly interests and engages you, your best bet is to sell it. That
way, you allow the business to move under committed new leadership thats
prepared to act quickly in tough times, while you have the freedom to do
other things. Later, if you want to recommit to being a business owner, youll
have the financial wherewithal to start fresh.
Keeping Your Priorities Straight

Ask retired businesspeople you admire to tell you what they learned about
keeping work, family, and personal time in perspective, and one thing
you probably will not hear is, If I had to do it all over again, I would
have worked lots more hours. Its far more likely that theyll advise you to
spend more of your lifes energy developing personal interests, protecting
your health, and spending time with family and friends. Of course, when a
business is hit by a large negative event, be it a hurricane, fire, or recession,
its often necessary to work longer hours, sometimes much longer hours, to
surmount the crisis. Fine, as long as you are working extra hours as part of a
sensible, goal-driven plan to get the business back on its feet.
Another way to think about how to fit your work into the type of life you
would like to lead is to make a list of the things you really care about. For
many people, it would look something like this:
stay close to our families
have time to share family responsibilities and spend happy time with our
spouses
spend time on personal interests (and develop new ones)
stay physically active and otherwise protect our health
spend time with friends, and
do work we enjoy and that pays well enough to adequately help support
our families.
Assuming your list is even a little like this, its crucial to notice that work
is only one item. And once you do, it should be easy to see why working
so many hours that you leave inadequate time for other priorities is a poor
way to lead your life over the long term. Of course, if work, work, and even
more work were the only way to ward off starvation or keep a roof over your
head, it might be your only choice. But in 21st-century Americaeven
in periods of sharp recessionthere are a huge number of entrepreneurial
opportunities. Dont become so obsessed trying to save a loss-making
enterprise that you fail to see that other opportunities abound.
How to Work Less and Make More

If you already work too many hours and dont have enough black ink on
your balance sheet to justify it, how can you cut back without risking
financial disaster? Reading this in the middle an economic meltdown, you
can be forgiven if you are thinking that it would be easier to find a unicorn
in the back yard. Not so. If, unlike most small business owners, you take the
time to truly understand the power of delegation, you can simultaneously
cut your hours, improve your productivity, and possibly even increase profits.
The Power of Delegation

At the Acme Sandblasting Co., the New York City company Ralphs
grandfather Frank Stuke Toors owned and ran during most of the first half
of the last century, Stuke personally knew how to do almost every job in the
business. He could make cost estimates for jobs, close a deal, machine a spare
part, splice a rope, write payroll checks, and even collect overdue bills. A few
days before he finally retired at 75, Stuke shed his three-piece suit, donned a
respirator and some work clothes, and climbed a scaffold to prove he could
still blast grime off a big expanse of granite.
Stuke was typical of the jack-of-all-trades American businessman whose
heyday lasted from the end of the Civil War through World War II. In a
far less bureaucratic, rule-bound, and technologically sophisticated world,
these people really could cost-efficiently do a great many tasks themselves.
Although it should be obvious in our hyperspecialized world this is no longer
true, huge numbers of entrepreneurs work horrendous hours, still trying to
run and control every aspect of their business. By doing so, they risk both
exhausting themselves and ruining their business.
Since at least 1776, when Adam Smith famously noted in The Wealth
of Nations that a group of people each specializing in one aspect of pin
production could make far more pins in a day than could the same number
of people each making whole pins, the principle of the division of labor
has been well established as a huge engine of increased productivity. Even
when times are tough and money is scarce, there is almost always a specialist
who can accomplish all but your most core entrepreneurial tasks better, and
ultimately cheaper, than you can. One good example involves preparing
the payroll, something that for a modest fee you probably can farm out to
a highly automated specialist, largely freeing you from the time-consuming
task Ralphs grandfather performed every other Friday afternoon.
Delegation by Trading
Sometimes, you can delegate without spending moneyinstead, you can
trade your surplus services or goods for those you need. For example, Margaret might help Jeremy with marketing in exchange for getting to share his
office and equipment. One-to-one barter arrangements can be complicated
to establish and sustain, but they come into vogue when cash is tight. If you
engage in a barter with someone, be sure both you and the other party benefit from the deal enough that youll both hang in over time, and write your
agreement down in the form of a simple contract.
Online bartering exchanges let you barter your goods or services for trade
credits, which you can then use to buy other goods or services. Bartering has
become a way to cover necessary expenses without using cash. For example,
a refrigeration specialist who is having trouble moving inventory sells a
display case to a florist for $3,000. The florist, who doesnt have the cash to
replace her faulty old display case, pays with trade credits she earned from
her bartering exchange. The refrigeration specialist gains $3,000 worth of
trade credits that he can then use to pay for services from other companies,
such as tax preparation or website design.
Many barter exchanges have spring up over the last few years. Three of
the better known ones are bizx.com (BizXchange), bbu.com (Better Barter
Unlimited), and greenapplebarter.com (Green Apple Barter).
Of course, it costs money to hire others to do routine tasks. But sensible

delegation frees up your time so you can concentrate on the high-value
aspects of your business including, especially, new product development and
marketing, which will produce much higher profits in the long run. If, for
even a moment, you doubt the wisdom of working with others, consider that
without the phone company, your Internet service provider, and package
delivery services, you would probably need to spend every waking hour just
trying to deliver essential messages. Fortunately, because these companies are
at our beck and call for a very reasonable cost, you can efficiently delegate
your communications tasks for a fraction of what it would cost to personally
deliver your messages.
Unfortunately, when it comes to many other business tasksfrom
bookkeeping to equipment maintenance and repair to graphic design
to human resources managementthe wisdom of delegation is less well
understood. Thats a big reason why so many Americans persist in wrongly
believing long hours and high profits go together. People who work overlong
hours often do so because they fail to grasp the crucial difference between
routine work and high-value work. But what if you have so little income
you cant possibly afford to delegate even the most time-consuming tasks to
others? If you need to handle every routine task yourself, what you have is a
bad job, not a good business.
Example: Jeff is an architect whose firm, J&D Associates, designs big buildings such
as schools and hospitals. Although he is a gifted draftsman, Jeffs real skill is selling
potential customers the idea that they are in great hands with J&D. But when the
recession hits and two of J&Ds big projects are put on hold, Jeff begins spending his
weekends and evenings in front of his computer anxiously helping do the design
work for several new bids.
Fortunately, his partner Dale, a more introverted type who enjoys running the
office side of the business, is smart enough to say Get the hell out of the office. Even
if we have to mortgage my house to hire another draftsperson, one thing is sureif
you dont focus all your energy on sales, we have no chance to survive.
What Do You Do Best?

Before you can delegate well, you need to understand the things you do
that contribute the most black ink to your bottom line. Only then can you
aggressively look for ways to get someone else to do the other bits. So your
first step is to identify the tasks you must really do yourself, as opposed to
those you handle either because no one else is available, you believe you
cant afford to hire help, or for some other less-than-convincing reason. For
example, if you are a website designer, and customers are attracted to your
small design company because of your imaginative graphics skills, it makes
sense for you to concentrate on the creative process. Even if money is tight,
pay someone else to renegotiate the lease or collect past due debtsthings
that are important, but not critical to your long-term success.
How to Delegate
Many small business owners readily agree they need to learn to delegate tasks
that someone else could do better. Nevertheless, they put it off. For example,
one man who puts in 12-hour days at his Internet-based sports memorabilia
business, whose wife had recently threatened him with divorce, came up to
Ralph after he made a luncheon presentation and said, I know I need to cut
back, but I just cant spare a dime to hire help right now. How do I start?
Heres what Ralph told him.
There are two keys to making a delegation plan work. First, you need to
find people who can do the necessary tasks better than you can. As long as
you understand the basic point that productivity increases and costs drop
when work is divided into a series of specialized tasks and assigned to people
with access to state-of-the-art technology, youll see that this shouldnt be
difficult. No question, if you are a perfectionist who has trouble letting go of
even the simplest tasks, learning to delegate can be a big hurdle. But perhaps
it will help get you started if you are able to concede that there really are
people in the world at least as competent and careful as you are. And this is
just as true if you are delegating routine office tasks or work that is crucial to
your businesss success, such as making important sales calls.
The second key to profiting from delegation is to put at least some of
the time you save into more profitable activities. For example, if finding
new clients for your financial planning service is the activity that will most
positively affect your bottom line and you have excellent rainmaking skills,
youll want to delegate as many routine tasks, such as bookkeeping, as
possible, and use the time you save to find customers. That way you win
three times: revenue goes up, the jobs you delegate get done better, and your
total work hours might even go down.
Example: Tina runs East Mountain, a rural yoga center that offers classes and retreats. Like many small business owners, Tina is stretched too thin, trying to deal with
the workaday details of running the business and at the same time spend enough
time with guests and teaching classes. But shes always thought she couldnt afford
to hire help. Finally, realizing that something has to give, Tina makes two lists: one
of the time-consuming tasks that wear her out without making much difference to
East Mountains success, and another of the tasks that attract clients. The routine
jobs include meal preparation, bookkeeping, and designing promotional materials.
The ones most important to customer satisfaction are teaching excellent, innovative
yoga classes and spreading the word about East Mountains unique programs.
Tinas next step is to find good people to do the non-core tasks at a reasonable
price. Because she is in a rural area with endemic unemployment, it proves relatively
cheap to find experienced independent contractors to take over the bookkeeping
and brochure design. But hiring someone for all the meal preparation turns out to
be prohibitively expensive. Instead, Tina decides to hire a cook to coordinate dinners
only, relying on workshop participants willing to trade work for a tuition reduction
to prepare East Mountains simple breakfast and lunch. To cover the additional cost,
Tina decides to devote one-third of the hours she saves to teaching two more classes
per week and the other two-thirds to marketing.
Tinas new marketing efforts include writing a blog and articles for interested media,
preparing press packages highlighting East Mountains new and noteworthy offerings,
and using email, regular mail, and the occasional phone call to stay in touch with
former students, yoga teachers, and others in the yoga network. As a result, business
increases by 40%. This lets Tina raise her rates by 25%, and East Mountain is more than
able to cover its additional labor costs. Best of all, Tina can now afford to hire a parttime, yoga-loving publicist to help with the routine aspects of her marketing program,
freeing Tina to take the occasional nap.
C H A P T E R
Work With Your Best Competitors

Treat Competitors With Respect........................................................................... 215
Getting Business From Competitors.................................................................... 217
Working for Your Competitors............................................................................... 218
Working With Your Competitors.......................................................................... 219
11
The trouble with the rat race is that even if you win, youre still a rat.
Lily Tomlin
our spouse, best friend, and nosiest brother-in-lawcombined

probably dont know your business as well as your closest competitors
do. Whether you import spices, silkscreen T-shirts, set tile, run a
gymnastics school, or paint nails, the entrepreneurs who vie with you for
business will closely track your successes and failures. Given that you often
compete with them for customers, deal with the same suppliers, and promote
your businesses in similar ways, you couldnt ignore them if you tried.
Competitors will also play a significant role in defining your business
reputation. If you set a high standard (the kids in your gymnastics classes
love what they do and frequently win regional competitions), you will
inevitably earn the respect of others in your field. They may even have to
change the way they operate to better compete with your successful example.
On the other hand, if you run a slipshod business, your competitors will
almost surely enjoy mocking your efforts.
To fully grasp how important earning the respect of your competitors can
be, talk to any established local businessperson in a competitive field, such
as a doctor, house painter, or copy shop owner. Ask the person to accurately
rank the businesss closest competitors by competence, integrity, cost,
timeliness, and other significant factors. Almost any businessperson will have
no trouble doing it blindfolded. In fact, peer-based evaluation systems tend
to be so accurate they are often used as a rating methodology by academics,
consumer groups, and others. For example, the editors of the book Americas
Top Doctors, by Castle Connolly Medical Ltd., start their rating process by
asking tens of thousands of American doctors a very simple question, To
which doctors would you send a member of your family? Nominees are
then separated by specialty and again rated, this time by teams of doctors in
each major geographical area.
Even if you agree that your competitors are likely to know a lot about your
business, you might still not see why you should embrace them, especially
when times are tough. Traditional small business wisdom, after all, teaches
that you should be wary of your rivals; you may even be coached to do
chapter 11 | work with your best competitors | 215
everything in your power to drive them out of business. Much of the rest of
this chapter explains not only why this scorched-earth approach is wrong,
but also why, when most businesses are struggling, a kinder, gentler approach
is far more likely to benefit your business and make your personal life more
pleasant. It could even save your business.
Treat Competitors With Respect

In large business, its at least theoretically possible for one corporation
to play hardball so successfully that it largely destroys its competitors.
From the Standard Oil Trust of the early 20th century, through mid-20th
century category-killers such as IBM, Sears, and General Motors, to 21stcentury Microsoft and Google, there are many examples of monopolybuilding corporate strategies that have produced huge profits, at least until
government antitrust regulators or rapidly changing technologies produced
new competitors.
The rules are different in the small business world. With lots of providers
in most fields, its rarely possible for one company to dominate. Leaving
aside the fact that to do so would mean that a small business would have to
grow large (something that most small entrepreneurs dont want anyway),
there are a variety of reasons why a local plumber, Chinese restaurant,
T-shirt printer, or tax preparer cant monopolize its market. One big reason
is location. Customers often choose these businesses precisely because they
are nearby. That makes it hard for a big centralized operator with one or two
megastores to completely take over as long as the small operators find ways
to stay close to their customers and provide specialized servicefor example,
a hardware store that opens two hours earlier than a big competitor or a
grocery store that stocks local foods.
Price competition is another big barrier, especially among service
businesses, which all have similar labor costs. For example, if ClipMe, a
local haircutting salon, suddenly slashes prices in half, chances are that every
other budget hair stylist in town will quickly realize that survival depends on
matching or beating ClipMes prices. The likely result will be that ClipMes
initial increase in volume will dry up, and its owner, learning that in most
instances no one wins a small service business price war, will put prices back
to their former levels. Similarly, if Ready T-Shirt announces that it plans
to move from a storefront to a large warehouse, install high-speed silkscreening equipment, and embark on an expensive advertising blitz, its local
competitors, Graphic Attack, T-Shirt Express, and T-Top are almost sure to
spot the danger early and move to counter it. They may lower prices even
before Ready T-Shirt makes its move, forcing Ready to similarly drop its
pricesand lose the profit margins necessary to justify an expansion loan.
Your Competitors, Your Friends

With some exceptions, most small business owners who succeed do so in significant part because they like what they do. The truly fortunate among them
create a vocation as well as a business. Examples come to mind easily: Ann,
who gives Ralphs softball-mad granddaughter pitching lessons; Antonio,
who owns and runs an excellent Italian deli; and Laurie, who owns a popular
yoga studio. Without exception, these men and women not only operate
profitable businesses, they enjoy and care about what they do. How can you
tell? Everything they doincluding getting to know their customersmakes
it easy to see how deeply each is committed to his or her business and the
people it serves.
So heres a key question you might never have answered: Assuming there
are good people like these in your chosen field, who better to be on good
terms with, especially in tough times when there may not be enough
business to support all local providers? After all, in our big, fast, anonymous
world, you are almost sure to have much in common with people who have
somehow been drawn to do the same work as you do, in the same place, and
at the same time. Except for the fact you see yourself scrapping with these
people for your daily bread, at least some might well turn out to be your
friends, if not soul mates.
So being seen by your small business competitors as running an efficient,

ambitious, and even highly competitive small business is positive, but being
regarded as an unfair competitor or business predator is almost sure to be
counterproductive. Its important to realize that in this context its often

what you say as much as what you do that influences how others regard you.
For instance, the president of one of Nolos competitors once bragged to a
prominent journalist, Nolo is history. The marketing director of another
competitor loudly proclaimed at an industry trade show, Well bury Nolo.
Although in both instances these executives may have been as guilty of
hyperbole as they were of a real plan to flatten Nolo, we have ever since been
extremely wary of both outfits.
Getting Business From Competitors

By their very size, small businesses are significantly limited in the amount
of work they can handle during any given period. A busy dentist, who on
average treats 80 people per week, has a very restricted ability to increase
these numbers. If too many patients call in too short a time, some will have
to be put off until later or, especially in the case of new patients, referred to
another dentist.
Of course, its not only a work overload that leads one small business
owner to refer customers to a competitor. In an age of increased
specialization, the exact specifications of the task often play a huge role
in a businesspersons decision to accept work or refer it to someone else.
For example, Bills Pruning may prefer to handle high-volume jobs on
hedges and small trees up to 30 feet, while sending more complicated and
potentially dangerous tall tree jobs to Way-Up Tree Care, which as its name
implies, specializes in caring for sky-huggers. True, the two companies
compete to trim medium-sized trees and, in periods where business is in
short supply, may further invade each others vertical space. But most often
they find mutual advantage in referring customers back and forth to fit each
others preferred customer profile.
Every busy small business at least occasionally refers customers to its
competitors, if for no other reason than to be able to meet the needs of its
established customers. True, referring an existing or potential customer to
a high-quality competitor means you run the risk that the person might
never come back. But making a good referral is less problematic than simply
turning the customer away. And its certainly better than recommending a
marginal businessthat is likely to leave the customer disappointed both by
the service received and the bad steer you provided.
Example: Millie, a regular customer of the Pour Vous catering company, recom
mends the company to Jeannie, who is helping plan her daughters wedding. When
Jeannie calls Pour Vous, its already fully booked for the date of the wedding, so Jeannie
asks Tad, Pour Vous owner, to recommend another caterer. A savvy businessperson,
Tad knows that Pour Vous has a lot riding on the success of his recommendation. If
Jeannie is satisfied by the caterer he suggests, Millie and probably others Jeannie talks
to will hear about it. But if the second caterer turns out to be a bust, Jeannie will let
Millie know, and at least some of the discredit is sure to rub off on Pour Vous. So Tad
recommends Good Hands, a business he considers thoroughly reliable.
A few days later he calls Deb, Good Hands owner, to be sure she realizes where
the referral came from. Fortunately, Good Hands lives up to its name, and a pleased
Jeannie tells Pour Vous longtime customer Millie how well the referral worked out.
As a result, Millie emails Tad her thanks and asks him to begin planning to cater the
big Christmas party.
A year later, when a recession hits and both businesses and individuals cut way
back on parties, many local caterers, including Pour Vous and Good Hands, feel
the economic pain. But based on mutual respect and the success of a number of
back-and-forth referrals like the one to Jeannie, Good Hands and Pour Vous decide
to combine some of their operations, including an office, trucks, and catering staff.
For now at least, the businesses will remain independently owned and operated, but
sharing costly overhead will allow each to survive until business picks up.
Working for Your Competitors

In many fields, its common for independent businesspeople to work at least
part time for one another. This is especially likely when a business is in the
start-up phase. A freshly minted CPA who opens her own tax preparation
service and has a short roster of clients might contact several established
accounting firms to see whether part-time work is available during the
tax season rush. Or a carpet installer might work two days a week for a
floor covering megastore, while devoting the other three to establishing an
independent carpet-laying service.
To make these sorts of relationships work typically takes patience,
discretion, and good judgment by everyone involved, but particularly on
the part of the new entrepreneur who, after all, is in the weaker bargaining
position. Until proven otherwise, the established businessperson is likely to
worry that the upstart might try to steal customers or clients. This explains
why the independent businessperson is often asked to handle only the bits
and pieces of jobs that require little or no customer contact.
But if, over time, the newbie is smart enough to demonstrate that he
or she is not a client poacher, the established businesss defensive attitude
will typically relax. The established business may even begin sending the
new business some of the very same accounts it was initially protective of.
Although this behaviorfirst paranoid, then generousmight strike you as
bizarre, in fact it makes sense. Thats because by the time the referral actually
takes place, the established business owner has had ample time to judge the
upstarts work and character. Assuming both prove solidand given the
new entrepreneurs clear determination to establish her own businessthe
established business owner may sensibly conclude that over the long term it
will be more beneficial to maintain cordial and cooperative relations than to
compete tooth and claw.
Working With Your Competitors

When a recession hits and business declines, many small businesses fail
because overhead costs gobble up such a high percentage of their income
that no profit is possible. For example, assume Jens financial planning
business loses one-third of its clients as recession-shocked customers pull out
of the stock market. The result is that when Jen subtracts her rent, salary for
her part-time receptionist, utilities, office cleaning expenses, and so on, she is
making less than $15 per hour. Then when two wealthy clients move all their
money to Treasuries and fire Jen, she is suddenly working for nothing at all.
Jen and other service providers, from caterers and barbers to car mechanics
and tax preparers, who face a similar business meltdown must either quickly
reduce overhead so as to be able to ride out the recession with reduced
incomeor close down.
One of the best ways to lower overhead expenses is to combine operations
with another high-quality business. For instance, if Jen started to share her
office and receptionist with another similar business, she would immediately
be back in the black, something that could give her enough time to increase
marketing efforts designed to reconnect with former clients and find new ones.
The keys to making an arrangement like this work are trust and respect.
For example, two small metal bending shops whose owners have known and
liked each other for years might be able to operate out of the same facility.
People who regard each other as unfair competitors never will.
Example: When the economic downturn hits, there are five nail salons in a city
neighborhood. Salon #1 is bigger, better financed, and more successful than the others. Salon #5 is a recent start-up that hasnt yet developed a loyal clientele. The other
three are more or less indistinguishable storefronts whose owners work hard for a
modest profit. After three months of declining business, Min, the owner of salon #2,
decides that if her business is to survive, she needs to do something fairly radical.
So she visits her distant cousin Lai, who owns salon #4, with a proposal. Since
Lais lease is up, why not combine operations in Mins salon? The businesses would
operate independently, with signage, invoices, and licenses making this clear. But by
operating out of one facility with shared rent and receptionist, and lending technicians back and forth, each business could make a small profit. It works. And that
small profit even grows somewhat when salons #3 and #5 close due to slow business
and high overhead.
resource
More on combining resources. The Sharing Solution, by Janelle Orsi and

Emily Doskow (Nolo), offers some great ideas for businesses interested in sharing
space and equipment with other businesses.
Of course its also possible to formally merge two or more businesses

into one legal entity. But unless one business can afford to buy the other,
this strategy is almost always problematic. Thats because in addition to
establishing a limited liability company or small corporation, assets must be
valued, and owners who are used to running their own show must agree on
how to jointly run the merged business. In our experience, this is difficult in
normal economic timesand almost impossible when businesses are under
economic pressure and their owners are stressed and short of funds.
C H A P T E R
How to Close Down Your Business

Create a Closing Team.................................................................................................. 226
Look at Your Contractual Obligations................................................................ 227
Deal With Your Landlord........................................................................................... 228
Collect Bills and Sell Off Inventory ...................................................................... 229
Collect Accounts Receivable.............................................................................. 229
Sell as Much Inventory as Possible.................................................................. 230
Notify and Pay Your Employees.............................................................................. 230
Liquidate the Businesss Assets................................................................................ 231
Identify the Assets.................................................................................................... 231
Deal Separately With Secured and Leased Assets.................................. 232
Find Buyers for Assets You Own...................................................................... 232
Get Prepaid Insurance Premiums Refunded.............................................. 233
Notify Creditors and Customers............................................................................ 234
Secured Creditors..................................................................................................... 234
Lenders........................................................................................................................... 234
Service Providers....................................................................................................... 235
Insurance Carriers..................................................................................................... 235
Suppliers and Other Unsecured Creditors................................................. 236
Customers..................................................................................................................... 238
Pay Your Debts................................................................................................................. 239
Negotiating a Deal.................................................................................................... 239
Prioritizing Your Debts.......................................................................................... 240
Pay Your Business Taxes ............................................................................................. 244
Payroll Taxes and Sales Tax.................................................................................. 244
12
Final Income Tax Returns..................................................................................... 245

For Employers............................................................................................................. 246
Taxpayer IDs................................................................................................................ 247
Dissolve Your Corporation or LLC......................................................................... 248
Vote to Dissolve......................................................................................................... 248
File the Proper Forms............................................................................................. 248
Get a Tax Clearance If Necessary..................................................................... 249
Dissolve Your Partnership.......................................................................................... 250
Cancel Permits, Licenses, and Fictitious Business Names......................... 251
Distribute Any Remaining Assets to Owners.................................................. 252
chapter 12 | how to close down your business | 225
When the horse dies, get off.

Kinky Friedman
specially if you cant make required tax payments or are slipping

behind on your house or car payments, chances are you are past
the point where trimming expenses or adopting a clever marketing
campaign will salvage your business. If you conclude that theres little or no
chance of getting back in the black anytime soon, it may be time to cease
operations, pay off as many debts as possible, and close down in an orderly
fashion, before your creditors force you to do it.
It can take months to wind up a business properly. You need to come up
with a plan that will offer the most protection possible to your personal
assets, your credit, and your reputation in the communityand to those
of your spouse, cosigners, and lenders. If you simply close down and let
the pieces fall where they may, you could end up haunted by unnecessary
headaches, lawsuits, and debts.
A proper shut-down process will give your creditors and customers clear
notice of your businesss closure, an important step toward limiting the
amount of time you may be subjected to lawsuits. Take your time even
announcing your decision to close. The order in which you notify people of
your intention to quit business can greatly affect your ability to make the
most of your last weeks or months. The sequence of the closing steps in this
chapter is not fixed, and many of them will overlaparrange the steps in a
way that makes sense for your business. For instance, if your restaurant needs
goods from your main supplier until the end, wait until the last week to let it
know of your closure.
This chapter gives an overview of the closing-down process. But every
business is different. Its almost always a good idea to get individualized
advice from a lawyer, accountant, or tax expert along the way.
cross-reference
Should you file for bankruptcy? The majority of small business owners
can wind up their business affairs without filing for bankruptcy. But if you have
many creditors and a heavy debt load, bankruptcy may be your best, or only, option.
Chapter 13 discusses bankruptcy and other ways to deal with significant debt. If you
do file for bankruptcy, it will be your first step in the closing process; the rest of the
steps discussed below will follow, shaped by the bankruptcy process.
Closing a Business: What Youll Need to Do

Create a closing team.
Look at your contractual obligations.
Deal with your landlord.
Collect bills and sell off inventory.
Notify and pay your employees.
Liquidate all business assets in an orderly fashion.
Notify customers and creditors.
Prioritize your debts and pay them to the extent possible.
Pay your taxes and file final tax returns.
If your business is an LLC, corporation, or partnership, dissolve your legal
entity.
Cancel permits, licenses, and fictitious business names.
After debts are paid, distribute any assets remaining to yourself and other
owners.
Create a Closing Team

It will make the closing process smoother if you can get advice from people
whove been through this before, especially if yours is a complicated situation
with a long list of creditors. Its possible that your existing advisory board
will have the requisite experience, but if not, try to add someone who does.
Youll probably also need to hire some experts. A business attorney
whos been through business closings can be a huge help in dealing with
recalcitrant landlords and other creditors. In addition, consulting an attorney
can alert you to any potential liabilities you havent considered or any steps
you might omit. Even more important may be seeking the advice of an
accountant or tax expert, who can advise you on the tax consequences of
selling assets, the various tax forms youll need to file, and ways to take
advantage of your business losses for tax purposes.
Look at Your Contractual Obligations

An important part of ending any business consists of examining all of
your contractual commitments, with the goal of either fulfilling them or
negotiating a termination. That way your business ends cleanly, with no
danger of being sued for unfulfilled contracts.
If you can complete your contractual commitments, do itits the best way
to avoid future hassles. For example, a furniture reupholsterer might sensibly
plan to complete all the jobs in his shop, while not taking any new ones.
If you have signed a long-term contract for ongoing performance of work or
delivery of goods that you simply cant complete, check first to see whether the
contract has a cancellation provision. If its reasonable (for instance, you have
to pay an early termination fee, or liquidated damages, of $300 to cancel a
$15,000 contract), exercise it. If not, call the other party, explain that you are
going out of business, and ask whether they would like to end the contract.
This will often be possible, especially if you can suggest another quality
provider willing to complete the work for the same price. If the other party
asks for a payment in exchange for a written termination agreement, dont
pay much. Instead, consider having a lawyer call the other party to negotiate.
When you do arrive at an agreement to end the contract, get it in writing.
Example: Talia and Aaron run Blue Egg Web Design, which designs and builds
websites for local small businesses. In January, Blue Egg signs a contract to build a
small e-commerce website for a local sporting goods store. The contract states that
Blue Egg will deliver a completed website by August for $15,000. In February, the
economy takes a turn for the worse, and Blue Eggs main client goes out of business,
meaning that Blue Egg loses a maintenance contract that paid $3,000 per month.
Without that business, Blue Egg will have trouble paying the rent.
Aaron and Talia, now expecting a baby, decide that Aaron has to get a stable,
well-paying job while Talia is off work. They decide to close down Blue Egg and tell
the sporting goods store they wont be able to complete the contract. Their contract
calls for a refund of any payments made to Blue Egg for work not performed but
doesnt say anything about what happens if Blue Egg doesnt complete the contract.
Fortunately, Aaron and Talia know the principals of an excellent Web design firm,
Fluid Web, and recommend them to the sporting goods store. Fluid Web signs a contract with the sporting goods store, which then releases Blue Egg from the contract
after Blue Egg returns the sporting good stores first payment.
Deal With Your Landlord

If youve been renting space, thats probably a big expense for your business
one you want to take care of. Your options depend on whether youre a
month-to-month tenant or have a lease for a certain period of time.
If you have been renting month to month, give your landlord written
notice to that youre terminating your agreement. Youll probably have to
give 30 days notice, but some commercial leases require 60 to 90 days.
Check your agreement.
If you have a long-term lease, you will be liable for any rent payments for
the remainder of the lease. Depending on your states law, however, your
landlord may have a legal duty to reduce (mitigate) his losses by looking for
a new tenant. Thats something you might be able to help with, to lessen
the chance that youll be liable for paying those remaining months. If the
landlord can rerent the place for the same amount (or more) than you pay,
you are off the hook for the rent (but the landlord can charge you for the
time the space was vacant, plus costs of rerenting the place). If the landlord
is not able to rerent the place with reasonable effort, however, you will be on
the hook for the rent for the remainder of the lease.
You might be able to negotiate a lease termination in exchange for paying
several months rent up-front. Your landlord will probably be happy to arrive
at a negotiated solution rather than having to chase you down for the money
or risk that youll file for bankruptcy.
If you paid a security deposit, ask your landlord to inspect the premises
with you well before you vacate, so that you can deal with all issues and
possible misunderstandings that could keep you from getting your whole
deposit back promptly. Especially if you have rented premises for some time,
you shouldnt be charged for normal wear and tearfor example, if, after
several years, the walls need repainting or the carpet should be replaced.
tip
Prepare an inspection checklist. It can be a good idea to prepare a onepage list of the premises main featureswalls, floors, windows, and so on. As part of
your walk-through with the landlord, ask the landlord to check off all features that
are in good shape before signing the form. Nolo offers a downloadable form, the
Landlord-Tenant Checklist, available on nolo.com.
resource
More information on commercial leases. See Negotiate the Best Lease

for Your Business, by Janet Portman and Fred Steingold (Nolo).
Collect Bills and Sell Off Inventory

Now is the time to try to collect money owed to you and to get rid of all
remaining inventory. Here are some tactics.
Collect Accounts Receivable

Before you send out a general notification that youre going out of business,
do your best to collect money thats owed to you. Dont waitits much
harder, and sometimes impossible, to collect accounts receivable after youve
ceased operations. Companies and customerswho may themselves be
strapped for cashwho owe you money will have far less incentive to pay
once they find out youre no longer going to be providing them with goods
and services. (For tips on how to collect receivables, including offering
discounts for prompt payments, see Chapter 3.)
Sell as Much Inventory as Possible

If your business has excess inventory, its time for a big sale. If you arent yet
ready to tell employees and suppliers about your plan to close, you may want
to start with a Blow-Out Sale and announce you are going out of business
only during your last week or two, further discounting prices then.
Especially if you are a retailer with deep roots in your community, a
going-out-of-business sale may be a big event, a chance to recoup some of
the money youve lost in recent months. To do this, in the early days of the
sale, consider restocking just the popular items that you know you can sell at
modest but still profitable markups.
If, after youve publicly announced your closing and had your goingout-of-business sale, you still have more inventory than you can possibly
sell, consider using websites like eBay and craigslist to sell the excess. A last
resort is to sell surplus inventory by the pallet or truckload at a site such as
liquidation.com, or to consider contacting a liquidator or discount outlet,
which will often buy surplus inventory in bulk for pennies on the dollar.
Notify and Pay Your Employees

If your business had employees, youve probably had to lay off some of them
already. If not, nows the time to lay off all but the people youll need for the
next few weeks or months to help wind down the business. In particular,
it is helpful if you can keep employees who have worked in the finance or
bookkeeping area to help wind up the businessespecially if they may know
more about the businesss finances and accounting procedures than you do.
You couldand some employers dosimply wait until the last day
of operations to notify the employees of the businesss closing, to avoid a
premature exodus. (Obviously, this isnt an option if youre a retail business
and have been having a going-out-of-business sale.) But its usually unwise,
especially when it will take months to close down your business and youll
need to take a number of steps that will surely alert employees. Especially
if you plan to make some layoffs before others, its usually best to fess up
to whats going on sooner, when you need to make the first layoffs. Then
consider incentivizing the essential people to stay, by committing to pay

them a small bonus for hanging in there until the last day.
For more about laying off employeesincluding legal rules about advance
notice, final paychecks, and some thoughts about severance paysee
Chapter 9.
Liquidate the Businesss Assets

Your next step is to turn your remaining business assets, such as office
equipment, tools, and furniture, into cash to pay your creditorsor in a
best-case scenario, to put in your pocket.
Identify the Assets

Make a list of the physical property your business owns, as well as any money
owed to the business in the form of rent, security deposits, and unpaid bills
you expect to collect. Your list should include:
business equipment, such as computers, phones, cash registers, and credit
card machines
office furniture, art, and supplies
vehicles
real estate
security deposits with landlords, utilities, or taxing agencies, and
prepaid insurance premiums you can get refunded to you.
For your records, write down a description of each item or category of
property, the condition of the property, and who owns itthat is, what
money was used to purchase the propertypersonal or business funds. In
addition, youll want to list how you tried to sell it (save copies of ads or
Web listings) and the amount you received. This list not only will help you
conduct your liquidation process, but also, keeping good records of your
property and what happens to it will protect you in case a creditor later
questions your liquidation of assets or in case you have to file for bankruptcy.
You will also need this information for your tax returns.
In addition to tangible property, you may be able to sell intangible

property that your business owns, such as:
a commercial lease at below-market rent or at a super location (but youll
probably need the permission of your landlord)
contracts with suppliers at below-market rates
contracts with customers at profitable rates (you may need your
customers permission)
works in progress that could have some value
your customer list and your company name (essentially, the goodwill
your company has built up)
intellectual property such as copyrights, patents, and trademarks, and
remaining accounts receivable.
Deal Separately With Secured and Leased Assets

Set aside assets that you have pledged as collateral for a debt or loan.
You cannot sell them without the permission of the creditor; selling loan
collateral is fraudulent and may be punishable as a crime. Youll need to
speak to the creditor about how to handle the collateralwhether you will
give it back as is or sell it with the creditors permission, giving the proceeds
to the creditor.
Likewise, leased property belongs to the lessor, not to you. Your main
options are to return the property or assign the lease contract to someone
else (the lessor will usually have the right to refuse an assignment, however).
For more information on settling the amount you owe on secured or leased
assets, see Pay Your Debts, below.
Find Buyers for Assets You Own

Next youll want to find buyers for property that is fully paid for and that
you have not pledged as collateral for another loan. Use your industry
contacts, including appropriate suppliers and competitors. Competitors
may also be interested in buying your intellectual property (trademarks,
copyrights, and patents) and any works in progress, as well as your customer
lists and company name or product names.
You might find buyers for fixtures, furniture, and equipment by listing
them on websites like eBay, craigslist, or bid4assets.com. Also search
for websites that specialize in auctions for your industry; there are sites
that specialize in restaurant equipment, industrial machinery, high-tech
equipment, construction equipment, and so on. Contacting a business
broker or professional liquidator can be a good idea if you have numerous
assets with significant value.
Again, dont forget that while accounts receivable are valuable now, they
will be much less valuable after you close. So make a high-energy effort to
collect them. Or, as discussed in Chapter 3, transfer high-quality accounts
receivable to a factor, or debt buyer, who, for a fee, will pay you a certain
percentage of the debt up front and the rest when they collect it.
tip
Dont cheat your creditors. Do what you can to get a good price
for your business assetsnot just for yourself, but because you have a legal
responsibility to your creditors to try to get fair market value for your assets. In
particular, the directors and officers of an insolvent corporation or LLC (one whose
assets are worth less than its liabilities) have a statutory duty to minimize losses
to the companys creditors. But no matter how your business is organized, you
commit fraud if you give away or sell business assets at below market rates or put
your interests ahead of those of creditors. In other words, forget about selling assets
cheaply and pocketing the cash or giving assets to friends or family.
Get Prepaid Insurance Premiums Refunded

Request refunds on your workers compensation premiums and liability insurance premiums, if your policies terms allow it. Because businesses pay workers
comp premiums in advance based on payroll estimates, workers comp carriers
are accustomed to adjusting accounts each year to return overpaid money, and
you should get a refund without a problem. With liability insurance, whether
youll get a refund depends on the terms of your policy.
Notify Creditors and Customers

You need to notify the people and businesses youve relied onbanks,
insurers, big customers, and so onthat youre closing. In some instances
this is a legal requirement; in others, you are required to by contract, and in
all, its of matter of good business practice.
Secured Creditors
If you owe a debt thats secured by collateral, such as a vehicle or equipment,
let the creditor know youll no longer be needing the item. If you used the
loan to buy the collateral, find out how you can return it. For example, if
you were still making payments on a loan for your company car, you could
voluntarily surrender the vehicle to the lender or you could sell the vehicle
and give the lender the proceeds. If you are going to try to sell a vehicle,
check with the lender to find out its procedures to get the lien released on
your vehiclemost lenders wont release the vehicle without money in
hand, so this may require both you and the buyer going to the lender to pay
off the loan.
Even after you turn over a secured asset or the proceeds from selling it,
there may be a deficiency, meaning that you owe the difference between
what the property was sold for and what you owed on it. Before you turn
over the property or sales proceeds, try to negotiate with the creditor to give
you a signed release that you will no longer owe money or the debt. Selling
the property rather than voluntarily surrendering it may decrease your
chance of owing a deficiency on the loan.
Lenders
If you have a bank loan or line of credit, your bank may call the entire loan
in immediately, or will at least want to know how you plan on paying it
off. Your loan agreement may give your bank the right to deduct from your
business bank account any amount you owe at any timethis is called a
right to setoff. So if your business account is at the same bank (which most
loan agreements require), dont be surprised to find money taken out of it
soon after your bank learns your business will be closing. If there are debts
youd rather pay before paying off your loan, such as payroll taxes or other
personally guaranteed debts, be sure to do it before notifying the bank of
your impending closure.
If the bank has a security interest in some of your business assets or in your
accounts receivable, it may grab this collateral. If not, it might at least want
to examine it (and your financial statements) to be sure its both physically
secure and of sufficient value to cover your debt, should you not be able to
repay it.
Service Providers
Service providers, such as utilities and payroll preparers, will want to know
the final day youll require services and how to collect their final bill. Provide
this information at least a few days before you cease operations so as not to
be charged for extra days. But if you signed any long-term contracts with
service providers, such as credit card processors and payroll providers, try to
give as much notice of the cancellation as possible to try to avoid any early
termination fees. Also, if you have made any deposits with utility companies,
find out how to get them back.
Insurance Carriers
Before you tell your liability insurance carrier to cancel your policy because
you are going out of business, read through the terms of your policy to
determine whether it covers past acts or whether youll need to keep it in
force for a year or two in case you are sued. If there is a pending legal threat
or even a whisper that you might be sued, speak to the insurance company
about ithiding issues when winding up coverage can cause your coverage
to fail if you are subsequently sued.
If you find you dont need to keep your liability policy active, the best
way to cancel it is to send a written request, by certified mail, return receipt
requested. If you think youre entitled to a refund on your premium, ask that
it be sent to you and give an address where you can be reached after your
business closes.
Cancel other types of policies such as car insurance and workers compensation if you havent already.
Suppliers and Other Unsecured Creditors

Suppliers who provide you with inventory or materials will want to know
when the last delivery should be made, whether youre returning any goods,
and when and how theyll get paid for goods theyve supplied. If you want
to continue to receive supplies until you close your doors, wait until the last
week to let suppliers know of your impending closure. Obviously, dont be
ordering anything unless you know you can pay for it!
When you decide its time to let your suppliers and unsecured creditors
know of your closure, send them a certified letter saying that you will be
closing your business and are requesting claims for paymentin other
words, final bills.
Special State Rules

If your business is in retail, wholesale, or manufacturing, in California, Virginia,
Georgia, Maryland, Wisconsin, or DC, you need to also comply with your
states bulk sales law. (This law applies to corporations, LLCs, partnerships,
and sole proprietors alike.) This law requires you to notify your creditors a
specific number of days before you close your business, and in some states, to
publish a notice of your impending closure in a local newspaper. (In California, this law also applies to restaurants.) Your local newspaper or recorders
office should be able to help you with the bulk sales notice. In most of these
states, sending a certified letter to all known creditors and publishing the notice in a newspaper in order to notify unknown creditors, as discussed above,
will take care of the bulk sales requirement as well.

Your letter should include the deadline for submitting claims, a statement
that claims will be barred if not received by the deadline, a list of the
information that the creditor should send to file a claim, and the mailing
address to which the creditor must send the claim. You must allow 90 to 180
days (120 days in the vast majority of states) for creditors to submit claims,
depending on your states corporate or LLC statute. To find out the rule in
your state, go to www.nolo.com/legal-research and choose your state. Then

search for known claims corporation or known claim limited liability
company. If a creditor does not respond within the time period, your
corporation or LLC can generally disregard that creditors claim.
Sample Letter to Creditor

Dear Mr. Lee:
We are saddened to inform you that Torchlight Productions, LLC, will be closing its doors on September 20. We are in the process of liquidating our assets
and will be paying off our debts to the fullest extent possible. Unfortunately,
our insolvency will prevent us from paying our debts in full. Please send
any claim for payment, including details on goods or services rendered and
address for payment, to the above address within 120 days. Claims received
after this date may be barred by law.
We have been proud to provide quality services over the years and regret
that economic realities force us to close. Thank you for your attention to this
difficult matter.
Very truly yours,
Emme Lorenz
CEO, Torchlight Productions, LLC
If a particular creditor does not receive notice that your LLC or

corporation is closing down, that creditors claim may survive the closing.
Because you may not be aware of all potential creditors, to limit the time
period in which a creditor can file claims, you should publish a notice in
your local newspaper (and on your website if you have one), that your
business is closing down. The notice should state that a claim will be barred
unless a proceeding to enforce the claim is started within a certain time
period and include a list of the information that the creditor should send
to file a claim and the mailing address to which these unknown creditors
may send claims. In most states, the time period for unknown creditors to
make a claim is two years, but in some states it is five. To find out the rule in
your state, go to www.nolo.com/legal-research and choose your state. Then
search for unknown claims corporation or unknown claim limited liability
company. If you are concerned about cutting off significant claims that
might be out there, run your letter and notice past a local business lawyer
before sending it, to make sure you fulfill all of your states requirements.
Sole Proprietorships and Partnerships

Lawsuits by creditors against sole proprietorships or partnerships must be
filed within the time set out by your states statute of limitations (usually
three to ten years) or be barred. To find out the statute of limitations in your
state, visit www.nolo.com and search for statute of limitations, which will
pull up a state-by-state table.
Even though sole proprietors and partners cant limit the time period in
which claims must be made, you may want to send a short letter to known
creditors, as well as publish a simple notice for unknown creditors, stating
that your business is closing. This should help flush out creditors, which is
something you might want to do before your partners disappear. If youd
rather not remind customers to send a bill or make a claim, as is true for
many sole proprietors, dont (but see Special State Rules, above, if you live
in California, Virginia, Georgia, Maryland, Wisconsin, or DC).
Customers
Give your customers notice that you are going out of business and as
mentioned above, fill any last orders, complete any final projects, and fulfill
any contractual obligations. If you cant fulfill an obligation, let the customer
know and return any deposits or payments for goods not delivered or
services not rendered.
If your business is big enough, you can send out a press release to newspapers to notify your customers that your business is closing. You can cite
economic downturn, rising costs, or competitive realities as the explanation
for closing, or just that you are moving on to new ventures. If your business
is on the small end, when you publish your statement in a local newspaper
that you are closing your business (see above), also consider thanking your
customers for their support.
Pay Your Debts

You probably have a good-sized pile of debtsto landlords, suppliers,
utilities, service providers, and possibly a bank or private lender. After you
notify these creditors of your upcoming closure, youll want to make plans to
either pay these bills in full, settle them for less than full payment, or consider
filing for bankruptcy. The fourth possible approachignoring your debts and
hoping your creditors will ignore youmight be tempting, but dont go that
route. It will almost surely result in your spending the next couple of years
hounded by collection agencies, repo people, lawyers, and lawsuits.
tip
If you cant pay all of your debts, consider bankruptcy. Bankruptcy

lets you wipe out debts you have no hope of payingand if your business owes a
pile of debts it cant pay, it could offer the fresh start you need. To decide whether
bankruptcy or a bankruptcy-like alternative such as an assignment for the benefit of
creditors is your best course of action, see Chapter 13.
Negotiating a Deal
If you cant pay all your creditors in full, the question becomes: How little
will they settle for? As you might guess, it depends on the type of creditor,
the legal details of the debt, and the attitude of the creditor. For example, if
your business is an LLC or corporation without any personally guaranteed
debts, a creditor will know that it doesnt have the option of collecting from
you personally, so it may be more willing to accept a small portion of what
your business owes as complete payment. But if you owe a debt personally,
or worse, a friend or relative cosigned for it, the creditor has much more
leverage.
But no matter what the legal status of your debts, in our experience, if you
can pay 30% to 70% cash on the barrelhead, its worth trying to settle them.
Many creditors, knowing that they will have a hard time collecting the debt
once you are out of business, may agree to settle your debt for 50, 60, or 70
cents on the dollaror even less if you hire a lawyer to negotiate for you.
Keep in mind that it wont help you much to settle one or two small debts
for a reasonable amount while not being able to settle larger ones. So it
might make sense to tell your creditors that your offers are contingent upon
all of your creditors agreeing to settle their debts.
caution
Debt forgiveness can be taxed as income. If creditors agree to settle

your debts for less than the amount you owe, the IRS and state tax agencies may
view this debt forgiveness as taxable income. (In other words, you dont have to pay
the money, so its like getting the same amount as income.) This could result in your
actually having positive taxable income, rather than an operating loss, in the year you
close. Owners of corporations and LLCs wont be personally liable to pay these taxes,
but sole proprietors and partners should talk to a tax adviser to see whether this
income can be applied to previous years net operating losses or otherwise wiped out.
Prioritizing Your Debts

First, if youve pledged an asset that you own personally as collateral, if you
want to keep it, youll want to pay that debt first. You will then want to pay:
any wages and benefits owed to employees, and
loans for which you are personally liable (in particular, court judgments).
If there is money left over, then you can pay suppliers, credit card companies, lease deficiencies, and bills for garden-variety business expensesadvertising, travel and entertainment charges, dues and subscriptions, and repairs
and maintenance. Lets look at how you might handle each type of creditor.
Equipment Lessors
Make arrangements to return leased equipment such as copiers, machinery,
and vehicles. If you return equipment before your lease term is up, you will
no doubt be liable for either the remainder of the payments in the lease term
or for an early return penalty. Try to negotiate a better deal while youve
still got the equipment. For example, you might offer to return two forklifts
and a pallet jack to the leasing company along with two months additional
payments, in exchange for a complete release of further obligations.
Again, if lots of money is at stake and the lessor is not willing to cooperate,
having a lawyer call, possibly with the suggestion that you may file for
bankruptcy, can be a huge help. No lessor wants to cope with bankruptcy
court and the fact that their property may deteriorate in the meantime.
Secured Creditors
If you werent able to negotiate with a secured creditor to release you from
owing a deficiency after you turned over the secured asset or the proceeds
from selling it (see Notify Creditors and Customers, above), the deficiency
is now like any other unsecured debt (see Unsecured Creditors, just below).
Unsecured Creditors
After you notify your unsecured creditors that you are going out of business
(see Notify Creditors and Customers, above), they will start calling
you, demanding to be paid. Often its best simply to explain that you are
preparing as fair a settlement offer as you can and will be in touch. Even if
it takes a few weeks to be sure how much you owe and how much cash you
have to divide among creditors, its worth the time to get it right.
When you are ready to discuss settlements, if you have just a few creditors,
you can explain your terms personally or by phone. Explain that your
business doesnt have the money to pay the creditor in full but that you can
offer a partial payment to settle the debt. If the creditors accept, great. Get
each creditor to sign a release for the entire amount in exchange for your
partial payment, and youre done. The release is criticalwithout it, you
have no proof that the debt has been satisfied. Creditors could sue you or the
business, which would be expensive and time-consuming to defend, even if
you end up not being liable for the debt.
If you have more than a few creditors, offering a settlement in writing is
often your best course of action. In your letters, spell out what you can pay
as settlement of the debt in full, that youre offering each creditor the same
percentage, and that youll need all creditors to agree to sign a settlement
releasing the debt before you can make the payments.
Sample Settlement Offer to Creditor

Dear Mr. Lee:
As you know, Torchlight Productions, LLC, is insolvent and closing its doors.
We regret that we are not able to pay your bill in full, but in an attempt to be
fair we are offering to pay all of our creditors 60% of their submitted claims.
This means we can pay you $9,000 of the $15,000 we owe you.
If you are willing to accept this amount as payment in full, please sign
the included release. This offer is contingent on all creditors accepting a
settlement of 60% of the amount owed. Thank you for your attention to this
difficult matter.
Very truly yours,
Emme Lorenz
CEO, Torchlight Productions, LLC
If some creditors want to negotiate for substantially more, and others

are threateningly uncooperative, its time to involve a lawyer. This will
immediately raise the seriousness of the negotiations, because the lawyer
will be able to convincingly let the creditors know that you may file for
bankruptcy if settlements arent reached. Creditors know that the costs and
delays inherent in bankruptcy would mean they will almost surely receive
less than you are offering and they wouldnt get the money for many months,
so most will accept your settlement.
A lawyer can also advise you on whether or not it makes sense to fully pay
a creditor who refuses to accept less. Likewise, if a creditor makes a request
for payment that you dispute, a business attorney can tell you what your
next steps should be.
If, after making settlements with your creditors, you have any cash or assets
left, you should set aside some money for potential future claims. Invariably,
after you close up shop, a creditor will come out of the woodwork. Do
your best to estimate any unpaid bills that might later surface or any
potential lawsuits that could be brought against your business. Some experts
recommend you set aside 1% of your annual revenue to provide for surprise
creditors, but a reasonable amount depends on the hazards of your particular
business. You can keep the money in your regular business bank account, a
savings account, or, if the amount is significant, an escrow account. Some
states actually require you to deposit the money into a trust account with the
state controller or commissioner of revenue.
If your business is an LLC or corporation, keep the money set aside for
two to five years, depending on your states statute. (See Notify Creditors
and Customers, above.) This is important because, if a corporation or LLC
distributes its assets to its owners after it dissolves and then a creditor appears
within the two- to five-year period, the creditor can sue the business owners
personally, to the extent of the assets distributed. If your business is a sole
proprietorship or partnership, you may want to keep a contingency fund for
three to ten years, depending on your states statutes of limitation.
Example: QuickClean Cleaners, Inc., closes its door after months of competing
with three different dry cleaners within a three-block radius in downtown Stamford, Connecticut. After laying off employees, paying suppliers and creditors, and
dissolving their corporation, the owners want to tie up loose ends. They know that
customers take a while to make claims for lost or damaged apparel and that QuickClean usually has to pay out about $6,000 per year in claims not covered by insurance. Wanting closure but not wanting to risk later personal lawsuits, QuickClean
sets aside $6,000 in a savings account, distributes the remaining assets to its three
shareholders, and dissolves the corporation. If there is money left over in the account
in two to five years, they can split the money among themselves.
see an expert
Get help if you expect big creditors claims. If you think significant
claims could surface after you close your business, see a lawyer. Your state may
impose specific requirements that youll need to know about. Nolos website features
a free lawyer directory with comprehensive profiles of business attorneys in your
area; to find one, go to http://lawyers.nolo.com.
Pay Your Business Taxes

Your tax obligations are your most important debts because governments
are given extraordinary legal powers to collect them. (See Chapter 4.) In
addition, you are personally liable for some tax debts, even if your business
is a corporation or LLC. So before you pay off even one trade creditor, make
sure youve met of all your tax obligations, as discussed below.
Payroll Taxes and Sales Tax

First and most important, if you have employees, make your final payroll tax
deposits and file all of your final employment tax paperwork on time. First
priority should go to federal taxes withheld from employees paychecks
income tax withholding and Social Security and Medicare taxes. Next in line
are state income withholding taxes and sales taxes that you have collected.
(When you file the final sales tax forms, be sure to write FINAL across the
top of the return.) With these serious tax obligations behind you, its time to
take care of the employers share of the Social Security and Medicare taxes.
tip
Negotiate with the IRS. If you owe the IRS more than you can pay,
you might be able to pay less than you owe through an offer in compromise or
installment payments. To start the offer in compromise process, fill out IRS Form
656, Offer in Compromise. To obtain an installment payment plan with the IRS,
use Form 433A, Collection Information Statement. For more information on the
advantages and disadvantages of each, as well as how to calculate the amount you
should offer to pay, see Stand Up to the IRS, by Frederick W. Daily (Nolo).
Final Income Tax Returns

There are a number of IRS requirements you need to take care of when
ceasing business operations; similar state requirements apply as well. Because
tax requirements can get complicated in a hurry, consider enlisting the help
of a tax professional, especially if your business makes over $50,000 per year
or has several owners.
Sole proprietors. As usual, report your income and expenses, including
information on gains or losses, on Schedule C of your Form 1040. File your
return by April 15 the year after you close your business. There is no final
return box to check on Schedule C.
Partnerships and LLCs. File Form 1065, U.S. Partnership Return of Income,
and check the box that says this is your final return. Also report any profits
or losses allocated to each partner for the year by filing Form 1065 (Schedule
K-1), Partners Share of Income, Credits, Deductions, etc. File both forms by
April 15 the year after your partnership closes.
Corporations. File Form 1120, U.S. Corporation Income Tax Return, and
check the box that this is your final return. Also report any income allocated
to each shareholder by filing Form 1120S (Schedule K-1), Shareholders Share
of Income, Credits, Deductions, etc. Shareholders will also need to report a
personal capital gain or loss when they return their shares to the corporation.
Finally, corporations also need to file IRS Form 966, Corporate Dissolution
or Liquidation, to report their dissolution. You need to file these forms two
months and 15 days after your tax year endsthat is, two months and 15
days after you close your business.
Reporting asset sales. You will experience a taxable gain or loss when
you liquidate your businesss assets. Youll need to file Form 4797, Sales of
Business Property, to calculate your gain or loss. After calculating the gain or
loss on this form, you record the total from this form on your personal or
corporate income tax return, depending on your form of business. (For more
information, see IRS Publication 544, Sales and Other Dispositions of Assets.)
For Employers
If you had employees or independent contractors working for you, youll also
need to take the following stepseven if you were the sole employee of your
corporation.
Employer returns. File your final employers federal tax return, IRS Form
941 or 944, and your final federal unemployment tax return, IRS Form
940 or 940EZ, by their regular due dates. Mark the returns as final and
include the proper amount of taxes. You must attach to both of these forms
a statement showing the name of the person who will be storing the payroll
records for the business and the address where the records will be kept. Also,
dont forget to file your states version of the wage and withholding report.
Withholding statements. Issue final wage and withholding information
to your employees on Form W-2, Wage and Tax Statement, by January 31 of
the year after your business closes. Report the information from the W-2s to
the IRS using Form W-3, Transmittal of Income and Tax Statements. (If you
were in the restaurant business, you must also file information on tip income
with Form 8027, Employers Annual Information Return of Tip Income and
Allocated Tips.)
Contractor statements. Issue payment information to freelancers and
contractors using Form 1099-MISC, Miscellaneous Income. Report the
information from the 1099s to the IRS using Form 1096, Annual Summary
and Transmittal of U.S. Information Returns, (unless you file the 1099-MISC
forms electronically).
Pension plans. If you provided your employees with a pension plan, youll
need to close it down. If the plan was a simplified employee pension (SEP)
plan, simply notify the financial institution running the plan that you wont
be making any more contributions. If you had a savings incentive match plan
(SIMPLE), you need to wait until the end of the year to shut it down. Legally,
you are required to continue to fund the plan until the end of the year.
Taxpayer IDs
You wont need your business ID numbers anymore, so take steps to cancel
them.
Federal employer identification number. The IRS will not cancel your
EIN, but if you no longer need the number for your business, the IRS will
deactivate your business account (and reactivate it if you ever go back into
business). To deactivate your account, write to the IRS at: Internal Revenue
Service, Cincinnati, OH 45999 and say that youre going out of business
and want to close your account. If you have the EIN Assignment Notice that
was issued when your EIN was assigned, include a copy of it when you send
your letter.Otherwise, be sure to include the complete legal name of your
company, your name, the EIN, and the business address. You must file all tax
returns due before the IRS will close your account.
State employer tax ID number and business tax account. To close your state
tax account, contact your state tax agency.Some state agencies have a notice
of discontinuance form that you must file; in other states you have to write
a letter to the tax agency. Most state tax agencies have clear instructions for
what you need to do on their website. You must file all tax returns due before
a state tax agency will close your account.
see an expert
Get tax help. You would be well advised to hire a tax preparer or accountant to file your final tax forms for you. It saves you the headache of preparing them
yourself, ensures their accuracy, and will no doubt gain you some deductions for business losses that you can take against other income you or your spouse bring home.
tip
Put away the shredder. After youve wrapped up all of your tax
paperwork, the IRS recommends that you keep tax records for seven years after
closing your business.
Dissolve Your Corporation or LLC

Several months after you send notice to your creditors, and after youve
settled debts with all known creditors, its time to officially end your
corporation or limited liability company (LLC). You need to dissolve your
entity with the secretary of state or the corporations division in your state
by filing a form or two. By dissolving your entity, you ensure that you are
no longer liable for paying annual fees, filing annual reports, and paying
business taxes. If you dont dissolve your corporation or LLC, you could be
looking at thousands of dollars in accumulated fees and penalties.
Officially dissolving your business also puts creditors on notice that
your business can no longer incur business debts. In fact, in some states, if
you dont notify them by officially dissolving your business, creditors and
customers could sue you for a longer period of time.
Vote to Dissolve
The first step to dissolving your company is for your shareholders or
members to officially agree to dissolve the business. The vote to dissolve the
entity should be recorded in a resolution in the minutes of a meeting or with
a written consent form and put it in your records book.
File the Proper Forms

Next, visit your states secretary of state or corporations division website
to find the dissolution form. It will be called a certificate of dissolution,
certificate of cancellation, articles of dissolution, or something similar.
Typically, the form merely asks for identifying information, but some states
also ask whether all debts and liabilities have been paid (or assumed by
another company or provided for in a bank or escrow account) and whether
the remaining assets, if any, were distributed. Most states charge a small fee
for filing the formcheck the form instructions for the amount.
When you send in your dissolution form to the state, include a cover
letter with your business name and corporation or LLC number as well as
your name, return address, and telephone number. If there is a fee, be sure
to include it. To be safe, send the form by certified mail, with return receipt
requested. The state should send you back a certificate of dissolution or
similar document, which you should file with the rest of your corporate or
LLC records. If you have questions on the paperwork, most states provide
very clear rules for dissolution on their websites.
resource
Online state offices. To find a link to your secretary of state or

corporations division website, go to www.statelocalgov.net.
If your corporation or LLC has qualified (registered) to do business in

other states, youll also need to file a form to withdraw your right to transact
business in that state. This form may be called an application of withdrawal,
certificate of termination of existence, termination of registration, or
certificate of surrender of right to transact business. If you neglect to file the
appropriate form, you will continue to be liable for paying annual report fees
as well as minimum taxes to those states, even if you cease all operations.
Corporations, dont forget to also file IRS Form 966, Corporate Dissolution
or Liquidation. LLCs, because they dont have stock to liquidate, dont need
to notify the IRS of their dissolution, except through checking the final
return box on Form 1065 (for LLCs with multiple members).
Get a Tax Clearance If Necessary

In some states, before you may formally dissolve your corporation or LLC,
you are required to obtain something called a tax clearance, consent to
dissolution, or verification of good standing from your state tax agency. The
secretary of state or corporations division will not allow your corporation or
LLC to dissolve if you have not filed your last tax return (checking the Final
tax return box and writing FINAL at the top) and paid all taxes owed. To
get the clearance or consent of the tax agency, you submit a request by phone
or fax. If you are current on filing tax returns and paying state taxes, you will
receive a letter or certificate declaring that you have no tax liability.
tip
Hang on to the evidence. Keep all dissolution and winding-up

paperwork for at least six or seven years.
Dissolve Your Partnership

If you have been doing business as a partnership, you and your business
partners need to vote to dissolve the partnership and record the decision in
writing. Also record in writing the responsibilities of each partner regarding
the debts and any future liabilities of the partnership. For instance, if Partner
#1 pays off half of the partnerships debt but Partner #2 fails to pay off his
half (or files for bankruptcy), creditors can still come after Partner #1 for the
rest of the partnerships debts. Without a written agreement that Partner #2
was to pay a certain debt, Partner #1 is out of luck. (Even with an agreement,
Partner #1 might not be able to collect if Partner #2 has no assets or files for
bankruptcy.)
see an expert
If your partnership is insolvent, consult a lawyer. If there arent

enough business funds to pay partnership debts, each partner would be wise to seek
the advice of a lawyer to protect their interests. To find a business attorney, go to
http://lawyers.nolo.com.
Its a good idea to file the states dissolution of partnership form (available
from your states secretary of state or corporations division website) as
additional proof that the partnership has been terminated. Typically, filing
a partnership dissolution form with the state isnt legally required unless
you filed paperwork with the state when you formed your partnership. (For
instance, in California, a partnership needs to file a certificate of dissolution
form only if it filed a statement of authority with the secretary of state when
the partners formed the partnership.)
It also makes sense to publish a notice in the local newspaper that the
partnership is no longer in business. This puts creditors on notice that the
partnership, as well as any of the partners, can no longer incur debts. This
is especially important for partnerships, because any partner can bind the
partnership to a deal without letting the other partners know. You could be
on the hook for debts you dont know about.
Cancel Permits, Licenses, and Fictitious Business Names

No matter what kind of business you have, you probably applied for and
received a business license or tax registration, sellers permit, and perhaps
a fictitious business name or dba (doing business as) statement from the
state or local government. You should cancel any kind of permit or license
you hold with the state, city, or county so that no one else can use it. You
could be responsible for any taxes and penalties incurred after you no longer
operate the business if, for instance, someone else were to get hold of your
sellers permit number and use it to buy goods at wholesale.
Fictitious name. If you filed a fictitious business name or dba statement, file
an abandonment form of the name with the same agency. Most agencies require
you to also publish the abandonment in a local newspaper for several weeks.
Sellers permit or resale license. A sellers permit goes by many different
names in different states, including a resale certificate, reseller license,
wholesale license, or sales tax ID number. If you hold one, contact the
agency that issued it and ask for the form to cancel it. (Dont be tempted
to continue to use your sellers permit or resale certificate for your personal
usein most states this is a crime.) If you made a security deposit when you
obtained your sellers permit or resale certificate, to get it back youll have to
turn in your permit and certificate and provide documentation that you have
made your full sales tax remittance.
Business license. To cancel your local business licensecalled a tax registration in some areascontract your city or county for the appropriate form.
Distribute Any Remaining Assets to Owners

After you have paid creditors claims, you can pay off any loans to existing
owners and sign the appropriate paperwork to document it. If there is still
money left over, the remaining cash and assets can usually be distributed to
the owners based on their pro rata share of ownership. But as discussed above,
if there is a possibility that a creditor may bring a claim after the company
is dissolved, you and the other owners should set aside a contingency fund
to pay any liabilities (or taxes) that surface after the dissolution, rather than
distributing the assets to yourselves.
When all is said and done, be sure to close out your business bank account
and cancel your business credit cards. However, you may want to wait a few
weeks or months to close your checking accountno matter how organized
you are, a bill or debt or two are certain to arise after you close.
caution
Dont distribute assets to owners if debts arent paid. State law prohibits a corporation, LLC, or partnership from distributing its assets to the owners if the
company cannot pay all of its debts. Not only are there penalties for doing so, but unpaid creditors can sue for the return of the assets from the owners. And the directors,
officers, members, or partners of the company who approved the illegal distributions
of assets can be held personally liable for the amount of the distributions.
If there are any assets left to be distributed, how the remaining cash and
assets are distributed to the owners depends on the structure of the company.
Corporations. In a corporation, the remaining cash and assets are totaled
and then divided by the number of shares owned by shareholders. The corporation pays the shareholders the amount of cash or assets thats proportionate to the number of shares each shareholder owns, and in exchange the
shareholders return their outstanding shares.
Partnerships and LLCs. In a partnership or LLC, distributions are made to
members and partners according to the balance in each member or partners
capital account. (All partners or members have capital accounts that start off
with their initial investments in the business and are increased when profits
are allocated to them and decreased when profits are distributed to them.)
If there isnt sufficient cash to pay each owner the amount in the capital
account, as is likely, whatever cash or assets that remain are split among the
owners based on the relative size of each ones capital account.
tip
Stay available. Even though your business is ending on a not-sosuccessful note, make sure that people who might need to get in touch with you
have your contact information. For instance, a former customer may need a referral,
or a former employee may need a reference. Leave contact information with your
business contacts, colleagues, employees, and customers. You never know when a
contact can help you out in the future, so it pays to keep your network alive.
C H A P T E R
Dealing With Debt:

Bankruptcy and Its Alternatives
Negotiating With Your Creditors......................................................................... 258
The Process................................................................................................................. 258
Advantages of Doing It Yourself..................................................................... 260
Hiring Help: Assignment for Benefit of Creditors....................................... 261
Filing for Bankruptcy.................................................................................................. 262
Chapter 7 Personal Bankruptcy...................................................................... 263
Chapter 7 Business Bankruptcy...................................................................... 263
Chapter 13 Bankruptcy....................................................................................... 264
Other Bankruptcy for Business: Chapters 11 and 12.......................... 266
Whats Your Best Strategy?...................................................................................... 267
Sole Proprietors....................................................................................................... 268
Corporations and LLCs........................................................................................ 268
Partnerships............................................................................................................... 269
More About Chapter 7 Personal Bankruptcy............................................... 269
Debts That Can Be Discharged........................................................................ 269
Are You Eligible for Chapter 7 Bankruptcy?............................................. 270
What Happens to Your Property................................................................... 271
Other Consequences of a Chapter 7 Bankruptcy . .............................. 276
More About Chapter 7 Bankruptcy for Business........................................ 277
If You Might File for Bankruptcy.......................................................................... 278
Dont Make Preference Payments to Creditors...................................... 278
Dont Borrow From Friends or Family Unless They Can
Afford to Lose It................................................................................................... 279
Dont Pay Yourself a Bonus or Back Pay..................................................... 279
13
Dont Go on a Shopping Spree ...................................................................... 280

Dont Take Equipment or Supplies From Your LLC
or Corporation..................................................................................................... 280
Avoid Taking Cash Advances on a Credit Card...................................... 280
Dont Pay Off Your Car Loan............................................................................ 281
Dont Panic About Utilities or Your Lease................................................ 281
Consider Returning Some Leased Property............................................. 281
Dont Pay All of Your Unsecured Debt....................................................... 281
Consider Selling Some Nonexempt Property......................................... 282
Dont Let Your Insurance Coverage Lapse................................................ 282
chapter 13 | dealing with debt: Bankruptcy and its alternatives | 257
Capitalism without bankruptcy is like Christianity without hell.

Frank Borman
f youve run up big debts (business or personal) and are worried about
never being able to repay them, it may be time to sell business assets, pay
off your debts as best you can, and move on. This chapter discusses the
three main ways to proceed:
Negotiate with your creditors and agree on a settlement that releases you
from further liability.
Hire a company or lawyer that specializes in this process to do it for you.
File for bankruptcy and let the court sell your assets and wipe out
remaining debt.
Which liquidation option works best for you depends on the size of your
business, the amount of your debts, and your personal inclination.
Bankruptcy is a powerful tool. You can use it to wipe out most unsecured
debtsfor example, credit card bills, lawsuit judgments, and debts to suppliers (unless they were secured by inventory). It can give you a fresh start,
and maybe even the opportunity to start a profitable new business. After all,
bankruptcy laws exist at least in part to encourage entrepreneurship and give
business owners the chance to start over. But if one of the alternative solutions
fits your situation, it will probably be less expensive, less time-consuming, and
less gut-wrenching than a bankruptcy filing.
see an expert
Consult a lawyer. Especially if a lot of money is at stake, check any

conclusions you reach after reading this chapter with a bankruptcy attorney. Look
for someone who will quote you a reasonable fee to review your business and
personal affairs and advise you on how to proceed in your particular situation. A
knowledgeable business associate may be able to direct you to an excellent attorney,
or you can check Nolos lawyer directory (www.nolo.com), which contains detailed
profiles of hundreds of bankruptcy lawyers.
Negotiating With Your Creditors

Many sole proprietors, as well as owners of small insolvent corporations,
LLCs, and partnerships, liquidate their own assets and negotiate their own
settlements.
The Process
The idea is simple: You or your lawyer calls each of your creditors and asks
them to release you from the debt, in exchange for some fraction of the full
amount you owe. Why should creditors do this? Because its often a better
choice than suing you and trying to chase down your remaining assets while
hoping you dont file for bankruptcy, which creditors know will leave little or
nothing for them after costs and fees are paid. Obviously, you need to have
enough business cash and assets that you can make at least partial payments
on your debts. If you are flat broke, your creditors will have no incentive to
negotiate with you.
Example: Darla runs the BookNook LLC, which sells new books upstairs and used
books downstairs. It has a diehard following, but when the economic downturn
hits the book industry especially hard, Darla cant keep her income above expenses.
When she decides to close the business, she owes three publishers a total of $80,000,
$4,000 to her landlord on the month-to-month lease that she personally guaranteed, and $1,000 to utility companies. She gives her landlord the required 30 days
notice. She returns as much book inventory as possible to the publishers, lowering
the amount she owes them to $40,000, and notifies them in writing that shes going
out of business. Of course they call her immediately to press for payment on their
invoices, but Darla tells them shell get back to them.
She then sells off her used book inventory as well as her bookshelves, cash registers, and computers (mostly to a competitor, the rest on craigslist), leaving her with
$25,000 in cash. She pays her landlord the $4,000 past duethis is a high priority
because she personally guaranteed the leaseand writes checks to the utilities.
Darla then writes to each of the publishers offering a final payment of 50 cents on
the dollar ($20,000 to satisfy her debts of $40,000). She makes the offer contingent
upon the publishers signing a written release that releases BookNook, Darla, and
her spouse from any liability for the debts. The publishers, knowing that BookNook
is an LLC and that Darla can either walk away from the business or file a Chapter 7
business bankruptcy, much prefer getting half their money immediately, so they take
the deal.
Liquidating your own business and settling its debts outside of bankruptcy
will take work on your part, and unless you have only a few debts and
thoroughly understand the legal effect of each, is best done with the help of
a lawyer who specializes in debt issues. Having a lawyer negotiate for you
is often a big advantage if, as is likely, some of your creditors can no longer
stand the sound of your voice. In addition, the lawyer will know how and
when to mention the bankruptcy alternative in an effort to convince all of
your creditors to accept your settlement as a better choice. If your creditors
agree to settle, your lawyer can also help you prepare the necessary releases
to be sure that, in exchange for your partial payment, you, your spouse, and
any cosigners will be fully absolved from future liability.
If your business is a corporation or LLC and you havent signed any
personal guarantees or become personally liable for any debts (such as
unpaid payroll taxes), you dont actually have to wait around for creditors
to sign releases. You can simply close the business, sell its assets, and pay
your creditors on a pro rata basis until the businesss cash is exhausted. The
downside of this approach is that by not getting signed releases, you open
yourself up to being hounded for years by collection agencies and possibly
even being sued. If you are sued, youll at least have to file a response in court
pointing out that you arent personally liable for the debt, and you may have
to hire a lawyer or appear in court. Worse, a creditor might even argue that
your corporation or LLC was just a sham to help you defraud creditors and
that it was really just you running the business (this is called trying to pierce
the veil of the corporation or LLC). If the creditor were to succeed, you
would be personally liable for paying the businesss debts. Getting releases on
all of your debts can avoid this, as can going through Chapter 7 individual
bankruptcy.
On the other hand, if you are personally liable for some business debts
because youre a sole proprietor or a partner, or because you signed some
personal guarantees, youll absolutely need to get all of your creditors to
settle with you and release your from the debts. If even one creditor refuses
to release you from a debt youre personally liable for, all of your other
settlements may be for naught, if the creditor sues you and takes your
property or you end up having to file for bankruptcy anyway. Again, a
business lawyer can help you keep this from happening.
Advantages of Doing It Yourself

Selling business assets yourself, rather than turning them over to a bankruptcy
court for liquidation, will likely bring in more money for your creditors. And
you wont have to pay the costs of bankruptcy (court and lawyers fees). So if
you feel an ethical duty to creditors and want to see that they receive as much
money as possible, this may be the way to go. Keep in mind, though, that
if you hire a lawyer to liquidate your company for you, these savings could
disappear.
Managing the liquidation outside of bankruptcy also gives you far more
control over which debts are paid. For instance, if you dont file for personal
bankruptcy, you can choose to first pay the debts for which you are personally
liable, such as:
trust fund taxes
a line of credit that you personally guaranteed, or
contracts or leases with your personal signature.
You might even be able to buy the businesss assets back yourself
something you might want to do if you are planning to start up a new
business after the liquidation. For example, you might want to buy back
a patent, copyright, or specialized technology to use in a new business.
By contrast, in a Chapter 7 business bankruptcy, the bankruptcy trustee
(the person in charge of gathering and selling the assets) may not let the
owners of a corporation or LLC purchase the companys assets (though
this is standard procedure for sole proprietors in individual Chapter 7
bankruptcies). Keep in mind that, especially if yours is a business that
required little capital to start up, such as a service business, you can easily
and legally start up a similar business after a Chapter 7 bankruptcy.
Finally, if before the liquidation you paid some creditors (perhaps family
and friends) at the expense of others, these preference payments wont be
taken away when you wind down your business yourself, as they would in
bankruptcy. (For instance, if you made payments on a loan to a relative or close
business associate in the year before filing, or transferred property for little or
no payment in the two years before filing, a bankruptcy court could take back
these payments or property to divide them equally among all creditors.)
For a discussion of how to liquidate your business and negotiate
settlements with your creditors, see Pay Your Debts in Chapter 12.
caution
Once you start negotiating, bankruptcy may not be an option.

You often cant go back and file bankruptcy once you start liquidating assets and
negotiating settlements yourself. Thats because if you have made any preference
payments or invalid transfers, these things will come back to bite you if you file for
bankruptcy. For more information, see If You Might File for Bankruptcy, below.
Hiring Help: Assignment for Benefit of Creditors

An alternative to liquidating your own business or filing for bankruptcy is
to follow a procedure called an assignment for the benefit of creditors, or
ABC. Here you work with one of the many ABC companies or law firms
that specialize in liquidating insolvent businesses. Basically, the company will
liquidate your assets and pay off your creditors (for a percentage of what it
is able to sell your assets for), while you and your co-owners move forward
with your lives.
This option generally works well if your business is a corporation or LLC
with a lot of debts and assets. A large liquidation can take months or years to
wind upsomething you probably cant afford to spend your time doing.
Heres how it generally works. Your business assigns (transfers) all of its
assets and debts to the ABC company or law firm, meaning that liability
for the businesss debts moves to the ABC company or firm. You might
still be liable for debts with personal guarantees (or all debts if you are a
sole proprietor or partner), however, so you want to discuss with the ABC
company paying these debts first.
An ABC company will almost always get more for your assets than a
bankruptcy trustee will, and it may be able to sell any intellectual property
you own to help pay debts, something a bankruptcy trustee usually will not
do. Going the ABC route is also usually faster and more private (and less
embarrassing) than a bankruptcy. To learn more about ABCs, speak to a local
business lawyer or search online.
Example: Angelos Meatpacking, Inc., has been suffering from poor sales for the
past year, and now Angelos accounts payable list is growing, creditors are demanding
payment, and the company will be out of cash within a few months. Angelo consults
with two ABC companies and finds that one company has experience with liquidating meatpacking companies, meaning that this company is more likely to get top
dollar selling Angelos business equipment. Angelo signs a contract with the ABC
company (now called the assignee) and provides a list of the companys creditors as
well as all of the business assets to be assigned.
First, the ABC company investigates whether Angelos company can be sold as a
going concern. If not, it will send a letter to all creditors notifying them of the fact that
the assignment has been made and providing a claim form for each creditor to submit
a claim to the ABC company. At the same time, the company advertises the assets for
sale in industry publications and, using its contacts, searches for another company to
take over Angelos lease, for a fee. It also publishes a press release simply stating that it
has acquired the assets of Angelos Meatpacking, Inc. After all of the assets have been
liquidated, the ABC company takes a percentage of the proceeds as its fee and distributes the rest based on the creditors claims. In six months, its all done.
Filing for Bankruptcy

Most people who talk of bankruptcy are referring to Chapter 7 bankruptcy,
also called straight or liquidation bankruptcy, which is by far the most
common type. However, there are several others. Lets take a look at each and
how it might help you when youre swamped by debt.
cross-reference
Understanding the legal status of your debts. Before you can decide
whether bankruptcy is right for you, its essential that you know whether you are
personally liable to repay your debts. Review Chapter 4 if you are unsure.
Chapter 7 Personal Bankruptcy

In a Chapter 7 personal bankruptcy, you ask the bankruptcy court to wipe
out (discharge) your debts. In return, you might have to let the bankruptcy
court sell some of your personal or business property and use the proceeds
to pay down your debt. An individual Chapter 7 bankruptcy typically takes
three to six months to move through federal bankruptcy court and generally
costs less than other types of bankruptcy.
Chapter 7 bankruptcy can efficiently wipe out most unsecured debtsfor
example, credit card bills, lawsuit judgments, and debts to suppliers (unless
they were secured by inventory). Secured debts are different. If you pledged
propertysuch as your home or caras collateral for a loan, the creditor is
entitled to take the property if you dont make the payments, even if you file
for bankruptcy. If you owe more on a secured debt (say a truck loan) than
the collateral (the truck), is worth, the difference (deficiency) is discharged
in bankruptcy. However, the lender can still take the collateral if you dont
make the payments.
Whether bankruptcy will solve your pressing debt problems depends on
a combination of factors, including the legal types of debt you have, how
your business is legally organized, and the nature and amount of the personal
assets you hope to protect.
Chapter 7 Business Bankruptcy

If your business is not a sole proprietorship, you can file a business Chapter
7 bankruptcy. This lets you turn over your business to the bankruptcy trustee
for an orderly liquidation. The business stops operating, and the court
liquidates all its assets to pay business creditors. The court doesnt touch your
personal assets if your business is a corporation or LLC.
The court takes the proceeds from the sale of the business assets and pays
what it can to creditors. When thats done, you wont owe any remaining
debtsincluding leases, contracts, credit cards, loans, and overdue accounts
unless you personally guaranteed them.
The process is very similar to that of a personal Chapter 7 bankruptcy. The
court fees are the same, but the bankruptcy trustee is likely to get a bigger
fee. And youll almost certainly need to hire a lawyer.
Can You File for Bankruptcy but Keep Running Your Business?
If youre hoping that bankruptcy is a magic solution that will both wipe out
your debts and let you continue your business debt-free almost as if nothing
happened, you may be disappointed.
Especially if you have a business that sells or manufactures products or
owns significant assets, Chapter 7 bankruptcy is unlikely to allow you to
continue in the same business. Thats because the bankruptcy court will sell
the business assets. If you have enough money, though, you could buy back
some of the assets and start a new businessthis happens all the time.
If your business is so deep in debt that youre considering bankruptcy, your
best and most realistic alternative is to close it down and rid yourself of as
many debts as possible. Then you can start a new, debt-free business.
Chapter 13 Bankruptcy
Businesses cant file for Chapter 13 bankruptcy, but business owners can.
You can use it to repay and discharge business-related debts for which youre
personally liable. To be eligible, your unsecured debts cant exceed $336,900
and secured debts cant exceed $1,010,650.
In a Chapter 13 bankruptcy, you dont lose any property. Instead, you pay
off part of your debts under a repayment plan (approved by the bankruptcy
court) over three to five years. Depending on your income and expenses, you
may actually have to pay only pennies on the dollar. (Some debts, however,
must be paid in full, including most tax debts, some employee pay, and back
alimony and child support.) If you complete the plan, youll be debt-free.
Chapter 13 bankruptcy requires continuing your business under the
scrutiny of a bankruptcy trustee (if you decide to continue it) and repaying
a portion of the businesss debtsa difficult task for a struggling enterprise.
Only about 35% of Chapter 13 filers complete their repayment plans. Its
usually cheaper and easier to liquidate your failing company and then start a
new, debt-free company.
Its hard for a business owner to keep up with paymentsimagine never
being late on a monthly payment when your income is seasonal, or fluctuates
with the economy and what your competition is doing. If youre a sole
proprietor, all of your personal and business property would be under the
bankruptcy courts control. You would need court permission to borrow
money or to buy or sell business assets (other than in the normal course
of business). You couldnt use credit cards, and you would have to submit
monthly reports to the bankruptcy trustee. If business picked up or you took
a side job, the extra money would have to go toward your debts.
If you missed a payment, the bankruptcy judge would probably convert
your case to a Chapter 7 bankruptcy or dismiss it, and order your business
to be liquidated. If that happened, you would owe your creditors the balance
of your debtsthat is, what you owed at the start of your bankruptcy case,
plus the interest that stopped accruing while you were in bankruptcy, less
whatever you paid through your repayment plan.
One advantage of a Chapter 13 over a Chapter 7 bankruptcy is that it lets
you reduce even secured debts. You can reduce a secured debt down to the
value of the collateral, rather than the amount you owe, which might be
much higher. Called cramming down your debt, this can let you hold on
to the collateral.
For example, if you owe $15,000 on a car loan and the car is worth only
$9,000, you can propose a plan that pays the creditor $9,000. Once you
pay the $9,000, the rest of the loan is discharged. You cant cram down the
mortgage on your primary residence or debts for cars or other property you
bought shortly before filing.
Although Chapter 13 bankruptcy is unlikely to help most small business

owners, there can be exceptions. A sole proprietor who doesnt want to lose
assets that wouldnt be exempt in a Chapter 7 bankruptcy, for example,
might want to consider Chapter 13. On the other end of the scale, it might
work for a business owner who has few assets, because in that case the
owner wouldnt be required to pay off many unsecured debts, if any. (Thats
because the amount you have to repay toward your unsecured debts is equal
to the amount of your nonexempt assets.) So if you have the patience and
perseverance to repay at least some of your debt, dont rule Chapter 13 out.
resource
More on Chapter 13 bankruptcy. See Chapter 13 Bankruptcy: Keep Your

Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).
Other Bankruptcy for Business: Chapters 11 and 12

Most small businesses use Chapter 7 bankruptcy, if they use bankruptcy
at all. But there are a couple of other kinds of bankruptcy you might have
heard of and be curious about.
Chapter 11. This type of reorganization bankruptcy is appropriate only for
large businesses and for individuals with very large debts: over $336,900 in
unsecured debts or $1,010,650 in secured debts. Because Chapter 11 is very
expensivethink $50,000 in attorneys feesand extraordinarily complex,
businesses with fewer than 100 employees really dont use it.
Chapter 12. This type of reorganization bankruptcy is for people whose
debts come mainly from the operation of a family farm.
see an expert
Time for an expert. If you think either of these kinds of bankruptcy

might help you, see a lawyer whos got experience with their special issues.
Whats Your Best Strategy?

Is a business or personal bankruptcy better, or should you try to settle your
debts with creditors and stay out of bankruptcy court altogether? It depends
on your situation. Generally, most small business owners file an individual
Chapter 7 bankruptcy to get rid of large personally guaranteed business
debts, rather than a business bankruptcy.
Ways to Sell Business Assets and Settle Debts

Settle with creditors
yourself or hire
lawyer to do it
Turn liquidation over File for business

to ABC company or Chapter 7
law firm
bankruptcy
Private process
Private process
Assets likely to bring

more than if sold by
bankruptcy court
Assets likely to bring

more than if sold by
bankruptcy court
You choose which

debts get paid first,
and how much each
creditor gets
Lets you turn nego

tiations over to professional and move on Public process
with your life
Assets sold in
bankruptcy always
If youve made payments to family or
fetch a low price
friends, those payments wont be taken Bankruptcy trustee
back as they would in controls how much
each creditor gets
bankruptcy
If youve made
payments to family
or friends, the
bankruptcy trustee
will demand that the
money be returned
and given to other
creditors
If youve made
payments to family
or friends, those
payments wont be
taken back as they
would in bankruptcy
Available only to
LLC, corporation, or
partnership
Doesnt affect
personal obligations
for business debts
File for personal

Chapter 7
bankruptcy
Lets you wipe out
personal obligations,
including those for
business debts
Public process
Assets sold in
bankruptcy always
fetch a low price; you
may lose personal
assets
Bankruptcy trustee
controls how much
each creditor gets
If youve made
payments to family
or friends, the
bankruptcy trustee
will demand that the
money be returned
and given to other
creditors
Bankruptcy goes on
Wont affect your
your credit record for
personal credit record ten years
Sole Proprietors
All business debts are personal when your business is organized as a sole
proprietorship. That means your bankruptcy choices are to file for individual
Chapter 7 bankruptcy, which will wipe out most of your debts, or for
Chapter 13 bankruptcy, which will let you repay some or all of your debts
over time. Sole proprietors generally dont make assignments for the benefit
of creditors because an assignment doesnt offer a discharge of debts like
Chapter 7 bankruptcy does.
However, if the value of your business assets is almost enough to pay
your debts, you might just be able to sell your assets and settle your debts
yourself, without bankruptcya process thats cheaper and less public than
bankruptcy. See Negotiating With Your Creditors, above.

If your business is a corporation or LLC, your decision will depend primarily
on whether or not you are personally liable for any of the business debts.
Generally, you dont need to file for personal bankruptcy to escape
most business debts, because you are not personally liable for them. The
corporation or LLC, as a separate legal entity, is liable. But if your business
cant pay all of its debts, youll want to negotiate a settlement with your
creditors, assign your debts to an ABC company, or file a business Chapter
7 bankruptcy. If you go the ABC or bankruptcy route, someone else (the
bankruptcy trustee) will handle the orderly liquidation of business assets and
payment of debts. Whatever business debts cant be paid will be wiped out at
the end of the bankruptcy case.
If, however, you personally guaranteed business debts and want to wipe
out those debts, youll need to file for personal bankruptcy. (You can file both
a business bankruptcy for business debts and a personal bankruptcy for your
individual debts.) For example, if you rented a space for your business and
the landlord insisted that you personally guarantee the lease, then you are on
the hook for back rent if there arent enough business assets to pay it. If you
file for personal Chapter 7 bankruptcy, you can get that debt discharged.
Partnerships
When youre a partner, youre personally liable for business debtsso in
almost all cases, youll need to file for Chapter 7 personal bankruptcy to
wipe out those debts. Of course, you can try to negotiate a deal with your
creditors on your own (see Negotiating With Your Creditors, above) or
assign your debts to an ABC company or law firm.
Partnerships rarely file for Chapter 7 business bankruptcy because it doesnt
rid the partners of their personal liability for any of the businesss debts. In
fact, it actually makes it easier for creditors to reach the partners personal
assets, because a bankruptcy trustee in a Chapter 7 bankruptcy case can sue
the partners personally to recover some cash to pay the partnerships debts.
More About Chapter 7 Personal Bankruptcy

Lets look in more detail at how filing for Chapter 7 bankruptcy can help
you get rid of most of your debt and give you a fresh start.
Debts That Can Be Discharged

Not all debts are dischargeable in Chapter 7 bankruptcy, but most are. As
a general rule, most unsecured credit card, medical, legal, and business
debts, including debts to landlords, suppliers, independent contractors,
and equipment rental companies, can be discharged, as can most court
judgments and unsecured loans. In addition, some taxes can actually be
discharged in bankruptcyback taxes more than three years old and the
employers portion of various payroll taxes.
The following debts are not dischargeable in bankruptcy:
recent back taxes; back taxes if no tax return was filed, regardless of when
due; and trust fund taxes
debts incurred to pay nondischargeable taxes (for example, if you took a
loan or cash advance from your credit card to pay your trust fund taxes)
recent debts for luxuries (for example, you buy a Mercedes three weeks
before filing)
cash advances of more than $825 within 70 days before you file
loans owed to a pension plan (say you borrowed money from your
401(k) plan)
student loans (unless repaying them would constitute an extreme hardship, such as a permanent disability that prevents you from ever working)
court-imposed fines and restitution (money damages you owe)
back child support and alimony, and
debts owed under divorce settlement agreements.
In addition, if a creditor objects to the discharge of a debt on the basis
of fraud, such as lying on a credit application or writing a bad check, or
because the debt was caused by willfully and maliciously damaging anothers
property, the bankruptcy judge can rule the debt to be nondischargeable.
caution
Codebtors will still be on the hook. A Chapter 7 personal bankruptcy

discharges only your debt obligations, not those of a codebtor, such as a person who
has cosigned for your loan, or a business partner who is equally liable for the debt.
(For more on codebtors obligations, see Chapter 4.)
Are You Eligible for Chapter 7 Bankruptcy?

Although individuals have to meet certain financial criteria to be eligible for
Chapter 7 consumer bankruptcy, business owners whose debts are primarily
due to business operations dont have to.
If, however, the majority of your debts (51% or more) are not from your
business, you must meet these financial criteria. To determine whether you
can file for Chapter 7, first you measure your income for the last six months
against the median income for a family of your size in your state. If your
income is below your states median income, its assumed you dont have
enough income to repay your debts and you can file a Chapter 7. To give you
an idea, the median annual income in the United States for a family of four
ranges from about $53,000 in Mississippi and New Mexico to $99,000 in
Connecticut, Maryland, and New Jersey.
If your income is more than the median, you have another hurdle to
clear, called the means test, which is designed to determine whether you
have enough disposable income, after subtracting allowed expenses and
required debt payments, to repay at least a portion of your unsecured debts
over five years.
In our experience, very few entrepreneurs whose businesses are so troubled
that they are contemplating bankruptcy fail the means test. But if for some
reason you dont pass, you are limited to using Chapter 13 bankruptcy for
your personal debts.
resource
Finding median income figures and the means test. To determine

whether you pass the means test (and to find the monthly income in your area), use
our free means test calculator at www.legalconsumer.com/bankruptcy/nolo. Enter
your zip code and then scroll down and enter your family size.
What Happens to Your Property

The biggest downside to Chapter 7 is that you may have to give up some
property. If, despite your businesss money problems, you still have a significant amount of property you own free and clear, including investments, real
estate, vehicles, or business assets, the bankruptcy trustee will take at least
some of it, sell it, and distribute the proceeds to your creditors.
However, if you have few personal assets, or you owe a lot of money on
them, you arent likely to lose much. And in any case, you will get to keep
the basic necessities of life, including clothing, furniture, possibly a vehicle,
and some or all of your equity in your house, depending on your states laws.
Now lets look at what youre likely to lose, if anything.
Your House
If you put your house up as collateral for a business loan or line of credit, and
you default on that loanor if you stop making mortgage payments on the
housethe lender can foreclose. Bankruptcy can delay the foreclosure for a
while, but ultimately, if you dont make the payments, youll lose your house.
But what about debts not tied to your house? To determine whether your
house might be sold to pay debts to your landlord, suppliers, or any other
business obligations, you need to understand how your states homestead
exemption works. Most states let you keep your principal residence if your
equity in it doesnt exceed a certain limit (and, of course, you keep making
mortgage payments). In other words, it cant be taken by creditors or by
the bankruptcy trustee to pay your debts. In Texas, Florida, and a few other
states, your residence is exempt no matter how much its worth. In most
states, only $10,000 to $50,000 of your equity is exempt from creditors.
However, in a few states, such as Tennessee, Ohio, Maryland, Kentucky, and
Alabama, the homestead exemption is $5,000 or less, and in New Jersey and
Pennsylvania, its zero. (Note that the homestead exemption applies only to
main residences, not second houses, vacation houses, or rental property.)
If the amount of equity you have in your home is less than your states
exempt amount, theres no equity for the trustee to take. Youll be able
to keep your houseassuming you keep up on your mortgage payments
after the bankruptcy. But if the equity you have in your home is worth
significantly more than the exempt amount, the trustee in a Chapter 7
bankruptcy will want to sell the house, give you the exempt amount (which
in most states you can continue to protect by investing it another house),
and use the rest of your equity to pay off your creditors.
Example: Nathans New York adventure travel company fails owing a $60,000 small
business loan. Because the company was a sole proprietorship, Nathan is 100% personally liable for its debts, and he files for Chapter 7 personal bankruptcy. Because
he has more consumer debts than personal debts (he owes $8,000 on credit cards
and $245,000 on his house), Nathan is required to take the Chapter 7 means test.
He passes it easily because for the last six months his income has been low and his
expenses high.
Nathans house is worth $300,000, giving him $55,000 in equity. In New York,
$50,000 of home equity is exempt from being taken to pay creditors. The bankruptcy
trustee could sell the house, give Nathan the $50,000 in equity that is exempt, and
pay the remaining $5,000 toward Nathans creditors. However, the trustee knows that
the costs of selling the house would be more than $5,000, making it a losing proposition for the trustee, so he doesnt sell the house and Nathan gets to keep it.
tip
Bankruptcy can buy you time. Some small business people file
bankruptcy just to get some badly needed breathing room. Thats because when
you file for bankruptcy, the court issues an automatic stay, an order that requires
all creditors to immediately stop collection activities, including foreclosure, and
prevents them from filing lawsuits or shutting off utilities. This delay might give
you at least a few months to bring in the income you need to get current on your
secured debts, so you can keep the collateral. After a month or two, however,
secured lenders can get court permission to proceed with a foreclosure, repossession,
or collection.
Your Car, SUV, or Pickup

If your car is security for your car loan, and you default on that loan, the
lender can repossess your car. Bankruptcy can delay the repossession for a
whilegiving you an opportunity to get currentbut ultimately, if you
dont make the payments, youll lose the car.
If your car isnt collateral for a debt, it still might be taken and sold by the
bankruptcy trustee to pay your business debts. It depends on your states
vehicle exemption limit. Most states allow you to keep one vehicle with
equity up to a certain exempt amountusually between $1,000 and $5,000.
However, some states, such as Texas, give you a lump sum exemption you can
use for any type of personal propertyincluding vehiclesup to a total of
$20,000 or $30,000. (To find out your states vehicle exemption limit, go to
www.legalconsumer.com/bankruptcy/exemptions and enter your zip code.)
Example: Jose and Jessica have two vehicles. One is a newish pickup on which they
are making payments; they have no equity in it since its value went down quite a bit
in the last year. The other is a ten-year-old car they own free and clear, worth $1,000.
In bankruptcy, because Jose and Jessica cant afford the payments, the pickup
goes back to the lender. The amount the lender is able to sell it for doesnt cover the
amount they owe on the loan plus costs, but this debt will be wiped out in bankruptcy. Because the older car is worth only $1,000, it is exempt from being taken to
pay other debts, meaning Jose and Jessica can keep it.
If you bought your vehicle in the last year or two and dont have much
equity in it, chances are you will be allowed to keep it after bankruptcyif
you can make the payments. On the other hand, if you have equity in your
car thats worth more than your states exemption amount (say you finished
paying for your car and its worth $12,000), you will probably have to give
it up to the bankruptcy trustee. However, the trustee is likely to give you an
opportunity to buy back the car at a greatly reduced price. If you decline, the
trustee will sell it, give you the exempt amount, and use the rest to pay your
creditors.
caution
Dont pay off your car before you file for bankruptcy. Many people
are under the erroneous impression that they get to keep one vehicle when they file
for bankruptcy, so they do whatever they can to pay off their best car or truck before
they file. As you can see from the discussion above, because exemption laws protect
only a limited dollar amount in most states, its better to owe money on your car
when you go into bankruptcy.
Leased Vehicles or Equipment

If you want to keep paying for a leased car or other equipment, you can
usually hold on to the leased property even after filing for Chapter 7
bankruptcy, by contacting the lease company and arranging to continue
making the payments.
Business Assets
The bankruptcy trustee has the power to take valuable business equipment
and supplies and sell them for cash, to at least partially repay your creditors.
However, most states let you keep a couple of thousand dollars worth of
tools or equipmentcalled the tools of the trade exemptionif you will
continue to use them to make a living. And again, some states give you a
lump sum exemption to use for any type of property, including business
property, up to a total of $20,000 or $30,000.
Having your business set up as a corporation or LLC wont protect your

business assets if you file personal bankruptcyif you are the sole owner
of your corporation or LLC. The bankruptcy trustee can simply take over
your shares or membership interest and vote to sell or liquidate the business
and distribute the proceeds to the businesss creditors. In deciding whether
to dissolve the corporation or LLC, the trustee will take a cost/benefit
approach: The trustee will look at the cost of dissolving and liquidating the
business, how much the assets can be sold for, and whether you can claim
any exemptions in the assets. In many cases, the businesss debts are equal to
or close to the value of the businesss assets, so the trustee decides liquidating
the business wouldnt be worth it. But if the business has little debt and
some valuable nonexempt assets, its likely that the trustee will dissolve the
corporation or LLC and sell the assets.
Other Valuable Assets

Every state allows you to keep a certain amount of essential personal
property, such as clothing, appliances, and furniture. Even if your property
is worth somewhat more than the exempt amount of personal property, the
bankruptcy trustee is not likely to take it to sell, because the considerable
costs of a legal sale would typically eat up the overage. However, expensive
art, collectibles, boats, antiques, stocks, bonds, and highly valuable jewelry
are likely to be taken and sold by the bankruptcy trustee. Fortunately, federal
law exempts virtually all pensions and retirement plans from being taken in
bankruptcy.
Example: Arcelia, with her husband Alejandros help, starts a high-end chocolaterie called Viva Chocolat! in Austin, Texas. Unfortunately, Arcelias timing is bad, and
a month after she spends $50,000 on rent, remodeling, permits, and equipment, the
economy goes south. After bringing in only $1,000 her first three months, Arcelia
buys her way out of her lease and closes down.
As a sole proprietor, she is personally liable for all of the businesss debts. Unable to
pay them, she files for Chapter 7 bankruptcy to protect their house and Alejandros
income (Texas is a community property state, so Alejandro and Arcelia are jointly
liable for Arcelias business debts). Because their debts are primarily business$50,000
in business debts and $30,000 in personal unsecured debtsthey dont need to pass
the means test.
In bankruptcy, their house is entirely exempt from being taken to pay their debts,
even though they have $350,000 equity in it, because the Texas homestead exemption is unlimited. They are also able to keep up to $60,000 in personal possessions
both of their vehicles, in which they have a total of $30,000 equity, and all of their
furniture, art, jewelry, and family heirlooms (Texas law exempts all of these). Arcelia
does have to sell the business equipment she bought to pay her business debts
they dont fall under the tools of the trade exemption since she wont continue to
use them to make a living. Fortunately, federal law protects the money in Alejandros
401(k) plan.
Other Consequences of a Chapter 7 Bankruptcy

Obviously, theres a lot to think about before you decide whether filing
Chapter 7 bankruptcy is in your best interest. In addition to the possibility
of losing property, here are a couple of other consequences that may be
important to you.
Payments you made to family or friends may be reversed. The bankruptcy
trustee will look at all payments and asset transfers you made during the
year or two before the bankruptcy filing to make sure that you didnt make
preference payments to certain creditors. If you made payments on a loan
to relatives or close business associates in the year before filing, or transferred
property to them for little or no payment in the two years before filing, a
bankruptcy court can reverse the payment or transfer. The trustee can and
will recapture (take back) payments you made to family or friends to divide
them equally between all creditors. If the money you paid to family or friends
has been spent, the trustee can sue the recipient of the payment to get it back.
To make things worse, if the bankruptcy judge decides you made the payment
or transfer for fraudulent purposes, your bankruptcy case could be dismissed.
Your credit rating will be damaged. A Chapter 7 bankruptcy will go on
your credit report and stay there for ten years. In theory, this information
may hurt your chance of getting a subsequent mortgage, car loan, other
credit, or possibly even a job. But in practice, if you are far over your head
in debt, its a good thing that you wont be able to immediately run up more
debt (after all, you can file Chapter 7 bankruptcy only every eight years).
Its also true that, if you take sensible steps to rebuild your credit and can
show you have a job, many lenders will extend at least some new credit
within a year or two. Keep in mind, though, that none of us yet knows what
upcoming credit markets will look like.
resource
In-depth information on filing Chapter 7. See How to File for Chapter 7

Bankruptcy, by Stephen Elias, Albin Renauer, and Robin Leonard (Nolo).
caution
You may need to get out of a partnership or LLC before filing for
bankruptcy. If you are a partner in a partnership or a member of a multi-member
LLC, you may have signed a buy-sell agreement that requires you to terminate your
ownership interest before filing for bankruptcy. If you dont, you open yourself up to
a lawsuit from your co-owners. A small business attorney can help you assess your
obligations and options here.
More About Chapter 7 Bankruptcy for Business

Corporations, LLCs, and partnerships can use Chapter 7 business bankruptcy
(though its rarely used for partnerships, and for good reason, as discussed
above). But if you file for personal bankruptcy to get rid of your personal
liability for your business debtsor you arent personally liable for any
business debtsthere may be little reason to file a business bankruptcy.
However, there are a few practical reasons business might want to file.
A Chapter 7 business bankruptcy is similar to a Chapter 7 personal
bankruptcy. The bankruptcy trustee sells the businesss assets and pays off the
creditors, priority debts (back taxes, wages, and benefits) first. No business
property is exempt, so the trustee can take anything the business ownsthe
entire company is liquidated. In theory, after the creditors are paid, the
business owners (shareholders, members, or partners) receive anything left

over. In fact, when a business files for bankruptcy, its liabilities usually exceed
its assets, and there is nothing left for the owners.
When a corporation or LLC files for bankruptcy, thats the end of its debts
(unless the owners personally guaranteed some of them). If creditors arent
fully paid, too badthe owners of the business are off the hook.
The bankruptcy trustee is paid from the businesss assets, so in actuality
your creditors, not you, pay the bankruptcy costs. What about your credit
rating? A corporation or LLC bankruptcy shouldnt affect your personal
credit if youre not personally liable for any of the businesss debts.
If You Might File for Bankruptcy

If you decide that personal or business bankruptcy is probably the best
strategy for you, youll need to plan ahead to steer clear of some common
missteps. Fortunately, even if you end up solving your debt problems
without bankruptcy, these tips make good sense anyway.
Dont Make Preference Payments to Creditors

If a friend, relative, or business associate has lent you money, you may be
tempted to try to repay some or all of it before filing bankruptcy. Bad idea.
When you file for bankruptcy, the bankruptcy trustee will scrutinize all
payments you make during the year before the filing, to make sure that some
creditors werent given an unfair advantage (called preference payments).
As mentioned above, the trustee will want to recapture (take back) any
preference payments you made to creditors within the 90 days before you
fileor within one year if those payments were made to a relative or close
business associate (an insider)and will divide them equally among all
creditors. If your relatives or associates cant come up with the money that
you paid them, the bankruptcy trustee can sue them to recover it.
You are legally allowed to pay one unsecured creditor ahead of the others if
the creditor is not a close relative or associatefor example, you can choose
to pay the business line of credit that you signed a personal guarantee on
before you pay your suppliers. The bankruptcy trustee will, however, look
back 90 days at payments you made to your regular creditors. The trustee
can make a company that was paid disgorge (return) payments of over
$5,475 and spread the money among all of your creditors. (But if fewer than
51% of your debts are from your business operations, the trustee can force
a company to disgorge only payments of more than $600 from a regular
creditor.)
Dont Borrow From Friends or Family Unless

They Can Afford to Lose It
If you borrow money from family and friends to repay your business debts
but then end up filing for bankruptcy, none of the money you borrowed
can be paid back, even if your business property is sold and the proceeds
distributed to your creditors. Thats because the bankruptcy court is likely to
classify a loan from a relative or close associate as a gift, not a loan.
Dont Pay Yourself a Bonus or Back Pay

The bankruptcy system treats you like an insider creditor. So if you pay
yourself a bonus, repay a loan you made to the business, or otherwise
take money out of the company during the 12 months prior to filing for
bankruptcy, it will be considered a recoverable preference payment. It might
even be considered bankruptcy fraud, which can result in jail time or at least
in the dismissal of your bankruptcy case.
Example: Julieta runs an insurance brokerage with five employees. When her sales
slump for three months in a row, Julieta realizes she has to cut her biggest expense:
payroll. First she lets her employees know that she cut her own salary from $8,000
per month to $4,000, and then she cuts everyone elses salary by 10%. Two months
later, business hasnt picked up, and she finds herself with even lower sales and
$120,000 in personally guaranteed debt. With her creditors threatening lawsuits, she
decides to file for Chapter 7 personal bankruptcy.
In the last month of business, she is able to collect an $8,000 commission payment
from a client insurance company. Reasoning that she gave up $8,000 in salary over
two months, she repays herself the $8,000 before filing for bankruptcy. After she files,
the court requires her to pay back the $8,000 to the bankruptcy trustee. Fortunately,
the bankruptcy judge does not find that her intent was fraudulent, so her bankruptcy
case is not dismissed.
Dont Go on a Shopping Spree

Some people, realizing that bankruptcy is inevitable, grab whatever cash they
can and buy a car, luxury items, or go on a trip before they file. Another bad
idea. If you buy luxury goods or services within three months of filing, you
are considered to have had the intent to defraud the bankruptcy court, and
the resulting debts wont be discharged in bankruptcy.
Even if you make big purchases, such as a vacation time-share, country
club dues, or even a pricey new wardrobe, more than three months before
filing, the creditor can still claim that your intent was fraudulent and you
never meant to pay the money backbut in this case, the creditor has to
prove that your intent was fraudulent. If the creditor is successful, these
debts wont be discharged in bankruptcy.
Dont Take Equipment or Supplies From Your

LLC or Corporation
If you are headed into bankruptcy, taking goods from your LLC or
corporation, like laptops, forklifts, vehicles, inventory, or supplies, is
considered stealing from your creditors and bankruptcy fraud, which can
result in the dismissal of your bankruptcy case or even criminal charges.
Avoid Taking Cash Advances on a Credit Card

If you take a large cash advance on a credit card before filing for bankruptcy,
the credit card company can assert that you were trying to defraud it
and that you had no intent of paying the money back. In consequence,
the bankruptcy trustee can treat the cash advance as a nondischargeable
debt, or even throw your case out of court entirely because of it. Any cash
advance over $825 taken within 70 days of filing for bankruptcy is usually
nondischargeable. Lesser amounts should be dischargeable unless the creditor
argues successfully that you had no intent to pay the money back.
Dont Pay Off Your Car Loan

As mentioned, many people erroneously believe that they get to keep one
car when they file for bankruptcy (regardless of the amount of equity) and
do whatever they can to pay off their car loan before they file. In truth, as
mentioned above, under the exemption laws of most states, you get to keep
only a limited amount of equity in a vehicle, typically $1,000 to $5,000. If
you have more equity in your car, the bankruptcy trustee will grab it to pay
down your debts. So find out your states equity limit for vehicles and stay
within it.
Dont Panic About Utilities or Your Lease

If you declare bankruptcy, the utility companies cant use this as an excuse
for immediately shutting off services (although they can require you to post
a reasonable deposit to keep on the lights, phone service, and heat). As long
as you pay future bills on time, you should be fine. Similarly, as long as you
keep paying your rent, your landlord cant evict you. Dont be spooked by
the clause, common in commercial leases, that says that youre automatically
in default (in violation of your lease) if you file for bankruptcy. These clauses
are generally not enforceable (except against sublessees and assignees).
Consider Returning Some Leased Property

If youre leasing equipment and are going out of business, return the
equipment to the leasing company before you file for bankruptcy. No doubt
the company will bill you for the amount owed under the remainder of the
lease, but this debt will be discharged in bankruptcy. On the other hand, if
you will try to soldier on with your business postbankruptcy and want to
keep leased property, youll need to keep making payments on time. Your
obligation wont be discharged by your bankruptcy, because the debt is
secured by the equipment.
Dont Pay All of Your Unsecured Debt

If you are certain that youll file for bankruptcy and there are certain
unsecured debts you plan to wipe out, such as credit card bills and medical
bills, it often makes sense to stop paying anything toward them. They will be
fully discharged in bankruptcy, so you dont really gain anything by paying
them down now. Better to put the money toward secured loans, such as your
mortgage or car loan, and debts youre personally liable for, such as payroll
taxes or bankruptcy fees. Just be really sure the unsecured debt you stop
paying on is dischargeable in bankruptcy before you stop making payments.
Consider Selling Some Nonexempt Property

If you own valuable property that you are likely to lose in a Chapter 7
bankruptcy, such as a boat, vehicle, or business equipment, you might
be able to sell it before you file and use the proceeds to pay personally
guaranteed loans and bankruptcy fees. However, you shouldnt use the
proceeds to increase your exempt propertyfor example, paying the
proceeds toward your mortgage when your home equity will be protected
by your states homestead exemption. If you do, and the court determines
that you intended to defraud your unsecured creditors, your case could be
dismissed and charges filed against you.
Dont Let Your Insurance Coverage Lapse

If you need to keep your liability insurance in force to cover unknown
liabilities, file for bankruptcy just after you renew your policy. Thats because
when you file, youll want to have insurance in place that extends at least
12 months into the future. Otherwise you may have a tough time finding
an insurance carrier willing to renew your business coverage or issue a new
policy. As long as you continue to pay on time for existing coverage, the
insurance cant be canceled because of your bankruptcy, and youll enjoy
some peace of mind.
A ppe n d i x
How to Prepare a Profit and Loss Forecast

and Cash Flow Analysis
Profit and Loss Forecast.............................................................................................. 284
Step 1. Estimate Future Revenue...................................................................... 285
Step 2. Estimate Your Variable Costs............................................................. 285
Step 3. Estimate Your Gross Profit................................................................... 287
Step 4. Calculate Your Net Profit...................................................................... 287
Cash Flow Analysis......................................................................................................... 292
Step 1. Enter Your Beginning Balance............................................................ 292
Step 2. Estimate Cash Coming In..................................................................... 292
Step 3. Estimate Cash Going Out..................................................................... 293
Step 4. Subtract Outlays From Income......................................................... 293
o determine with a reasonable degree of accuracy whether your

business can return to profitability, you need to master two essential
spreadsheet tools: a profit and loss forecast and a cash flow analysis.
If you havent prepared these yet, its high time you learned. (Good news: Its
not hard.)
Why do you need both of these tools? Basically, because they tell you
different things. The P&L forecast is a very useful long-term management
tool, which you can use to predict your businesss viability six months or
a year into the future. But it doesnt give you a picture of how and when
money comes in and out of your business. A P&L could show that you
were making a profit while your bank account was below empty. So its also
essential that you accurately track cash using a cash flow analysis.
resource
More on making a plan. If you want more detailed step-by-step help,

complete with far more detailed explanations and examples, check out How to Write
a Business Plan, by Mike McKeever (Nolo).
Profit and Loss Forecast

A profit and loss, or P&L, forecast is a projection of how much money you
will bring in by selling products or services and how much profit you will
make from these sales. In good times, you use it to ensure that there will be
enough money coming in to exceed the costs of providing the goods and
services so you can make a solid profit. In tough times, your P&L can play
an essential role in showing you what kind of a plan you need to return to
breakeven, so that youll be able to survive until better times come.
If you use accounting software, such as Intuits QuickBooks, Sages Peachtree
Accounting, or Accounting Express by Microsoft, it will generate a P&L
forecast for you once you enter monthly sales and expense estimates. You
can also create your own forecast, using a basic spreadsheet. Just look at the
sample P&L below and youll see how to set it up.
appendix | how to prepare a profit and loss forecast and cash flow analysis | 285
Step 1. Estimate Future Revenue

Start by estimating how much youll take in each month during the next six
to 12 months. No question, this will be a guesstimate, but if you extrapolate
from current sales levels and allow for significant seasonal fluctuations and
other known variables, you shouldnt be too far off.
Example: Emme owns and operates a consignment shop that sells gently used
clothes for women and children. She buys her inventory from moms who bring in
their own and their childrens clothing to sell. Emme is careful to buy mostly wellknown brands (and when possible, high-end ones) that she can sell for a premium.
Before the economy took a dive, Emme was selling $15,000 of clothing per month.
But sales have been down almost 30% lately. For her profit and loss forecast, she estimates that shell bring in an average of $10,000 per month in sales over the next year
more at back-to-school time and the holidays, less during the slow summer months.
Step 2. Estimate Your Variable Costs

Now estimate the monthly cost to you of the goods or services youll sell as
part of achieving your sales estimate. These are your variable costs. Theyre
called variable, or sometimes incremental, because they go up or down
depending on the volume of products or services you produce or sell. (And
in retail, theyre called cost of goods.) For example, if youre a mail-order
business, then the more you sell, the more youll pay for shipping costs.
Other variable costs include inventory, supplies, materials, packaging, and
sometimes labor used in providing your product or service. In the case of
services, count labor costs as variable costs only if they will go up or down
depending on how many sales you make. For instance, if you have to hire
independent contractors or temps to cover busy periods, those labor costs
are variable. But if you employ a manager, bookkeeper, or marketing employee, youll have to pay their salaries no matter how much sales go up or
down, meaning their wages should be listed under fixed costs (overhead) in
Step 5, below.
Your Gross Profit Margin

Its also useful to know your gross profit margin. Gross profit margin measures the
difference between the costs of producing a product or providing a service and
what youre selling it for. In short, it lets you know how profitable your products and
services are.
To get your profit margin, divide your estimated average monthly gross profit by
your estimated monthly sales.
Example: Emme divides her monthly gross profit of $5,500 by her $10,000 of sales,
to get a profit margin of 55%. Now she knows she will get to keep, on average, about
55 cents of every sales dollar she takes in (before paying for overhead).
Profit margins can be used in many different ways. Some businesses regularly
calculate their profit margin to monitor the profitability of their products or services.
A decrease in profit margin over time usually means that variable costs have gone
upcosts for raw materials, manufacturing, or laborwhich should nudge the
company to either look for new suppliers or raise prices. Other businesses use their
anticipated profit margin to help them price products or services (and increase
profitability). For example, a business that requires a profit margin of 60% and
produces a product that costs $20 to make would set the retail price at around $50
($20 (100% 60%)). (However, some experts disagree with this use of profit margin,
recommending instead that businesses start with the price they think customers will
pay and then making sure the costs are low enough to make a profit.) Another way to
use profit margins is to screen new products and services to sell. For instance, a retail
gift shop might decide to add only new products that can be bought and sold at a
price that yields a profit margin of 50%.
Whats a good profit margin? The answer varies across industries. For example, most
airlines have low profit margins, around 5%; the software industry has traditionally had
high profit margins, around 80%90%; wholesalers profit margins are somewhere in
the middle, between 15% and 35%. But without looking at the costs of a companys
overhead, such as marketing and administration, profit margins dont give the whole
picture of a companys profitability.
Example: Emme used to spend more than $6,500 per month to buy used clothing
to resell. But because sales have been down so much, she will need less inventory and
estimates that she will probably spend only about $4,500 per month.
Step 3. Estimate Your Gross Profit

Now simply subtract your average monthly variable costs from your
estimated average monthly sales revenue to get your estimated monthly gross
profit. This number will let you calculate how much of each dollar of sales
you get to keep. From that amount, however, youll have to pay for overhead
costs; anything left over is your net profit.
Example: Subtracting her inventory costs of $4,500 per month from her sales estimate of $10,000 per month, Emme estimates her average monthly gross profit will be
$5,500. (This is before subtracting her overhead, which is discussed below.)
Step 4. Calculate Your Net Profit

Your net profit is the most important number you need to determine. This
lets you see whether youll have any money left after paying your overhead
costs or, failing that, whether you can at least break even. To arrive at your
net profit, make a list of your monthly fixed costs, which are items such as:
rent
employees wages (including payroll taxes, benefits, and workers
comp costs)
your wages, if you plan to pay yourself a regular wage regardless of how
profitable the business is (but if, as is typical, youll just take whats left
over after costs are paid, dont include your salary as a fixed cost)
utilities
telephone
insurance
office equipment
advertising, and
accounting, bookkeeping, or tax preparation fees.
Divide any annual expenses, such as insurance premiums, by 12 to get a
monthly amount.
To arrive at your monthly net profit (or loss), subtract your average
estimated monthly fixed costs from your monthly gross profit.
Example: Over the past year, Emme has been able to pay herself $60,000 from the
business, but she knows that with sales dropping this wont be possible in the coming year. She guesses shell need to cut her take-home wages to $30,000and if she
cant bring home at least that amount, she wont keep the shop open.
Emme adds up her fixed costs, including these and a few others:
$1,000 for rent
$100 for utilities
$4,000 for wages (this includes $12,000 per year for a part-time assistant as well
as employment taxes and costs), and
$100 for insurance (her annual premium is $1,200), and so on.
The total of her fixed costs comes to $5,500 per month. When she puts one
months numbers together in a spreadsheet, here is what it looks like.
January
Sales Revenue
10,000
Cost of Goods
4,500
Gross Profit
5,500
Fixed Costs
Rent
1,000
Wages
4,000
Utilities
100
Telephone
30
Insurance
100
Advertising
40
Accounting
130
Miscellaneous
100
Total Fixed Costs
5,500
Net Profit (Loss)
When you are satisfied with your cost estimates for an average month, fill
in estimates for six or 12 months. Then, for each month, subtract your total
fixed expenses from your gross profit to get the net profit.
Example: Emme fills in an entire year of sales estimates, with the usual dip in sales
she experiences in summer and then upswings in September when the kids go back
to school and in December, traditionally her best month. Then, using her estimate of
$4,500 in monthly variable costs and her estimate of $5,500 in monthly fixed costs,
she comes up with a net profit for each month. Emme notices that in the summer
shell lose a little over $1,000 per month for a few months in a row, but will make it
back up by December.
Emmes Profit and Loss Forecast
January
February
March
April
May
Sales Revenue
10,000
10,000
10,000
10,000
10,000
Variable costs
4,500
4,500
4,500
4,500
4,500
Gross Profit
5,500
5,500
5,500
5,500
5,500
Rent
1,000
1,000
1,000
1,000
1,000
Wages
4,000
4,000
4,000
4,000
4,000
Utilities
100
100
100
100
100
Phone
30
30
30
30
30
100
100
100
100
100
Advertising
40
40
40
40
40
Accounting
130
130
130
130
130
Miscellaneous
100
100
100
100
100
Total Fixed Costs
5,500
5,500
5,500
5,500
5,500
Net Profit (Loss)
Fixed Costs
Insurance
June
July
August
September
October
November
December
8,000
8,000
7,000
12,000
10,000
10,000
15,000
4,500
4,500
4,500
4,500
4,500
4,500
4,500
4,400
4,400
3,850
6,600
5,500
5,500
8,250
1,000
1,000
1,000
1,000
1,000
1,000
1,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
100
100
100
100
100
100
100
30
30
30
30
30
30
30
100
100
100
100
100
100
100
40
40
40
40
40
40
40
130
130
130
130
130
130
130
100
100
100
100
100
100
100
5,500
5,500
5,500
5,500
5,500
5,500
5,500
1,100
1,100
1,650
1,100
2,750
Cash Flow Analysis

To prepare a cash flow analysis, youll use many of the same figures you came
up with for your profit and loss forecast. The main difference is that youll
include all cash inflows and outflows, not just sales revenue and business
expenses. For example, youll include loans, loan payments, transfers of
personal money into and out of the business, taxes, and other money that
isnt earned or spent as part of your core business operation.
Also, in your cash flow analysis, youll record costs in the month that you
expect to incur them, rather than spreading annual amounts equally over
12 months. This is important because its easy to show a monthly profit on
a spreadsheet but go belly up from lack of cash if you cant pay your bills
on time. For example, if you have a $4,000 workers comp premium and a
$3,000 liability insurance premium due each July 1, youll need to find a way
to come up with real dollars then, not later. Plus, if you make sales to some
customers on credit (for example, a painter who invoices customers after the
job is done rather requiring full payment up front), your cash flow analysis
should account for the fact that you wont get paid right away, as well as the
fact that you might not collect some of the credit sales at all.
Here are the steps you need to follow to create a cash flow analysis like the
sample below. Do one month at a time.
Step 1. Enter Your Beginning Balance

For the first month, start your projection with the actual amount of cash
your business will have in your bank account.
Step 2. Estimate Cash Coming In

Fill in all amounts you expect to take in during the month. Include sales
revenue that will actually be in hand, collections of previous sales made on
credit, transfers of personal money into the business, and any loans coming
into the businessbasically, every dollar that will flow into your business
checking account.
Step 3. Estimate Cash Going Out

Enter all your projected payments for the month. Include your variable costs
(cost of goods), your fixed costs such as rent, tax payments, and any loan
payments. Add them to get your monthly total.
Step 4. Subtract Outlays From Income

Finally, subtract your total monthly cash-outs from your total monthly
income; the result will be your cash left at the end of the month. That figure
is also your beginning cash balance at the start of the next month. Copy this
amount to the top of the next months column and go through the whole
process over again.
Example: On January 2 (as a New Years resolution), Emme starts work on a cash
flow projection for the next 12 months. She starts by putting the $5,000 she has in
her business bank account in the Cash at Start of Month column for January. In her
Cash Coming In section, she includes her cash sales (which are about 75% of her
sales) and her credit sales (about 25% of her sales) on separate lines. She adds in all
of the cash sales, but only 80% of her credit sales, because some percentage of her
credit customers always take longer than 30 days to pay. In the Cash Going Out
section, Emme includes her variable and fixed costs, putting the annual insurance
premium shes about to pay in the January column rather than spreading it over 12
months.
Emmes Cash Flow Analysis

January
February
March
April
May
5,000
3,340
3,080
2,220
1,960
Sales Paid (75%)
7,500
7,500
7,500
7,500
7,500
Collections of Credit Sales
2,000
2,000
2,000
2,000
2,000
9,500
9,500
9,500
9,500
9,500
Inventory
4,500
4,500
4,500
4,500
4,500
Rent
1,000
1,000
1,000
1,000
1,000
Wages
4,000
4,000
4,000
4,000
4,000
Utilities
100
100
100
100
100
Phone
30
30
30
30
30
1,200
Ads
200
Accounting
130
130
130
130
130
Miscellaneous
600
Loan payments
11,160
9,760
10,360
9,760
9,760
3,340
3,080
2,220
1,960
1,700
Cash at Start of Month

Cash Coming In
Loans & transfers

Total Cash In
Cash Going Out
Insurance
Taxes
Total Cash Out
Cash at End of Month
June
July
August
September
October
November
December
1,700
740
2,900
6,410
4,770
5,030
5,290
6,000
6,000
5,250
9,000
7,500
7,500
11,250
1,600
1,600
1,400
2,400
2,000
2,000
3,000
7,600
7,600
6,650
11,400
9,500
9,500
14,250
4,500
4,500
4,500
4,500
4,500
4,500
4,500
1,000
1,000
1,000
1,000
1,000
1,000
1,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
100
100
100
100
100
100
100
30
30
30
30
30
30
30
280
130
130
130
130
130
130
130
400
200
10,040
9,760
10,160
9,760
9,760
9,760
9,960
740
2,900
6,410
4,770
5,030
5,290
1,000
Its easy to see why a cash flow analysis can give you a more realistic picture
of whether your business will have the money to pay its expensesin other
words, sufficient cash flow to stay afloatthan a P&L forecast. This is
especially true for companies that make sales on credit, because typically
some credit sales are not paid within the expected 30 days (and others not at
all). A P&L forecast does not account for late or missing payments, and this
is why its so important to do a cash flow analysis as well.
Example: After filling in her cash flow projection, Emme realizes that her account
will go significantly negative in the slow summer months. She may not even be back in
the black in December, her biggest sales month, because she has estimated that about
$500 per month in payments on credit sales will be late. (Though if she eventually
gets caught up collecting her accounts receivable, she will be profitable for the year.)
But given that some customers will always pay late, she knows that if she cant reduce
her costs in some way, she will need some cash to tide herself over in some months,
especially during the summer. Because she has already cut her own pay in half and
trimmed other expenses to the bone, shell have to bring in money from extra sales,
provide extra services, or get a loan from family, friends, or a bank line of credit.
Despite what your P&L forecast says about your company being profitable
or breaking even over the next six to 12 months, if your cash flow is projected
to go negative, it means youre not going to be able to pay your bills when
they become due, and youll have to bring in more income or borrow some
cash to cover the shortfalls.
Example: Going back to her spreadsheet, Emme sees that a loan of $8,000 would
cover the shortfall, even accounting for making a small loan payment. After December sales are in, shed still have a balance of $5,000. But she also sees that even if she
gets a loan, it would let her business survive only about 12 to 18 months of lower
sales before again going cash-negative the next summer. In short, she needs to make
sure that she can boost her sales back to her previous levels within the next 12 to 18
months, or she risks going in the red again before paying back the loan.
Emmes Cash Flow Analysis With $8,000 Loan
January
February
Cash at Start of Month
5,000
11,180
Sales Paid (75%)
7,500
Collections of Credit Sales

Loans & Transfers
March
April
May
10,760
9,740
9,320
7,500
7,500
7,500
7,500
2,000
2,000
2,000
2,000
2,000
8,000
17,500
9,500
9,500
9,500
9,500
Inventory
4,500
4,500
4,500
4,500
4,500
Rent
1,000
1,000
1,000
1,000
1,000
Wages
4,000
4,000
4,000
4,000
4,000
Utilities
100
100
100
100
100
Phone
30
30
30
30
30
1,200
Advertising
200
Accounting
130
130
130
130
130
600
160
160
160
160
160
Total Cash Out
11,320
9,920
10,520
9,920
9,920
Cash at End of Month
11,180
10,760
9,740
9,320
8,900
Cash Coming In
Total Cash In
Cash Going Out
Insurance
Miscellaneous
Loan payments
Taxes
June
July
August
September
October
November
December
8,900
6,300
3,980
310
1,790
1,370
950
6,000
6,000
5,250
9,000
7,500
7,500
11,250
1,600
1,600
1,400
2,400
2,000
2,000
3,000
7,600
7,600
6,650
11,400
9,500
9,500
14,250
4,500
4,500
4,500
4,500
4,500
4,500
4,500
1,000
1,000
1,000
1,000
1,000
1,000
1,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
100
100
100
100
100
100
100
30
30
30
30
30
30
30
280
130
130
130
130
130
130
130
400
200
160
160
160
160
160
160
160
10,200
9,920
10,320
9,920
9,920
9,920
10,120
6,300
3,980
310
1,790
1,370
950
5,080
Emme sets about thinking how to come up with the extra $8,000. Her
first thought is having a one-time sale. But even at her usual 55% profit
margin, she would need to sell an extra $14,500 in clothes to generate that
much gross profit. Discounting prices for a big sale would lower her profit
margin, meaning shed have to sell more. (If she sold her inventory at a 20%
discount, her profit margin would be less than 45%, and shed need to bring
in more than $18,000 in additional sales.)
Realizing that she doesnt have a realistic chance of selling that much
inventory, she goes looking for a loan. When family, friends, and the bank
turn her down, her last resort is to take $8,000 from her home equity line
of credit to tide her over. In the meantime, she gets to work on a clever
marketing plan to boost sales until better times are here.
Index
A
Abandonment form, business name, 251
ABC (assignment for the benefit of
creditors), 261262, 268
Accounts receivable, 5961, 6364, 92,
229
Advertising, 158161, 167169
Advisory committee, 45
Age discrimination, in layoffs, 179
Alternative lenders, 6162
Articles of dissolution, 248
Asset liquidation. See Liquidation and
debt settlement
Assets distribution, 252253
Assets, hiding, 95
Assets, in Chapter 7 bankruptcy,
274276
Assignee, 262
Attorneys. See Lawyers
Automatic stay, 273
B
Back taxes, 85, 269
Bank accounts, 66, 234, 243, 252
Bank lines of credit, 6466, 73, 91
Bank loans, 6162
Bankruptcy
automatic stay, 273
avoiding common missteps in, 96,

278282
business, 263264, 266, 277278
Chapter 11 bankruptcy, 266
Chapter 13 bankruptcy, 75, 264266,
268
considering at business closing,
225226, 239
debts exempt from, 89, 90
to delay foreclosure, 82
fraud in, 96, 279, 280, 282
jointly owned debts in, 75
means test, 271
median income requirements, 270271
and negotiating with creditors, 242,
261
vs. other liquidation options, 260,
267269
personal, 263, 268, 269
preference payments in, 260261, 276,
278279
recapture, 276, 278
secured debts in, 263, 265, 281282
types of, 262266
unsecured debts in, 87, 263, 266,
278279, 281282
See also Chapter 7 bankruptcy
Bartering exchanges, 209
Benchmarking, 123126
Benefits, employee, 50, 194195

Bills. See Debts
Borrowing money, 6166
Brainstorming, 131135
Bulk sales law, 99, 236
Burnout, 204206
Business bankruptcy, 263264, 266,
277278
Business license cancellation, 251252
Business name abandonment, 251
Business partners, debt liability and, 72,
7879
Business phone, 90
Business rent, 8788, 93, 281
Business reputation, 41, 43, 188
Business strategy, changing your, 11, 17,
3033
Business structure, and personal liability,
96101
Business travel, 54
Business trends, responding to longterm, 122123, 125128
Buying, tips on careful, 4647
C
Cars, 80, 92, 234, 273274, 281
Cash advances, 270, 280
Cash flow, 4045, 6668. See also
Creating more cash; Cutting expenses;
Income and profitability
Cash flow analysis

for business planning, 6
preparation steps, 292293, 296297,
300
sample, 294295, 298299
Certificate of dissolution/cancellation,
248249, 250
Chapter 7 bankruptcy
for business, 263264, 277278
Chapter 13 conversion to, 265
cosigners/guarantors in, 75
credit rating damage, 276277
debts that can be discharged, 269270
disposition of property, 271276
eligibility, 270271
and partnerships/LLCs, 269, 277
personal bankruptcy, 263
reversal of payments to family/friends
under, 276
Chapter 13 bankruptcy, 75, 264266,
268
Child support, 79, 85, 90, 270
Clients. See Customers
Closing your business
canceling permits/licenses/fictitious
business name, 251
collecting bills/selling off inventory,
229230
considering bankruptcy, 225226, 239
INDEX | 303
contingency funds for debts after, 243,

252
corporation/LLC dissolution, 248250
creating a closing team, 226227
dealing with your landlord, 228229
distributing assets to owners, 252253
going-out-of-business sales, 230
liquidating business assets, 231233,
245
looking at contractual obligations,
227228
notifying creditors/customers, 234239
notifying/paying your employees,
230231
overview on, 3334, 226
partnership dissolution, 250251
paying your business taxes, 244247
paying your debts, 239244
selling your business, 78, 24, 33
Codebtors, 7475, 270
Collateral, 7980, 91, 232, 234, 235,
263. See also Secured debts
Collecting a judgment, 8384
Collection agencies, 61, 92
Common law states, 76, 7778
Community property states, 7577, 84,
86
Competitors
combining resources with, 48, 220
embracing your, 214217
getting business from, 217218
outlasting your, 1718

selling assets to, 232233
working for, 218219
working with, 219221
Consent to dissolution, 249
Construction businesses, 1011, 1920
Co-owner asset distribution, 252253
Co-owners, bankruptcy and, 277
Copying ideas, from other businesses,
123126
Corporations
advisory board for, 5
asset distribution after closing, 252
closing your business, 233, 236238,
243, 245
credit card debt liability, 67
dissolution and wind-up, 248250
filing for bankruptcy, 263, 275,
277278
following corporate formalities,
100101
leases in name of, 49
lines of credit and, 66
liquidation options, 259, 261, 268
payroll trust fund penalties, 89
personal liability for business debt,
7273
protecting against future liability,
100101
reducing insurance coverage, 56
sole proprietorship/partnership
conversion to, 9699
taking on home equity debt liability,

6768
Corporations division, state, 248, 249
Cosigners, 7475, 270
Cost of goods, 285
Costs, 8, 17, 285, 287289. See also
Cutting expenses
Court judgments, 8385, 90
Covenants, line of credit, 6465
Cramming down your debt, 265
Creating more cash
borrowing money, 6166
internal sources for, 5761
See also Cutting expenses
Credit card processors, 47, 6667
Credit cards, 67, 73, 94, 252, 280
Credit holds, 60
Creditors
disgorging payments, 279
illegal distribution of assets and, 252
insider, 278, 279
involuntary secured creditors, 80
judgment creditor, 8385
liquidating your assets and, 233
notifying of business closing, 234238
paying your debts at closing, 239244
piercing the veil, 100101
preference payments to, 260261, 276,
278279
requesting claims for payment from,
236238
secured vs. unsecured, 80

statute of limitations on debt collection,
83, 238, 243
use of credit profile, 44
See also Debts; Negotiating with
creditors
Credit profile, 44, 101, 276277
Customers
on advisory board, 5
bill paying incentives for, 112113
classes for, 12, 157, 165
closing your business and, 227228,
238239
creating a marketing target, 145151
encouraging recommendations from,
163167
identifying your target, 142145
involving in innovation, 127128,
136137
marketing to current, 146147
offering money-back guarantees to, 166
providing consumer-oriented
information to, 170, 171, 172, 203
referring to competitors, 217218
requesting support from long-term,
156, 160, 161163, 166
sources of cash from, 5861
Cutting expenses
acting quickly, 2627
business travel, 54
buying more carefully, 4647
INDEX | 305
credit card processing service, 47

deciding how much to cut, 30, 3435
discretionary spending, 46
employee-related, 5052
equipment, 4748
insurance, 5657
and marketing, 30, 54
printing costs, 55
professional fees, 5455
renegotiating your lease, 4849
requesting creditor write-offs, 5556
before selling, 8
shortening the work week, 52
subletting unneeded space, 4950
See also Layoffs
D
dba (doing business as) statement
cancellation, 251
Debt forgiveness, 240
Debt payment prioritization
accounts sent to collection, 92
business rent, 93
child support, 90
court judgments, 90
credit cards, 94
estimated taxes, 94
insurance premiums, 93
mortgages, 91
payroll, 89
payroll taxes, 8889
personally guaranteed loans, 90
secured debts, 91
suppliers bills, 93
unsecured debts, 9495
utility bills, 8990
vehicle payments, 92
when closing your business, 240243
Debt repayment plan, Chapter 13,
264265
Debts
asset distribution and, 252
borrowing money, 6166
contingency fund, 243, 252
cramming down your, 265
credit card, 67
creditor claims for payment, 236238
discharged in Chapter 7 personal
bankruptcy, 269270
fraudulent, 96, 270
home equity, 6768, 73, 91
importance of paying bills on time,
4145
jointly owned, 7479
paying at close of business, 239244
personal liability for business debts,
7174, 97, 259260, 264265, 268
reaffirming, 75
settlement of, 241243
statute of limitations on collection, 83,
238, 243
understanding legal status of, 263
warning on converting, 56
See also Creditors; Debt payment
prioritization; Liquidation and debt
settlement; Minimizing debt liability;
Personal guarantees; Secured debts;
Unsecured debts
Deed in lieu of foreclosure, 82
Deed of trust, 8182, 91
Deficiency, loan, 80, 234, 241
Delegation of work, 208212
Discounts
coupled with request for customer
support, 161163, 166
creditors offering prompt/early
payment, 42, 59
customer payment, 58, 59, 60
recession rate, 54, 105, 113, 157
sales and special offers, 156157, 160,
169, 172173, 230
service business, 1718, 104105
targeting bargain shoppers, 148149
Trying to Stay in Business Sale,
172173
Discretionary spending, 46
Discrimination, layoffs and illegal,
178179
Disgorging of payments, 279
Dissolution of business, 248251
Dun & Bradstreet credit reports, 44, 101
E
Early termination fee, 227
EIN (employer identification number),
247
Email marketing, 169172
Email new-idea conferences, 135
Employees
benefits for, 50, 194195
and closing your business, 230231
cost of, 110
cutting expenses related to, 5052
employee appreciation programs,
189191
and final income tax returns, 246
involving in innovation, 135136
off-site, 182
reducing the work week, 52
reversing cutbacks, 3537
See also Keeping good employees;
Layoffs
Equipment
in bankruptcy, 274, 280, 281
eliminating nonessential, 4748
as exempt property, 86
leased, 48, 241, 281
repossession of, 8081
returning at close of business, 234, 241
seizure of, 89
Estimated taxes, 94
INDEX | 307
Event sponsorship, 157158

Exempt property, 8586, 272, 274, 281
Expenses, 8, 17, 285, 287289. See also
Cutting expenses
Factoring, 6364
Family members
on advisory board, 5
bankruptcy and loans from, 260261,
276, 278, 279
borrowing from, 6263
hiding assets with, 95
Federal EIN (employer identification
number), 247
Fictitious business name cancellation,
251
Final paychecks, 180
5/15 reports, 135
Fixed costs, 287289
Foreclosures, 8182, 271272
Franchises, 2324
Fraud, bankruptcy, 279, 280, 282
Fraudulent debts, 96, 270
Fraudulent transfer laws, 95
Friends, hiding assets with, 95
Friends, loans from, 6263, 260261,
276, 278, 279
Health insurance benefits, preserving

employee, 50
Hibernation, 89
Hours, reducing work week, 52
House painter profit statement, 108110
Houses
disposition in bankruptcy, 271273
home equity debt, 6768, 73, 91
homestead exemptions, 68, 272
foreclosure on, 8182, 91, 271272
ownership in common law states, 77
Gross profit margin, 286

Guarantors, 7475
I
Illegal discrimination, layoffs and,
178179
Importers, 2223
Income and profitability
debt forgiveness tax implications, 240
evaluating your, 104105, 106
formulating a profits plan, 105106
profit and loss forecast, 6, 14, 284285,
287291, 296297
retail and manufacturing profit

statement, 113116
service business profit statement,
107113
work less/make more, 208212
See also Cash flow analysis
Income tax returns, 245, 247
Independent contractors, 89, 246
Innovation
benchmarking (copying), 123126
brainstorming, 131135
changing your business strategy, 11, 17,
3033
choosing the best ideas, 138140
as a continuous process, 129131
invention, 120123
involving customers in, 136137
involving employees in, 135136
overview on importance of, 118120
serendipity, 126129
taking time for, 138, 206
Insider creditor, 278, 279
Installment payments, tax debt, 244
Insurance carriers, notifying of business
closing, 235
Insurance coverage, retaining in
bankruptcy, 282
Insurance expense reductions, 5657, 93
Insurance premiums, refund of prepaid,
233
Intangible property, 232
Intellectual property, 232233, 260, 262

Invention, innovation by, 120123
Inventory, 46, 5758, 99, 113116, 230,
280
Involuntary secured creditors, 80
IRS payment options, 244
J
Jointly owned debt, 7479
Judgment creditor, 8385
Judgment lien, 84
Judgment proof, 83
Judicial foreclosure, 81
K
Keeping good employees
acknowledging contributions, 193195
communicating early and often,
188189
establishing an upbeat workplace tone,
195197
fair treatment and pay, 186188
guarding against ostentatiousness,
197200
importance of, 185186
leading instead of dominating, 191193
retaining your sense of purpose, 188
showing your appreciation, 189191
staying involved in your business, 206
INDEX | 309
L
Lawyer profit statement example,
110113
Lawyers
advice in partnership insolvency, 250
advice on liquidation options, 257
for creditor negotiations, 5556,
242243, 244, 259
help with closing your business,
226227
for lease renegotiation, 49
for overdue account collection, 6061
requesting discounted fees from, 54
Layoffs
company security and, 183
cutting jobs, not people, 5254
logistics of, 179183
making a layoff plan, 177179
providing references, 180181
reversing cutbacks, 3537
sample layoff statement, 184185
See also Keeping good employees
Leaflet marketing programs, 157
Leases
in bankruptcy, 274, 281
closing your business and, 228229,
232, 241
equipment, 48, 81, 241, 281
liability for back rent, 8788, 93
personal guarantee of, 73
renegotiating, 4849
rental inspection checklist, 229
vehicle, 81, 92
Lenders, 6162, 234235
Letters of recommendation, employee,
180181
Liability insurance, 233, 282
License cancellation, 251252
Liens, 80
Line of credit, 6466, 73, 91, 101, 234
Liquidated damages, 227
Liquidation and debt settlement
assignment for the benefit of creditors
(ABC), 261262, 267269
comparison of three options for,
267269
consulting a lawyer, 257
negotiating with your creditors,
239243, 258261, 267269
taxes following, 245
See also Bankruptcy
Liquidation bankruptcy. See Chapter 7
bankruptcy
LLCs (limited liability companies)
closing your business, 233, 236238,
243, 245
converting from sole proprietorship/
partnership to, 9699
and filing for bankruptcy, 263, 275,

277278
following LCC formalities, 100101
leases in name of, 49
lines of credit and, 66
liquidation options, 259, 261, 268
payroll trust fund penalties on, 89
personal liability for business debt,
6768, 7274
protecting against future liability,
100101, 259
Loans
application fraud, 96
bankruptcy and preference payments,
260261, 276, 278279
foreclosures, 8182
handling at close of business, 234235
for immediate cash, 6166
loan deficiency, 80, 234, 241
from pension plans, 270
personal guarantees for, 7273, 78, 90,
101
Look-back period, 95
Luxury items/purchases, 269, 275, 280
M
Machines. See Equipment
Managers, in layoff process, 179180,
182
Manufacturers, 99, 113116
Marketing
creating a marketing target, 145151
cutting expenses before, 30
drawbacks to paid advertising, 158161
email, 172
encouraging customer
recommendations, 163167
identifying your target customers,
142145
long-term outreach, 157158
matching target audience to products/
services, 154158
overview on, 12, 54
providing consumer-oriented
information, 170, 171, 172, 203
requesting support from long-term
customers, 156, 160, 161163
short-term money-makers, 156157
Trying to Stay in Business sales,
172173
using paid listings effectively, 167169
website, 169172
word-of-mouth, 16, 163166
Media publicity, 158
Medicare taxes, 71, 8889, 244
Merchant cash advances, 6667
Minimizing debt liability
choosing bankruptcy, 87
for jointly-owned debt, 7479
personal liability for business debts,
7174
protecting against future personal
INDEX | 311
liability, 96101
secured debts, 7982
secured vs. unsecured creditors, 80
staying out of deeper trouble, 9596
unsecured debts, 8287
wage garnishment, 85
See also Debt payment prioritization
Mitigating the damages, 87
Monthly fixed costs, 287289
Monthly gross profit, 287
Mortgages, 8182, 91
N
Narrowcast advertising, 167
Negotiating with creditors
bankruptcy and, 242, 261
caution on personal guarantees, 56
to continue ordering, 93
debt forgiveness, 5556, 240
discounts for paying early, 42
liquidation and debt settlement,
239243, 258261, 267269
on mortgages/deeds of trust, 8182
release of debt, 241242, 259
Net profit, 287
New ideas. See Innovation
Nonexempt property, 83, 266, 275, 282
Nonjudicial foreclosure, 81
Nonprofit donations, 158
Nonrecourse factoring, 64
Notice, close of business, 236239, 251

Notice requirements, layoff, 180
Notification of change in business form,
9799
O
Offer in compromise, 244
Offset of funds, 66
Online resources
alternative lending sources, 61
auto lease swapping, 92
bartering exchanges, 209
claims for payment laws, 237, 238
CreditBuilder, 101
exempt property, 85
forming an LLC/corporation, 97
liquidating tangible assets, 233
loan paperwork, 63
means test, 271
property exemptions, 85
secretary of state offices, 249
Overwork. See Work hours
Owners, asset distribution to, 252253
P
Paid listing advertising, 167169
Partnerships
closing your business, 238, 243, 245
converting to LLC/corporation from,

96100
filing for bankruptcy, 270, 277278
importance of release from debt,
259260
liquidation options, 269
personal liability for business debt, 72,
7879
Payroll, 5052, 89, 177, 180, 186188
Payroll providers, 235
Payroll taxes, 71, 8889, 244
Peer-to-peer lending, 62
Penny-saver publications, 167, 169
Pension plans, 246, 275
Permit cancellation, 251
Personal bankruptcy, 263, 268, 269
Personal guarantees
avoiding, 49, 56, 101
cosigners and, 7475
on home equity loans, 6768
for LLC/corporation debts, 7273, 82,
90, 261, 268
negotiating with creditors and,
259260
and payments in bankruptcy, 278279
spouses and common law states, 78
Personal liability for business debts,
7174, 97, 259260, 264265, 268
Personal property, 89, 275276
Piercing the veil, 100101, 259
P&L (profit and loss) forecast, 6, 14,

284285, 287291, 296297
Postnuptial property agreements, 76
Preference payments, 260261, 276,
278279
Prepayment discounts, customer, 58
Price, and your target market, 148149
Price increases, 5859
Printing cost reductions, 55
Professional fee reductions, 5455
Profit. See Income and profitability
Profit and loss (P&L) forecast, 6, 14,
284285, 287291, 296297
Profit margins, 286
Prompt payment discounts, 42, 59
Property
disposition in bankruptcy, 271276
exempt, 8586, 272, 274, 281
intellectual, 232233, 260, 262
liens on, 80
liquidating business assets at closing,
231233, 245
nonexempt, 83, 266, 275, 282
postnuptial agreements, 76
secured debts and, 7982
seizure of, 84, 89, 90
tangible, 231, 233
vehicles, 80, 92, 234, 273274
See also Equipment; Houses
Publication of change in business form,
99
Publisher profit and loss example, 114
INDEX | 313
R
Reaffirming a debt, 75
Recapture, 276, 278
Recession rate/discount, 54, 105, 113,
156
Reciprocal discounting program, 156
Recourse factoring, 64
Refinancing, 82
Release of debt, 241242, 259
Rent, 8788, 93, 281
Repossessions, 8081, 92, 273
Resale certificate/license cancellation,
251
Resource combining, 48, 220
Restaurants
bulk sales laws and, 99, 236
changing business direction, 3233
importance of cleanliness in, 164165
marketing and innovation, 21,
123124, 147
special considerations for, 2022
Retailers
adding a service component, 116
asking for customer support, 162, 173
bulk sales laws and, 99, 236
calculating gross profit margin, 286
discounting, 57
embracing long-term trends, 125127
hibernation, 10
identifying your customers, 147, 148,
149
innovation and marketing, 128, 131,

156, 157
marketing vs. advertising, 159161
negotiating with creditors, 258259
profit and loss forecast example, 285,
287291
renegotiating your lease, 4849
selling your business, 10
understanding profitability, 113116
working reasonable hours, 204205
Retirement plans, 86, 246, 275
Right to setoff, 234
S
Sales, 156, 172173, 230
Sales taxes, 88, 244
Sales tax ID number cancellation, 251
Saving your business
changing business direction, 11, 3033
choosing hibernation, 89
choosing to sell, 78, 33
construction businesses, 1920
creating an advisory board, 46
franchises, 2324
importance of acting fast, 2627
objectivity in, 45, 910
overview on choice of, 912
restaurants, 2022
retailers, 1216
service businesses, 1619
short-/medium-/long-term of business,
6
wholesalers/importers, 2223
See also Creating more cash; Innovation;
Keeping good employees; Marketing
Search engine optimization (SEO), 171
Secretary of state, dissolution of business
entity, 248249, 250
Secretary of states registry of liens, 84
Secured debts
in bankruptcy, 263, 265, 281282
closing your business and, 232, 234,
241
liability for, 73, 7982, 91
Seizure, 84, 89, 90
Sellers permit cancellation, 251
Selling your business, 78, 24, 33
SEO (search engine optimization), 171
Separate property agreements, 76
SEP retirement plan, 246
Serendipity, 126129
Service businesses
asking for customer support, 162163
changing business direction, 3132,
203
client bill paying incentives, 112113
creating positive word-of-mouth, 164,
165166
cutting back, 29, 3437, 5152, 5354
hibernation, 89
identifying your customers, 144147,
151
importance of delegating, 210, 212

innovation in, 122123, 129, 139
looking at profitability, 104105
making money in, 107113
marketing of, 16, 156157, 170
offering discounts, 17, 18, 58, 104105
opting for selling, 7
raising prices, 59
working with your competitors, 218,
220
Setoff of funds, 66
Settlement of debt. See Liquidation and
debt settlement
Severance pay, 181
Short sale, 82
SIMPLE retirement plan, 246
Small claims court, 6061
Social financing, 6162
Social Security taxes, 71, 8889, 244
Sole proprietorships
closing your business, 238, 243, 245
converting to LLC/corporation, 9699
home equity debt liability and, 67
importance of release from debt,
259260
liquidation options, 266, 268
personal liability for business debt, 72
Specials offers, customer, 156157
INDEX | 315
Spending less. See Cutting expenses

Sponsoring an event, 157158
Spouses debt liability, 7578, 84, 86
State income tax withholding, 88
State laws
bulk sales, 99, 236
claims for payment, 236238
community and common law property,
7578
final paychecks, 180
fraudulent transfer, 95
homestead exemptions, 68, 272
landlord mitigation of losses, 228
layoff notice, 180
notification of change in business form,
99
property exemptions, 85, 273
statute of limitations on creditor claims,
238, 243
on unsecured debt collection, 83
wage and hour, 89
wage garnishments, 84
withholding/sales taxes deposits, 88
State tax issues, at closing, 247, 249
Statute of limitations, on debt collection,
83, 238, 243
Store credit cards, 81
Straight bankruptcy. See Chapter 7
bankruptcy
Strategy, changing your business, 11, 17,
3033
Subletting unneeded space, 4950
Suppliers. See Creditors

Supplies, in bankruptcy, 280
Supporting the arts, 158
Survival plan. See Saving your business
T
Tangible property, 231, 233
Tax-deferred retirement plans, 86
Taxes
at closing of business, 244249
and debt forgiveness, 240
estimated, 94
federal corporate dissolution
paperwork, 249
partnership conversion, 100
payroll, 71, 8889, 244
retention of tax returns, 247
state, 247, 249
tax debt, 41, 85, 269
Taxpayer ID, 247
Telephone, 90
Till tap, 83, 84
Tools of the trade exemption, 86, 274
Tourism-related businesses, 10, 147, 165,
168
Travel, cutting business, 54
Trends, responding to, 122123,
125128
Trust fund penalty, 8889
Trying to Stay in Business Sale, 172173
U
Uniform Commercial Code (UCC)
records search, 84
Unsecured debts
in bankruptcy, 87, 263, 266, 278279,
281282
creditor collection options, 8283
in judgment collection, 8387
priority of paying, 9495
Utilities, 8990, 235, 281
V
Variable costs, 285, 287
Vehicles, 80, 92, 234, 273274, 281
Verification of good standing, 249
W
Wage garnishment, 84, 85
Website marketing, 169172
Wholesale license cancellation, 251
Wholesalers, 2223
Withholding taxes, 88, 244, 246
Word-of-mouth marketing, 163166
Workers compensation premium
refunds, 233
Work hours
caution on laziness, 206
danger of burnout, 204206
delegation of work, 208212
importance of a sane schedule, 203207
myths around overwork, 202203, 210
working less/making more, 208212
Work week reduction, 52
Writ of garnishment, 84
Y
Yellow-pages listings, 125, 167, 168
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NOLO

In Nolo you can trust.

stop the red

Attorney Ralph Warner and

Free Legal Updates at Nolo.com

N O L O Your Legal Companion

Make the law as simple as

Whether you have a simple question or a complex

NOLOS LAWYER DIRECTORY

Old law is bad law. Well

Recognizing that the law

To make sure that this is the

Save Your Small

Ralph Warner, J.D. & Bethany K. Laurence, J.D.

Cover and Book Design

delta printing solutions, inc.

Your Small Business Companion.....................................................................1

1 Can You Save Your Business?

2 Dont Ignore Bad News

3 Control Your Cash Flow

4 Minimize Liability for Your Debts

5 Concentrate on Whats Really Profitable

7 Identify Your Customers

8 Dont Waste Money on Ineffective Marketing

9 Handle Layoffs FairlyAnd Keep Your Best People

10 Dont Work Too Much

11 Work With Your Best Competitors

12 How to Close Down Your Business

13 Dealing With Debt: Bankruptcy and Its Alternatives

to Prepare a Profit and Loss Forecast and

Your Small Business Companion

2 | save your small business

Can You Save Your Business?

4 | save your small business

he economic tsunami that has engulfed America and much of

Stepping Back to Plan for the Short and Long Term

chapter 1 | can you save your business? | 5

Creating Your Advisory Board

6 | save your small business

chapter 1 | can you save your business? | 7

Selling Your Business

8 | save your small business

Information on selling. The Complete Guide to Selling Your Business,

Putting Your Business in Hibernation

chapter 1 | can you save your business? | 9

Saving Your Business

10 | save your small business

chapter 1 | can you save your business? | 11

12 | save your small business

Special Considerations for Different Kinds of Businesses

chapter 1 | can you save your business? | 13

14 | save your small business

chapter 1 | can you save your business? | 15

Example 2: Phyllis runs an upmarket womens clothing boutique called Festoon,

16 | save your small business

chapter 1 | can you save your business? | 17

A sales meltdown is more difficult to overcome if you run a service business

18 | save your small business

chapter 1 | can you save your business? | 19

20 | save your small business