Honour, honesty and transparency are your best assets when closing a business

Many entrepreneurs will have no option but to close down their businesses. With the ravaging effects Covid-19 has had on the economy, formal employment may not be an alternative for many. Starting again is the only choice available for these entrepreneurs.

A friend of mine recently started a new business after closing down his old one. After four years of struggling to keep the old business afloat, he finally took the brave decision to shut it down and start a new business in a related field in which he could take advantage of his expertise, his relationships and his clients.

What struck me about the way he approached the business closure (or zero hour) was the transparency and honour with which he conducted himself.

Six months before zero hour, the actual point at which he submitted his final documents relating to closing down the business, he started a process of having conversations with his major suppliers and told them about his intentions. To his surprise, all but one continued to supply him in that business and also committed to supplying his new business with easier terms to aid in the rebirth.

Three months before zero hour, he started engaging with his major clients to float his new business idea with them. In doing so, he combined market research with relationship building, while also conditioning clients to the approaching change.

Two months before zero hour, he began having discussions with his senior team about his intended plans and was transparent about the fact that it would be impossible to take them all across to the new business. This balanced the need to give them enough time to make alternative arrangements with the need to prevent productivity fallout if the discussion was held too far in advance. A week later, he informed his full team about the situation.

In this instance, the transition between the new and old businesses was relatively seamless. His suppliers continued to supply him (albeit with different products), he brought across trusted senior management and staff to help him run the new business, and his clients continued to support him.

This was in stark contrast to another entrepreneur in my personal circle. In that case, the entrepreneur let his senior team know a week before he was closing down, and told his staff on the day they were issued with retrenchment notices. He made no attempt to communicate with his suppliers (who by this time were screaming at him for payment via phone and email), and he made absolutely no attempt to communicate with his clients.

In my opinion, he acted in a completely dishonourable manner and the consequences were predictable… When he started his new business in a related industry, only one of his four senior team members was willing to join him, and he had to start recruiting new staff from scratch, as none of his previous employees trusted him.

Although many of his previous clients entertained his approaches and even agreed to purchase from and support him, none of his former suppliers was prepared to supply him. This meant he had to go through the painful process of setting up cash-on-delivery relationships with new suppliers, which, of course, had an impact on his cash flow.

While I don’t have all the context and details of these two cases, and while one should not judge other people’s situations and how they respond to them, I ask myself: If I were in the predicament of having to close down my business, which of these two approaches would I take?

The first approach does have its risks. It requires far more effort and vulnerability, and it can result in a situation where you have prematurely demotivated staff. A demotivated staff complement may accelerate zero hour, thus potentially reducing the time available to ensure the new business is ready to launch. Competitors finding out about your predicament early will most likely result in them making aggressive moves in the marketplace to take advantage of your now known weakened position.

Suppliers who hear about your potential business demise may become skittish and not extend vital credit, thus accelerating the time to zero hour.

This situation is the one that entrepreneurs most fear -- that they will be forced to close their businesses at a point when their Plan B is not yet in play.

It seems some entrepreneurs believe there is a trade-off between, on the one hand, being honourable but losing strategic control and, on the other hand, being less honourable and less transparent but gaining strategic control. In reality, any strategic advantage you gain by using the latter approach is short term at best. In the long term, it is the complete opposite.

What those who act dishonourably forget is that we live in a relatively small ecosystem, where our reputations are critically important to our long-term success. Before I do business with someone new, I research them. I Google them and check Facebook and LinkedIn to see if we have any common friends or associates. I immediately call these mutual acquaintances to get a GBU (a good, bad or ugly) reference on the individual concerned. A good means the person is trustworthy and a good operator, a bad is a “don’t touch this person as they are not ethical” and an ugly is “this person may be a nice person but is not a good entrepreneur”.

Good entrepreneurs with good reputations are the ones that we tend to see rebounding successfully in a new business over the long term. Guard your reputation at all costs because, when it comes down to it, your reputation is, as my father taught me, “the most important asset in your life”.

My advice to anyone facing a zero-hour moment is to start putting together a Plan B immediately and, once that plan has been researched and rigour tested to some extent by trusted confidantes, to begin the move to Plan B in a transparent and honourable manner as quickly as possible. DM168