FOR CHRIS HOUGHTON, owner of two eclectic home-furnishings stores in Brooklyn, N.Y., called Trailer Park, December was the worst month his business has ever experienced. Not only is he stuck with about 95% of one store’s unsold holiday merchandise, but now he’s preparing to shutter his second shop.

“Consumers just aren’t buying,” says Houghton. Even before Christmas, sales were down significantly, he says, adding that: “For the last six months we’ve barely been making enough to pay the bills and rent.”

Post-holiday store closings are a rather common fate for small businesses, says David Cornblatt, chief executive of OLS Trading, a liquidation advisory firm in Gaithersburg, Md. Struggling businesses often try to stay open through the holiday season, hoping to get one last shot at profitability, he explains.

But for many businesses, this year's holiday sales were dismal. From Dec. 1 through Dec. 24, total retail sales, excluding automobiles, fell by 8% year over year, according to MasterCard's (MA) SpendingPulse unit, which tracks consumer spending. Corporate-turnaround consultants like Fred Crawford, chief executive of AlixPartners, a Michigan-based advisory firm, predicts that thousands of big and small retailers will shutter in the new year.

What many small-business owners will find is that closing up shop requires a lot more work than simply hanging up a "Going Out of Business" sign. In fact, the process is rife with legal issues, unexpected costs and other pitfalls. Here are a few pointers to keep in mind:

Notify your creditors

Let your creditors know if you're about to host a liquidation sale. Otherwise, you could be breaking the law, says Paul J. Rauseo, managing director of George S. May, a small-business management consulting firm in Chicago. While in most states, merchants aren’t required to notify creditors before they go out of business, several states including North Carolina and New York have a "bulk sales” law, which prohibits the sale of business assets — such as equipment, consumer products and other inventory — outside the ordinary course of business. In these states, if business owners want to liquidate their company’s assets, they’ll typically need to provide written notice to creditors and publish a notice of the sale in a local newspaper or classified ad. If the creditors are owed money, they can make claims on the sale’s proceeds.

Be careful what you sell

Selling items that have a lien against them without the express permission of the lien holder is strictly prohibited, says Rauseo. “If you sell an asset that has a lien on it, you can go to jail.” And obviously, if you don’t own something outright — for example, you’re still making payments — don’t sell that item without consent either.

Honor your obligations

Just because you're going out of business, doesn't mean you're off the hook when it comes to financial obligations. If you owe money to an employee’s pension fund, for example, you’re still required to pay, says Rauseo. The worst mistake you could make is forgetting to pay Uncle Sam. Even though you’ve officially decided to close up shop, you’re still required to pay taxes, he says.

Host a public liquidation sale

Selling excess inventory and equipment in “bulk” to a single buyer can offer fewer headaches. However, these days, finding a single buyer that’s flush enough to buy a business’s inventory is almost impossible, says Mike Lee, president of Quitting Business, a retail liquidation consultancy in Bellingham, Wash. If a business can’t find such a buyer, then selling the goods to the public via a liquidation sale is the next best step, he says. These sales involve strategically marking down inventory to both motivate buyers to shop and eke the most value out of unsold merchandise. To help you devise an optimal strategy, contact a liquidation consultant. (One caveat: Many states including Arizona and Maine require a license to hold going-out-of-business sales.)

Seek out specialized dealers

Trying to unload computers, office furniture, restaurant and other specialized equipment? Approach dealers that specialize in buying and selling those items, says Cornblatt from OLS Trading. For instance, Brooklyn, N.Y.-based Office Furniture Corp., purchases and removes small loads of high-quality furniture and then sells it to dealers or directly to the public. And reseller Portland Store Fixtures offers to haul away some old merchandise displays and other store fixtures for free. To help you find such businesses, speak with a liquidation consultant who can also connect you with interested private parties or direct you to relevant auctions.

Donate leftover inventory

By donating old equipment to organizations such as Gifts In Kind International or Habitat for Humanity, you can deduct the fair market value of the equipment from your taxes, suggests Cornblatt. And, these charitable organizations will typically do all the footwork for you. (Click here to view IRS rules for determining fair market value.)

Write to Diana Ransom at dransom@smartmoney.com

  

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