What you need to know before shutting down your startup  

April 30, 2024
4 min read

Few people enthusiastically purchase or renew their insurance. By its nature, it assumes potential harm, which many people would rather not experience or even think about. Sadly, ignoring a matter does not make it go away.

Just like most policyholders do not anticipate harm, most startup founders do not want to contemplate the possibility of failure. Yet, it is part of the entrepreneurial experience.

At least 50% of startups will not survive the first five years of business and will shut down due to internal factors such as failing to find product-market fit, conflict between co-founders, mismanagement of funds, and external factors such as recessions or the regulatory environment.

Regardless of why they cease operating, the process is never pleasant for the founders, investors, or employees. Still, business closures must be handled properly to avoid problems down the road.

This article covers what is required to shut down a business in Nigeria. Each jurisdiction has laws that govern the closure of a business, so ensure that you understand the laws in your jurisdiction.

Why shutting down properly is important  

Closing down a startup that you've worked hard to build can be distressing, but it must be done properly.

Dissolving a startup properly provides clarity and transparency for everyone involved and leaves no one in doubt over why the shutdown was necessary or what happens to assets owned by the business.

Early-stage investors frequently place more emphasis on founders than they do on the startup, so founders must protect their reputations by properly shutting down their startups.

Many founders would launch a new startup despite previous failures. When this happens, they may need to raise funding. Founders who handle the process of closing down properly will have a better chance of raising money from former investors than those who do not.

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Shutting down properly ensures that startups fulfil all legal and financial responsibilities. If a startup owed any debt or contractual obligation before shutting down, shareholders may be liable if the shutdown is not conducted properly. It also helps startups maximise value for their investors and shareholders.

How to shut down a startup  

In Nigeria, the Companies and Allied Matters Act 2020 states two major ways for the winding up of a company: voluntary winding up and winding up by the court.

Voluntary winding up takes place when shareholders decide to shutter a startup's operations. This could be because the company is insolvent or has met its objectives. Winding up by the court occurs when a petition is brought before a court requesting a company's closure.

The first step to take is to analyse the state of your startup properly and justify the decision to wind up.

"There should be some documented analysis as to why, against all odds, the only route for this company is not a merger, is not an acquisition, is not a management buyout, is not a secondary sale of shares, but a shutdown. You have to look at the reason why every other option that allows the company to still be self-sufficient is not explored before you just shut down," Rosemond Phil-Othihiwa, a corporate commercial startup attorney, says.

The results of your analysis will give you conclusive evidence, which you can present to the board of your startup or its equivalent. You'll have to interact with your board on more than one occasion to ensure that everyone agrees there is no other viable option.

These interactions will also determine the best route for winding up that allows all stakeholders to recover some of their investment. If you've given out employee stock options, you should also identify what the plan will be.

You must work with a competent legal professional during this process to avoid any repercussions. Ideally, this should have been included in your stock option policies, so you're not scrambling.

Communication is key   

Even if you've been aware that your startup will be closing shop for some time, it's still not going to get easier.

You may be tempted to stay silent about it, but this is one time you need to communicate clearly and frequently. Your investors and shareholders would often be the first to learn of this decision, but ensure you keep them updated.

"Communication is important, with your stakeholders, with your board, with your management team, with your employees, with third parties, and with your customers," she says.

They've supported your dreams with their money, time, and expertise, so you should keep them informed. Moreover, you may have to return some funds to them, depending on how and why the business shuts down.

Employees also need to know what's going on. Just like you, their lives are going to be affected by this decision, so let them know early enough.

"As soon as management has a reasonable understanding of the situation, it is important to have a communications plan on how information will be passed across stakeholders. Transparency is essential to building trust, and credibility and eliminating any doubts or suspicions that stakeholders may have," Ibukun Falope, Account Manager at Talking Drum Communications, says.

Another set of people that should be kept in the loop are your customers and vendors. Depending on the service you offer, your shutdown may significantly impact your customers' operations.

Letting them know in good time gives them adequate time to prepare. If you run a startup that holds customer deposits, you should also communicate your plan to return customer funds.

Finally, expect media attention. This may not always happen, but if your startup has been in the news frequently or has had some success, you can expect journalists to come and ask questions.

Falope advises startups to be proactive with their communication. A communication strategy must be in place before a public announcement and should include company spokespersons, what message should be conveyed, and the best way to do so. Timing should also be considered.

"You can’t be too late or too early, you have to be “on time.” Failure to do this will have severe consequences," she adds.

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Accidental writer, covering Africa's startup landscape and its heroes. Find me on Twitter @chigo_nwokoma.
Accidental writer, covering Africa's startup landscape and its heroes. Find me on Twitter @chigo_nwokoma.
Accidental writer, covering Africa's startup landscape and its heroes. Find me on Twitter @chigo_nwokoma.

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