Closing a restaurant is a process, not an event. The day you lock the door for the last time is the end of a sequence that starts weeks or months earlier and continues for weeks or months after.
Owners who treat closing as an event -- who stop paying rent, tell employees on a Friday, and walk away -- create legal and financial problems that follow them for years. Owners who treat it as a process protect themselves, their employees, and their credit.
Here is the complete checklist, in order.
Step 1: Make the decision and set a closing date
The closing date determines everything else. It sets the timeline for employee notices, vendor cancellations, lease negotiations, and license surrenders. Pick a date that gives you enough time to complete the process without extending your losses longer than necessary.
For most independent restaurants, 30 to 60 days is a reasonable closing timeline. Franchise restaurants may need 60 to 90 days to satisfy de-identification requirements. Restaurants with complex lease situations may need longer to negotiate a buyout or assignment.
Step 2: Notify employees
Federal law requires employers with 100 or more employees to provide 60 days' advance notice of a plant closing or mass layoff under the WARN Act. Most independent restaurants have fewer than 100 employees and are not subject to the federal WARN Act.
However, some states have "mini-WARN" laws with lower employee thresholds. California's WARN Act applies to employers with 75 or more employees. New York's applies to employers with 50 or more. Check your state's requirements before you set your closing date.
Regardless of legal requirements, giving employees as much notice as practical is the right thing to do. Your staff has bills and families. Two weeks is the minimum. Four weeks is better if you can manage it without the news causing a mass departure before you close.
For a detailed walkthrough of employee obligations, see Closing a Restaurant: Employee Pay, Final Checks and the WARN Act.
Step 3: Notify your landlord
Your lease specifies the notice required for termination. Read it. If you are closing before the lease term ends, you need to negotiate a buyout or assignment, not just give notice. Notice of closure is not the same as termination of the lease.
If you have a personal guarantee on the lease, the guarantee survives until the lease is formally terminated and the landlord releases you. Closing the restaurant does not end your lease obligation.
Start the landlord conversation early. A landlord who has time to find a new tenant is more likely to negotiate a reasonable buyout than a landlord who is surprised by your closure.
Step 4: Cancel vendor contracts and subscriptions
Make a list of every vendor, service provider, and subscription the business has. Food distributors, linen services, POS systems, music licensing, pest control, waste removal, and any other recurring service. Each one has a cancellation process and may have a contract with a notice requirement or early termination fee.
Cancel in writing. Keep records of every cancellation confirmation. Vendors who continue to deliver after you close will invoice you, and those invoices become debts.
Step 5: Handle inventory and equipment
Perishable inventory should be used, donated, or disposed of in the days before closing. Non-perishable inventory can be sold to other restaurants or returned to distributors if your contracts allow it.
Equipment is typically the largest recoverable asset in a restaurant closure. A restaurant equipment dealer or auction house can provide a valuation. Selling equipment directly to other restaurants or through an online marketplace typically yields more than auction prices but takes longer.
If you have equipment under lease or financing, contact the lender before you dispose of anything. Leased equipment must be returned. Financed equipment may have a payoff amount that affects how you handle the sale.
Step 6: Pay employees their final wages
Every state has laws governing the timing of final paychecks. In most states, final wages are due on the next regular payday or within a specified number of days after termination. Some states require immediate payment on the last day of work.
Payroll taxes must be deposited with the IRS on the normal schedule, even during a closure. Unpaid payroll taxes create personal liability for the business owner -- they are not dischargeable in bankruptcy and can result in the IRS's Trust Fund Recovery Penalty, which holds the owner personally liable for the employee portion of unpaid payroll taxes.
Step 7: File final tax returns and close tax accounts
The IRS requires a final federal income tax return for the year the business closes, a final employment tax return (Form 941), and a final sales tax return with your state. You must also cancel your EIN registration with the IRS.
If the business has a sales tax account with the state, close it formally. Leaving a sales tax account open after the business closes can result in estimated assessments and penalties.
Step 8: Surrender licenses and permits
Liquor licenses, food handler permits, health department permits, and business licenses all need to be formally surrendered or allowed to lapse. A liquor license in a quota state may have resale value -- check with a liquor license broker before you surrender it.
Some licenses have refund provisions for the unused portion of the license period. Others do not. Check each license's terms before you surrender.
Step 9: Close bank accounts and credit lines
After all final payments are made, close the business bank accounts and any lines of credit. Notify your bank in writing. Keep records of the final account statements.
If the business has outstanding credit card debt, contact each lender to discuss settlement options. Credit card debt is unsecured and is often negotiable, particularly when the business is closing and the alternative is collection.
Step 10: Dissolve the legal entity
If the business is an LLC or corporation, file the dissolution paperwork with the state. In Texas, this is a Certificate of Termination filed with the Secretary of State. Failing to formally dissolve the entity can result in continued franchise tax obligations and annual report requirements.
The dissolution process varies by state. An attorney or accountant can handle the filing for a few hundred dollars.
What happens after you close
The legal and financial obligations of the business do not end on the day you close. The lease obligation continues until it is formally terminated. Vendor invoices for services rendered before closing will arrive after you close. Tax returns are due on their normal schedule.
Build a post-closing checklist that tracks every outstanding obligation and its expected resolution date. The goal is to reach a point where every obligation is either paid, settled, or formally discharged.
For a look at what the process will cost, The Real Cost to Close a Restaurant covers all the categories. For the employee-specific obligations, Closing a Restaurant: Employee Pay, Final Checks and the WARN Act goes deeper. If you want a second opinion on your specific situation, book a call with Rod.