Downsizing Your Business

As the economy tightens up, you may find the need to downsize your business. Downsizing should be planned as thoroughly as starting a business.

Although there are many aspects to downsizing, reducing your workforce is probably the most significant aspect to consider. If you don’t have enough work for all your employees, a reduction in force can significantly reduce your expenses.

However, just because you need to downsize doesn’t mean you can use it as an excuse to get rid of the employees that you don’t like. You are not exempt from discrimination and wrongful-termination claims in choosing who is laid off. If you find yourself defending such a lawsuit, the cost in attorney fees will far exceed the savings in wages.

Structuring Your Layoffs

You must structure the layoff appropriately and legally. Make sure that there aren’t any unusual restrictions on layoffs. These would be found in your own employment manual or a collective-bargaining agreement with your employees, if you have one. Check these documents first. State or federal laws may also govern layoffs, depending upon the number of employees you have.

Start with a reduction plan, which is very similar to a business plan. A business plan plots out the first five years, determines what is needed and how it will be achieved over time. With a reduction plan, you also look at what your new, smaller business will need and how you will meet those needs over the downsizing period.

Next — without considering the specific employees that you have now — make a list of the number of employees and job skills needed to accomplish the goals in your reduction plan. The skill list will determine what positions you need to keep in the new business, not the positions you need to eliminate. After making this determination, look at your current employees and decide who fits the criteria. Focusing on whom you’re keeping rather than whom you’re laying off helps demonstrate the business nature of your decision. Forming a committee to review your decisions is also a good idea.

Reducing Your Space

If you have less work, you may also need less space. One way to deal with excess space is to sublease it. This provides income to cover your rental payments (or mortgage, if you own your building) and makes use of space that you don’t currently need.

Be careful about the length of any sublease term. If business turns around and you need to upsize, you may want to get the space back. Unfortunately, the shorter the term of a sublease, the less you can charge per month. Consider adding a provision to your sublease allowing you to buy out the remainder of the term. Also consider renting to another contractor. If your business turns around, theirs is likely to turn around, too, and they may be looking to get out of the sublease to upsize at the same time that you want your space back.

Check your lease to see whether and to what extent you are allowed to sublease. Usually, subleasing is subject to a reasonableness standard, meaning that the landlord can’t unreasonably object. Keep in mind that just because you have a sublease doesn’t mean that you are relieved of your obligations under the master lease. If your subtenant doesn’t pay rent to you, that’s no excuse for you not paying the full rent to your landlord.

What if you can’t find a subtenant and you just can’t keep up with the rent? You could try to renegotiate your lease with your landlord: Perhaps he’d be willing to lower the rent payments now in exchange for raising the payments later. If you absolutely must walk out on your lease, you should make that decision carefully and in conjunction with your attorney. Depending on the terms of the lease, you may have less financial exposure by leaving.

Finally, if you own your space and are paying a mortgage on it, another way to deal with the cost of maintaining the space is to try to renegotiate the terms of your mortgage. Perhaps your lender would be willing to change a 15-year mortgage to 30 years, lowering your monthly payments. Or perhaps you can refinance at a lower rate than you currently have. Be as smart about downsizing as you were about upsizing.