Ending the Venture
Chapter 17
Bankruptcy Overview
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Statistics on Bankruptcy
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Frequency
Breakdown of types
Lessons from Bankruptcy
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Don’t diversify too much
Bankruptcy only protects from creditors
Can be difficult to separate owner and
company
Don’t wait too long
Don’t hide it
Bankruptcy Act of 1978
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Purpose
Three types of Bankruptcy
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Chapter 11
Chapter 13
Chapter 7
Chapter 11- Reorganization
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Least severe
Process
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Present case
Design a plan
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Divide interests
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Extension
Substitution
Composition
If affected, tell how
Agreement
Surviving Bankruptcy
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Can be used to restructure and reorganize
Don’t file for Chapter 11, unless you mean it
Be prepared for creditor’s to examine financial
statements
Understand the process and what is protected
Transfer litigation to bankruptcy courts
Prepare realistic financial plan
Prepackaged Bankruptcy
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Settle debts before legal proceedings
Process
Creditor Benefits
Other Applicant Benefits
Applicant Drawbacks
Chapter 13- Extended Payment
Plans
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Sole proprietorship
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Unsecured debt less than $100,000
Secured debt less than $350,000
Chapter 13
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Order of priority
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Secured creditors
Administrative expenses
Claims from business operations
Wage claims up to $2000
Contributions to employee payment plans
Claims by creditors
Taxes
General Creditors
Chapter 7- Liquidation
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Voluntary v. Involuntary Bankruptcy
Reorganization Strategy
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Successful strategy
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Prepare a plan
Sell plan to secured creditors
Communicate with creditors
Don’t write checks you can’t cover
Keep Venture Going
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Avoid Excess Optimism
Develop Effective Marketing Plan
Good Cash Projections
Know the Market Environment
Identify Stress Points
“I Have a Bad Feeling About This”
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Warning Signs of Bankruptcy
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Materials to meet orders are lacking
Payroll taxes are not paid
Suppliers demand payment in cash
Increase in customer complaints
“I Have a Bad Feeling About This”
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Warning Signs of Bankruptcy
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Lax financial management
Directors can’t explain major transactions
Deep discounts to customers to get money
Contracts accepted below standard amounts
to generate cash flow
Bank requests subordination of loans
Key personnel leave the company
Other Issues
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Starting Over
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Learn from Mistakes
Dealing with venture capitalists in a new
venture
Reality of Failure
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Consult with family
Consult with professionals
Don’t hang in too long
Business Turnarounds
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Recognize warning signs and act!
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Have a plan
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“Hand on” management
Get out and understand the problem
Goals and objectives
Action
Exit Strategy
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“Getting out”
Ways
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Succession by Family Members
Direct Sale
ESOP
Management Buyout
Succession of Business
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To Family Members
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High failure rate
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Plan components/considerations
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Why?
Owner’s role
Family dynamics
Income
Business environment
Treatment of loyal employees
Issues
Succession of Business
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To Non-family Members
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Train existing employees
Advantages
 Equity issues
 Can take time
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Hire a manager
Equity issues
 Job description
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Succession in Non-family companies
Partnership
 Corporations/LLC’s
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Harvesting
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Direct Sale
ESOP
Management Buyout
Direct Sale
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Most common harvesting method
Time and planning
Payment
Brokers
Agreement terms
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Advisory role
Competition prevention
ESOP
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Substitutes for pension plan
Highly regulated
Advantages
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Motivation
Loyalty
Easier transfer later
Tax deductions
Disadvantages
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Complexity
Management Buyout
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Direct sale
Process
Methods
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Cash
Bank
Note to entrepreneur
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Selling stock
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Advantages
Why would bank and investors support?
Public Offering
Merger