Ending the Venture

Chapter 17

Bankruptcy Overview

Statistics on Bankruptcy

Frequency Breakdown of types

Lessons from Bankruptcy

Dont diversify too much Bankruptcy only protects from creditors Can be difficult to separate owner and company Dont wait too long Dont hide it

Bankruptcy Act of 1978

Purpose Three types of Bankruptcy

Chapter 11 Chapter 13 Chapter 7

Chapter 11- Reorganization

Least severe Process

Present case Design a plan

Extension Substitution Composition If affected, tell how

Divide interests

Agreement

Surviving Bankruptcy

Can be used to restructure and reorganize Dont file for Chapter 11, unless you mean it Be prepared for creditors to examine financial statements Understand the process and what is protected Transfer litigation to bankruptcy courts Prepare realistic financial plan

Prepackaged Bankruptcy

Settle debts before legal proceedings Process Creditor Benefits Other Applicant Benefits Applicant Drawbacks

Chapter 13- Extended Payment Plans

Sole proprietorship

Unsecured debt less than $100,000 Secured debt less than $350,000

Chapter 13

Order of priority

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

Voluntary v. Involuntary Bankruptcy

Reorganization Strategy

Successful strategy

Prepare a plan Sell plan to secured creditors Communicate with creditors Dont write checks you cant cover

Keep Venture Going

Avoid Excess Optimism Develop Effective Marketing Plan Good Cash Projections Know the Market Environment Identify Stress Points

I Have a Bad Feeling About This

Warning Signs of Bankruptcy

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

Warning Signs of Bankruptcy

Lax financial management Directors cant 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

Starting Over

Learn from Mistakes Dealing with venture capitalists in a new venture Consult with family Consult with professionals Dont hang in too long

Reality of Failure

Business Turnarounds

Recognize warning signs and act!

Hand on management Get out and understand the problem Goals and objectives

Have a plan

Action

Exit Strategy

Getting out Ways

Succession by Family Members Direct Sale ESOP Management Buyout

Succession of Business

To Family Members

High failure rate

Why? Owners role Family dynamics Income Business environment Treatment of loyal employees

Plan components/considerations

Issues

Succession of Business

To Non-family Members

Train existing employees

Advantages Equity issues Can take time

Hire a manager
Equity issues Job description

Succession in Non-family companies

Partnership Corporations/LLCs

Harvesting

Direct Sale ESOP Management Buyout

Direct Sale

Most common harvesting method Time and planning Payment Brokers Agreement terms

Advisory role Competition prevention

ESOP

Substitutes for pension plan Highly regulated Advantages

Motivation Loyalty Easier transfer later Tax deductions

Complexity

Disadvantages

Management Buyout

Direct sale Process Methods

Cash Bank Note to entrepreneur

Selling stock

Advantages

Public Offering Merger

Why would bank and investors support?