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

Divide interests

Extension
Substitution
Composition
If affected, tell how

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

Reality of Failure

Consult with family

Consult with professionals
Dont hang in too long

Business Turnarounds

Recognize warning signs and act!

Have a plan

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

Action

Exit Strategy

Getting out
Ways

Succession by Family Members

Direct Sale
ESOP
Management Buyout

Succession of Business

To Family Members

High failure rate

Plan components/considerations

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

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

Disadvantages

Complexity

Management Buyout

Direct sale
Process
Methods

Cash
Bank
Note to entrepreneur

Selling stock

Advantages

Why would bank and investors support?

Public Offering
Merger