Ending the VentureEnding the Venture

Chapter 17Chapter 17

Bankruptcy OverviewBankruptcy Overview

Statistics on BankruptcyStatistics on Bankruptcy FrequencyFrequency Breakdown of typesBreakdown of types

Lessons from BankruptcyLessons from Bankruptcy

Don’t diversify too muchDon’t diversify too much Bankruptcy only protects from Bankruptcy only protects from

creditorscreditors Can be difficult to separate owner Can be difficult to separate owner

and companyand company Don’t wait too longDon’t wait too long Don’t hide itDon’t hide it

Bankruptcy Act of 1978Bankruptcy Act of 1978

PurposePurpose Three types of BankruptcyThree types of Bankruptcy

Chapter 11Chapter 11 Chapter 13Chapter 13 Chapter 7Chapter 7

Chapter 11- ReorganizationChapter 11- Reorganization

Least severeLeast severe ProcessProcess

Present casePresent case Design a planDesign a plan

ExtensionExtension SubstitutionSubstitution CompositionComposition

Divide interestsDivide interests If affected, tell howIf affected, tell how

Agreement Agreement

Surviving BankruptcySurviving Bankruptcy

Can be used to restructure and reorganizeCan be used to restructure and reorganize Don’t file for Chapter 11, unless you mean itDon’t file for Chapter 11, unless you mean it Be prepared for creditor’s to examine Be prepared for creditor’s to examine

financial statementsfinancial statements Understand the process and what is Understand the process and what is

protectedprotected Transfer litigation to bankruptcy courtsTransfer litigation to bankruptcy courts Prepare realistic financial planPrepare realistic financial plan

Prepackaged BankruptcyPrepackaged Bankruptcy

Settle debts before legal proceedingsSettle debts before legal proceedings ProcessProcess Creditor BenefitsCreditor Benefits Other Applicant BenefitsOther Applicant Benefits Applicant DrawbacksApplicant Drawbacks

Chapter 13- Extended Payment Chapter 13- Extended Payment PlansPlans

Sole proprietorshipSole proprietorship Unsecured debt less than $100,000Unsecured debt less than $100,000 Secured debt less than $350,000Secured debt less than $350,000

Chapter 13Chapter 13

Order of priorityOrder of priority Secured creditorsSecured creditors Administrative expensesAdministrative expenses Claims from business operationsClaims from business operations Wage claims up to $2000Wage claims up to $2000 Contributions to employee payment plansContributions to employee payment plans Claims by creditorsClaims by creditors TaxesTaxes General CreditorsGeneral Creditors

Chapter 7- LiquidationChapter 7- Liquidation

Voluntary v. Involuntary BankruptcyVoluntary v. Involuntary Bankruptcy

Reorganization StrategyReorganization Strategy

Successful strategySuccessful strategy Prepare a planPrepare a plan Sell plan to secured creditorsSell plan to secured creditors Communicate with creditorsCommunicate with creditors Don’t write checks you can’t coverDon’t write checks you can’t cover

Keep Venture GoingKeep Venture Going

Avoid Excess OptimismAvoid Excess Optimism Develop Effective Marketing PlanDevelop Effective Marketing Plan Good Cash ProjectionsGood Cash Projections Know the Market EnvironmentKnow the Market Environment Identify Stress PointsIdentify Stress Points

““I Have a Bad Feeling About I Have a Bad Feeling About This”This”

Warning Signs of BankruptcyWarning Signs of Bankruptcy Materials to meet orders are lackingMaterials to meet orders are lacking Payroll taxes are not paidPayroll taxes are not paid Suppliers demand payment in cashSuppliers demand payment in cash Increase in customer complaintsIncrease in customer complaints

““I Have a Bad Feeling About I Have a Bad Feeling About This”This”

Warning Signs of BankruptcyWarning Signs of Bankruptcy Lax financial managementLax financial management Directors can’t explain major transactionsDirectors can’t explain major transactions Deep discounts to customers to get moneyDeep discounts to customers to get money Contracts accepted below standard Contracts accepted below standard

amounts to generate cash flowamounts to generate cash flow Bank requests subordination of loansBank requests subordination of loans Key personnel leave the companyKey personnel leave the company

Other IssuesOther Issues

Starting OverStarting Over Learn from MistakesLearn from Mistakes Dealing with venture capitalists in a new Dealing with venture capitalists in a new

ventureventure Reality of FailureReality of Failure

Consult with familyConsult with family Consult with professionalsConsult with professionals Don’t hang in too longDon’t hang in too long

Business TurnaroundsBusiness Turnarounds

Recognize warning signs and act!Recognize warning signs and act! ““Hand on” managementHand on” management

Have a planHave a plan Get out and understand the problemGet out and understand the problem Goals and objectivesGoals and objectives

ActionAction

Exit StrategyExit Strategy

““Getting out”Getting out” WaysWays

Succession by Family MembersSuccession by Family Members Direct SaleDirect Sale ESOPESOP Management BuyoutManagement Buyout

Succession of BusinessSuccession of Business

To Family MembersTo Family Members High failure rateHigh failure rate

Why?Why? Plan components/considerationsPlan components/considerations

Owner’s roleOwner’s role Family dynamicsFamily dynamics IncomeIncome Business environmentBusiness environment Treatment of loyal employeesTreatment of loyal employees

IssuesIssues

Succession of BusinessSuccession of Business To Non-family MembersTo Non-family Members

Train existing employeesTrain existing employees AdvantagesAdvantages Equity issuesEquity issues Can take timeCan take time

Hire a managerHire a manager Equity issuesEquity issues Job descriptionJob description

Succession in Non-family companiesSuccession in Non-family companies PartnershipPartnership Corporations/LLC’sCorporations/LLC’s

HarvestingHarvesting

Direct SaleDirect Sale ESOPESOP Management BuyoutManagement Buyout

Direct SaleDirect Sale

Most common harvesting methodMost common harvesting method Time and planningTime and planning PaymentPayment BrokersBrokers Agreement termsAgreement terms

Advisory roleAdvisory role Competition preventionCompetition prevention

ESOPESOP

Substitutes for pension planSubstitutes for pension plan Highly regulatedHighly regulated AdvantagesAdvantages

MotivationMotivation LoyaltyLoyalty Easier transfer laterEasier transfer later Tax deductionsTax deductions

DisadvantagesDisadvantages ComplexityComplexity

Management BuyoutManagement Buyout

Direct saleDirect sale ProcessProcess MethodsMethods

CashCash BankBank Note to entrepreneurNote to entrepreneur

AdvantagesAdvantages Selling stockSelling stock

Why would bank and investors support?Why would bank and investors support? Public OfferingPublic Offering MergerMerger