Ending the Venture Chapter 17

Bankruptcy Overview Statistics on Bankruptcy Frequency Breakdown of types

Lessons from Bankruptcy 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 Purpose Three types of Bankruptcy Chapter 11

Chapter 11- Reorganization Least severe Process Present case Design a plan Extension Substitution Composition Divide interests If affected, tell how Agreement

Surviving Bankruptcy 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 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 Don’t write checks you can’t 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 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 Starting Over Reality of Failure Learn from Mistakes Dealing with venture capitalists in a new venture Reality of Failure Consult with family Consult with professionals Don’t hang in too long

Business Turnarounds Recognize warning signs and act! Have a plan “Hand on” management Have a plan 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 Why? Plan components/considerations Owner’s 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 Job description Succession in Non-family companies Partnership Corporations/LLC’s

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 Advantages Selling stock Why would bank and investors support? Public Offering Merger