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17 Chapter Ending The Venture

Bankruptcy Bankruptcy Act (1978 & 1984) Chapter 7 – Liquidation (70%) Fair Distribution To Creditors Protect Debtors- Unfair Depletion & Demands Chapter 7 – Liquidation (70%) Chapter 13 – Installment Payments (29%) Chapter 11 – Reorganization (1%) Prepackaged Bankruptcy

Bankruptcy’s Lessons Overextension To Markets Protects From Creditors Not Competitors Entrepreneur = Business Recognize Failure Too Late Emotionally Painful

Chapter 11- Reorganization Least Severe Alternative- “Breathing Room” Cash Flow Problems Can Be Overcome Plan Prepared & Approved By Court Extension- Postpone Claims Substitution- Exchange Something For Debt Composition- Prorated Settlement

Bankruptcy Survival Bargaining Chip- Restructure And Reorganize File Before Failure Of Cash Or Revenue Chapter 11- Only If Chance Of Recovery Examination Of Transactions For Fraud Maintain Good Records Understand Completely Transfer Litigation To Bankruptcy Court Realistic Reorganization Plan

Chapter 13- Extended Payment Budgets Future Income To Outstanding Debt Payment Of All Priority Claims

Chapter 13- Priorities Secured Creditors Administrative Expense Claims From Operations Wage Claims Contributions To Benefit Plans Claims Of Consumer Creditors Taxes General Creditors

Chapter 7- Liquidation Voluntary vs. Involuntary Involuntary Requirements Debts Not Being Paid When Due (1 – 3 Creditors) Custodian Appointed Fair Value Of Assets < Debts (Balance Sheet Test)

Bankruptcy Trustee Elected By Creditors- Interim Appointed By Court Becomes Owner Of All Nonexempt Property Can Set Aside Petitions Transfers Property To Creditor

Strategy During Reorganization Prepare Plan Sell Plan Communicate No Checks That Can’t Be Covered

Reducing Risk Of Failure Avoid Excess Optimism Prepare Good Marketing Plan Make Good Cash Projections Keep Abreast Of Market Identify Business Stress Points

Bankruptcy Warning Signs Financial Management Lax Inability To Document/Explain Transactions Large Discounts To Speed Up Cash Flow Contracts Below Standard Amounts Bank Wants Subordination Key Personnel Leave Lack Of Materials Unpaid Taxes Demand For Cash Payment Customer Complaints Increase

Failure Reality Consult with Family/Friends Seek Outside Assistance Drop Venture That Is Draining Resources

Succession Planning Issues Senior Management Committed To Plan Well-Defined Job Descriptions Open Process

Succession Planning Transfer To Family Member Transfer To Non-Family Role Of Owner- Full-Time/Part-Time/Retire Members Able To Work Together? Income Transition Business Environment Loyal Employees Tax Consequences Transfer To Non-Family Train Key Employee- Retain Some Equity Retain Control- Hire Manager Sell

Harvesting Direct Sale Employee Stock Option 2-3 Year Plan to Sell To Employees Create Trust Fund Management Buy-Out- Based On Value Of Goodwill & Asset Appraisal

Direct Sale Requires Time & Planning Buyer Payment Method Business Broker Business Plan Employment Contract Covenant Not To Compete