17-1

17-2

ChapterChapter1717

Ending The VentureEnding The Venture

17-3

BankruptcyBankruptcyBankruptcy Act (1978 & 1984)Bankruptcy Act (1978 & 1984)

Fair Distribution To CreditorsFair Distribution To Creditors

Protect Debtors- Unfair Depletion & DemandsProtect Debtors- Unfair Depletion & Demands

Chapter 7 – Liquidation (70%)Chapter 7 – Liquidation (70%)

Chapter 13 – Installment Payments Chapter 13 – Installment Payments (29%)(29%)

Chapter 11 – Reorganization (1%)Chapter 11 – Reorganization (1%)

Prepackaged BankruptcyPrepackaged Bankruptcy

17-4

Bankruptcy’s LessonsBankruptcy’s LessonsA.A. Overextension To Overextension To

MarketsMarketsB.B. Protects From Creditors Protects From Creditors

Not CompetitorsNot CompetitorsC.C. Entrepreneur = BusinessEntrepreneur = BusinessD.D. Recognize Failure Too Recognize Failure Too

LateLateE.E. Emotionally PainfulEmotionally Painful

17-5

Chapter 11- ReorganizationChapter 11- Reorganization

Least Severe Alternative- “Breathing Least Severe Alternative- “Breathing Room”Room”

Cash Flow Problems Can Be Cash Flow Problems Can Be OvercomeOvercome

Plan Prepared & Approved By CourtPlan Prepared & Approved By Court Extension- Postpone ClaimsExtension- Postpone Claims

Substitution- Exchange Something For DebtSubstitution- Exchange Something For Debt

Composition- Prorated SettlementComposition- Prorated Settlement

17-6

Bankruptcy SurvivalBankruptcy SurvivalBargaining Chip- Restructure And Bargaining Chip- Restructure And

ReorganizeReorganizeFile Before Failure Of Cash Or RevenueFile Before Failure Of Cash Or RevenueChapter 11- Only If Chance Of RecoveryChapter 11- Only If Chance Of RecoveryExamination Of Transactions For FraudExamination Of Transactions For FraudMaintain Good RecordsMaintain Good RecordsUnderstand CompletelyUnderstand CompletelyTransfer Litigation To Bankruptcy CourtTransfer Litigation To Bankruptcy CourtRealistic Reorganization PlanRealistic Reorganization Plan

17-7

Chapter 13-Chapter 13- Extended PaymentExtended Payment

Budgets Future Income To Budgets Future Income To

Outstanding DebtOutstanding Debt

Payment Of All Priority ClaimsPayment Of All Priority Claims

17-8

Chapter 13- PrioritiesChapter 13- Priorities

Secured Secured CreditorsCreditors

Administrative Administrative ExpenseExpense

Claims From Claims From OperationsOperations

Wage ClaimsWage Claims

Contributions To Contributions To Benefit PlansBenefit Plans

Claims Of Claims Of Consumer Consumer CreditorsCreditors

TaxesTaxesGeneral General CreditorsCreditors

17-9

Chapter 7- LiquidationChapter 7- Liquidation

Voluntary vs. InvoluntaryVoluntary vs. Involuntary

Involuntary RequirementsInvoluntary RequirementsDebts Not Being Paid When Debts Not Being Paid When

Due (1 – 3 Creditors)Due (1 – 3 Creditors)

Custodian AppointedCustodian Appointed

Fair Value Of Assets < Debts Fair Value Of Assets < Debts (Balance Sheet Test)(Balance Sheet Test)

17-10

Bankruptcy TrusteeBankruptcy Trustee

Elected By Creditors- Interim Elected By Creditors- Interim

Appointed By CourtAppointed By Court

Becomes Owner Of All Becomes Owner Of All

Nonexempt PropertyNonexempt Property

Can Set Aside PetitionsCan Set Aside Petitions

Transfers Property To CreditorTransfers Property To Creditor

17-11

Strategy DuringStrategy DuringReorganizationReorganization

Prepare PlanPrepare PlanSell PlanSell PlanCommunicateCommunicateNo Checks That Can’t Be No Checks That Can’t Be CoveredCovered

17-12

Reducing Risk Of FailureReducing Risk Of Failure

Avoid Excess OptimismAvoid Excess OptimismPrepare Good Marketing Prepare Good Marketing PlanPlan

Make Good Cash Make Good Cash ProjectionsProjections

Keep Abreast Of MarketKeep Abreast Of MarketIdentify Business Stress Identify Business Stress PointsPoints

17-13

Bankruptcy Warning SignsBankruptcy Warning Signs

Financial Management Financial Management LaxLax

Inability To Inability To Document/Explain Document/Explain TransactionsTransactions

Large Discounts To Large Discounts To Speed Up Cash FlowSpeed Up Cash Flow

Contracts Below Contracts Below Standard AmountsStandard Amounts

Bank Wants Bank Wants SubordinationSubordination

Key Personnel LeaveKey Personnel Leave Lack Of MaterialsLack Of Materials Unpaid TaxesUnpaid Taxes Demand For Cash Demand For Cash

PaymentPayment Customer Complaints Customer Complaints

IncreaseIncrease

17-14

Failure RealityFailure Reality

Consult with Consult with

Family/FriendsFamily/Friends

Seek Outside AssistanceSeek Outside Assistance

Drop Venture That Is Drop Venture That Is

Draining ResourcesDraining Resources

17-15

Succession Planning IssuesSuccession Planning Issues

Senior Management Senior Management Committed To PlanCommitted To Plan

Well-Defined Job Well-Defined Job DescriptionsDescriptions

Open ProcessOpen Process

17-16

Succession PlanningSuccession Planning

Transfer To Family MemberTransfer To Family Member Role Of Owner- Full-Time/Part-Time/RetireRole Of Owner- Full-Time/Part-Time/Retire Members Able To Work Together?Members Able To Work Together? IncomeIncome Transition Business EnvironmentTransition Business Environment Loyal EmployeesLoyal Employees Tax ConsequencesTax Consequences

Transfer To Non-FamilyTransfer To Non-Family Train Key Employee- Retain Some EquityTrain Key Employee- Retain Some Equity Retain Control- Hire ManagerRetain Control- Hire Manager SellSell

17-17

HarvestingHarvestingDirect SaleDirect SaleEmployee Stock OptionEmployee Stock Option

2-3 Year Plan to Sell To Employees2-3 Year Plan to Sell To EmployeesCreate Trust FundCreate Trust Fund

Management Buy-Out- Based On Management Buy-Out- Based On Value Of Goodwill & Asset Value Of Goodwill & Asset AppraisalAppraisal

17-18

Direct SaleDirect SaleRequires Time & PlanningRequires Time & Planning

Buyer Payment MethodBuyer Payment Method

Business BrokerBusiness Broker

Business PlanBusiness Plan

Employment ContractEmployment Contract

Covenant Not To CompeteCovenant Not To Compete