Bankruptcy Overview

Statistics on Bankruptcy Frequency Breakdown of types

Present case Design a plan Extension Substitution Composition

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

Divide interests 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

Bankruptcy Act of 1978

Purpose Three types of Bankruptcy Reorganization Extended Payment Plans Liquidation

Prepackaged Bankruptcy
Settle debts before legal proceedings Process Creditor Benefits

Reorganization
Least severe Process

Other Applicant Benefits Applicant Drawbacks

Reorganization Strategy
Successful strategy Prepare a plan

Extended Payment Plans

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

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

Liquidation
Voluntary v. Involuntary Bankruptcy

 Increase in customer complaints 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

Recognize warning signs and act! 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

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

Succession of Business
To Family Members High failure rate

Business Turnarounds

Why?

 Plan components/consideratio ns Owners role Family dynamics Income Business environment Treatment of loyal employees Issues 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

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

Harvesti ng
Direct Sale

Management Buyout
Direct sale

Process Methods Cash Bank Note to entrepreneur Advantages Selling stock Why would bank and investors support? Public Offering Merger