Chapter 17

Ending
the
Venture

McGraw-Hill/Irwin
Entrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. 17-2
 Bankruptcy
 Bankruptcy act (1978; amendments added in 1984 and
2005) ensures:
 Fair distribution to creditors.
 Protect debtors: unfair depletion and demands.
 Most common types of bankruptcies:
 Chapter 7: liquidation (70%).
 Chapter 13: installment payments (29%).
 Chapter 11: reorganization (1%).
 Prepackaged bankruptcy.

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Business and Nonbusiness U.S. Bankruptcy
Filings, 1984–2004

 <<Insert Figure 17.1>>

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 Bankruptcy’s Lessons
 Too much time and effort spent on diversifying in
markets where entrepreneurs lack knowledge.
 Bankruptcy protects entrepreneurs from creditors, not
from competitors.
 Difficult to separate entrepreneurs from the business.
 Entrepreneurs recognize failure too late.
 Bankruptcy is emotionally painful.

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 Bankruptcy Act Provisions
 The Act provides three alternative provisions for a firm
near or at a position of insolvency:

 Reorganization, or Chapter 11 bankruptcy.

 Extended time payment, or Chapter 13 bankruptcy.
 Liquidation, or Chapter 7 bankruptcy.

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 Chapter 11: Reorganization
 Least severe alternative: “breathing room”.
 Cash flow problems can be overcome.
 Plan prepared and approved by court.

 Decisions made reflect one or a combination of the

following:
 Extension: postpone claims.
 Substitution: exchange something for debt.
 Composition: prorated settlement.

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 Surviving Bankruptcy
 Can be used as a bargaining chip to restructure and
reorganize.
 File before failure of cash or revenue.
 Chapter 11 should be files only if chance of recovery.
 Be prepared for examination of transactions for fraud.
 Maintain good records.
 Understand completely.
 Transfer litigation to bankruptcy court.
 Realistic reorganization plan.

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 Chapter 13: Extended Payment
 Individual creates a five-year repayment plan under
court supervision.
 A court appointed trustee receives money from debtor.
 He/ she is responsible for making scheduled payments to
all creditors.

 This budgets future income to outstanding debt.

 Requires payment of all priority claims.

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 Chapter 13: Priorities
 Secured creditors.  Contributions to benefit
 Administrative expense. plans.
 Claims from operations.  Claims of consumer
creditors.
 Wage claims.
 Taxes
 General creditors.

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 Chapter 7: Liquidation
 Voluntary vs. involuntary.
 Voluntary: entrepreneur’s decision to file for bankruptcy.
 Involuntary: Petition of bankruptcy filed by creditors
without consent of entrepreneur.

 Involuntary Requirements
 Debts not being paid when due (1 – 3 creditors).
 Custodian appointed.
 Fair value of assets < debts (balance sheet test).

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Liquidation under Chapter 7 Involuntary
Bankruptcy

 <<Insert Table 17.1>>

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 Strategy During Reorganization
 Prepare plan.
 Sell plan.
 Communicate.
 No checks that can’t be covered.

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Requirements of Keeping a Venture Afloat

 <<Insert Table 17.2>>

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 Bankruptcy Warning Signs
 Financial management  Bank requests
becomes lax. subordination.
 Inability to document/  Key personnel leave.
explain transactions.  Lack of materials.
 Large discounts given to  Unpaid taxes.
speed up cash flow.  Demand for cash
 Contracts are accepted payment.
below standard amounts.  Customer complaints
increase.

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 Failure Reality
 Entrepreneur should:

 Consult with family/friends.

 Seek outside assistance.
 Drop venture that is draining resources.

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 Business Turnaround
 Entrepreneur needs to recognize the warning signs of
bankruptcy.

 Consider following principles:

 Aggressive hands-on management.
 Management must have a plan.
 Action.

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 Succession Planning Issues
 Senior management committed to plan.

 Well-defined job descriptions.

 Open process.

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Succession Planning Tips

 <<Insert Table 17.4>>

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 Succession Planning
 Transfer to family member
 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.
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 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.

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 Direct Sale
 Requires time and planning.
 Buyer payment method.
 Business broker.
 Business plan.
 Employment contract.
 Covenant not to compete.

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