17-2 ending the venture mcgraw-hill/irwin entrepreneurship, 7/e copyright © 2008 the mcgraw-hill...
TRANSCRIPT
17-2
Ending
the
Venture
McGraw-Hill/IrwinEntrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 17
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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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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. Administrative
expense. Claims from
operations. Wage claims.
Contributions to benefit plans.
Claims of consumer creditors.
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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Strategy During Reorganization
Prepare plan. Sell plan. Communicate. No checks that can’t be covered.
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Bankruptcy Warning Signs
Financial management becomes lax.
Inability to document/ explain transactions.
Large discounts given to speed up cash flow.
Contracts are accepted below standard amounts.
Bank requests subordination.
Key personnel leave. Lack of materials. Unpaid taxes. Demand for cash
payment. 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
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.