Wind it Down?

• tamelarich
• January 13th, 2010

One of the reasons I didn't shut down my unprofitable business sooner was that I had no idea how to do it.

Don't laugh. No one goes to business school to learn how to wind a business down and every red-blooded entrepreneur wants to focus on growth, not failure.

Here's what Rick Mitchell, bankruptcy attorney (and Chapter 7 bankruptcy trustee panel for the United States Bankruptcy Court for the Western District of North Carolina)  noticed after 30+ years in practice:

Very few business owners will say that they do not have the will and energy to fight to save the business. Most think that their business is the best thing since sliced bread. All they need is a little time (or more investment) as business is sure to improve. Very little thought is given to the fact that considerable effort has been spent and money invested with nothing but losses resulting.

Answer these questions

These five questions from CA-based bankruptcy attorney, Cathy Moran would have saved me months of heartache:

1. Do you have the time, energy, and desire to continue the business?
2. Could the business prosper if it wasn’t servicing old debt?
3. Could the business prosper if it shed equipment or premises leases?
4. Could you start a like business if you walked away from this one?
5. Could you sell this business as a going concern?

If you answered "yes" to questions 2 & 3 a consultation with a bankruptcy attorney might yield a window of opportunity. As my attorney told me, "most troubled businesses can afford to service some debt and bankruptcy helps us find the right amount."

If you answered "yes" to 1 & 4 but you're struggling, perhaps an hour with your accountant would yield belt-tightening tactics you hadn't considered. A third party opinion and fresh set of eyes might be just what you need to fight another round. Bankruptcy trustee Rick Mitchell says

If the answer to question 4 is yes, there is not much reason for the debtor to beat his or her head against a wall of debt.  The object of working is making a living not working for the sake of working.  If the debtor can earn a living in a new business, he or she should seriously consider doing it.

If you could sell the business as a going concern (Q5) but don't want to do so because you know you'd suffer a loss, you're probably in the toughest position of all.  In this case,  get your accountant and a bankruptcy attorney in the room at the same time before you enter into serious discussions with potential buyers.  Check your ego at the door and open your heart, mind and books to these advisors. They'll give you negotiating parameters  well worth the $500 you'll pay them for an hour of their time. Again, Mr. Mitchell:

Remember the principle of sunk cost -- what a debtor has in a business is not a consideration. The only consideration is the future profitability of the company. I don’t care if I have $1,000,000 dollars in the company and can only sell it for enough to cover the debt. Unless the company can be profitable in the future, ending the sleepless nights would be enough for me to want to sell.

Why you need to know a bankruptcy attorney

Most of us don't want to declare bankruptcy and a bankruptcy attorney understands that. A skilled practitioner can help you avoid bankruptcy and map out asset planning and protection strategies to employ until the market for your goods or services improves.

Asset planning and protection strategies? Small business owners are usually personal guarantors of their company's debts. This means if you default on business loans, creditors could seize your home, your heirlooms, your savings and more An attorney can guide you in how to prioritize the bills you pay (personally and for your business) and advise you in transferring or liquidating assets legally.

And as counterintuitive as it may sound, it might make sense to declare personal bankruptcy for the purpose of protecting your business.

Huh? If  it turns out that what you consider "business" debt is really personal debt (an attorney can tell by the contracts and guarantees you signed) you and your company may be able to find a fresh start if you file for personal bankruptcy protection.

Before you call the attorney who drafts your contracts or who filed your articles of incorporation for bankruptcy counseling, think again. If your lawyer hasn't handled a bankruptcy case in the past six months, chances are you'll be better served dealing with a specialist.  Most firms offer a free initial consultation so if nothing else, take the free offer and compare what they say to what your existing lawyer advises.

In tough times like these, the advice of financial professionals is priceless.

Tamela's here for small business owners who are watching their dreams and livelihoods go up in flames. With the credibility of someone who's been there, too, she writes about dealing with creditors, the IRS, family members and your own inner demons. She now earns her keep as a business ghostwriter. http://TamelaRich.com

Tickers: bankruptcy, business life cycle, financial health, making an informed financial decision, small business

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