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When to Shut Down Your Company

Last week we started the blog series (written by Roger Glovsky), How to Wind Down Your Company.  The response and comments were great!  Keep them coming.  This week we tackle the hardest problem of all: deciding when to shut down your company.

It is not easy an easy decision, especially for entrepreneurs.  Starting a company is about creating a vision, persuading others to believe in the vision, turning an idea into reality, and pursuing a dream.  The last thing an entrepreneur wants to do is to shut down his or her dream.

So, how do you make the decision to shut down your company?  When do you decide to shut down your company?  The short answer is: When the company has no other alternatives.

What are the alternatives?

Financing.  If the company burns through the Series D funding, why not just raise Series E, F or G?  There are plenty of letters in the alphabet, aren’t there?  No.  Not every business problem can be solved with money.  The business model may have changed.  Competition may be too great.  Technology may have failed to perform.  Or the customer just didn’t buy enough of the products.  And the Series A, B, C, and D investors may already have been burnt by prior down rounds, cram downs, or failed expectations.

Sale or Merger.  This may be the best option for an entrepreneur, if it is available.  The sale or merger of a business is often regarded as a success even if the sale price is well below the amount contributed by investors.  Why?  Because the sale price may not be disclosed.  The typical press release of a failed business simply states that a small company was acquired by a big company and that together the new combined company plans to do great things.  The big company may get strategic assets (often technology or intellectual property) at a discount and the small company preserves its reputation.  Win-win.  The public may not ever know that the business failed.

Bankruptcy.  The company could file for bankruptcy and leave it to the courts to handle it.  This can be an expensive and inefficient process.  Why? Because the courts have required procedures to ensure fairness to those with potential claims including lenders, suppliers, customers, tax authorities, employees, investors, shareholders, and others.  The process of sorting out potential claims takes time and the resulting delays may reduce or destroy the value of certain business assets.  Often, the disposition of business assets can be handled better outside of bankruptcy through private settlement processes.

Crash and Burn.  You could simply leave the company on "autopilot" and let the business hit the wall at 200 mph.  As I mentioned in my first post, the end result is "crash and burn". Complete loss of life.  No one walks away.  It isn’t pretty.  The business dies and no one takes responsibility for its failure.  No regard for any of the trust relationships created during the visionary, start-up and operating phases.  Just "oh well, we tried."  The problem is personal assets could be at risk and the law may hold directors, officers, and stockholders (or other business representatives and owners) responsible long after the business entity ceases to exist.

Deciding "there is no alternative," should not be a last minute determination.  In most companies, you can see the end coming well in advance.  Either the company is gaining customers or losing them.  The energy is either flowing into the management team or out of it.  The products are either shipping with fewer bugs or more bugs.  The cash flow is either improving or getting worse.  If you are paying any attention to the business at all, you know what’s happening.

Shutting down a business is really a process, not a decision.  You don’t just wake up one morning, look at your to do items and then write "wind down company" at the top of the list.  It’s a process.  You have to go through the painful, possibly agonizing process of evaluating your alternatives.  You should consider carefully who will be affected by the shut down and seek advice from trusted and knowledgeable sources.  You should consult with your board of directors (or other governing body) as well as your legal counsel and financial advisors.  In the end, you need to make a thoughtful, well-reasoned decision and then take the necessary actions.  The earlier you deal with the issues, the more alternatives you will have and the easier it will be to transition to the next venture.

During the mid 1990′s, I was President of a software development company faced with the decision of shutting down its business.  We were selling Mac software to enterprise customers at a time when almost every major corporation in America stopped using the Mac in the workplace.  And we were competing against other vendors, including Apple, that were literally giving away a similar product for free.  We had some good years and were profitable, but we were selling into a legacy systems market and saw the end coming well in advance.  We reviewed various options with our board of directors and made several attempts to develop new products and pursue other opportunities, but in the final analysis, we decided that the various options did not match our talents or resources. Instead, we wound down the business and simply distributed the remaining assets to the stockholders.

You don’t have to "pull the trigger" right away, but you do need to begin planning well in advance.  Whatever you do, don’t wait too long to start the process; it gets messy.  What do I mean by "too long"?  The company can’t meet this week’s payroll.  The Company doesn’t have enough money to pay its taxes.  The company already missed a loan payment.  You are wondering what happens to your personal guarantees when the business fails.

What is the likelihood of business failure?  I can’t vouch for the information, but here are some interesting statistics.  We would like to hear your war story about winding down a business.  What made you decide to cease operations?  What actions did you take?  What alternatives did you consider?

Roger Glovsky is a founding partner of Indigo Venture Law Offices, a business law firm based in Massachusetts, which provides legal counsel to entrepreneurs and high-tech businesses. Mr. Glovsky is also founder of LEXpertise.com, a collaboration and networking site for lawyers, and writes blogs for iLaw2.com and The Virtual Lawyer.

The above content is intended to serve as a general discussion of the subject matter and is provided for informational purposes only. It is not legal advice and should not be construed as such. Do not act upon this information without seeking professional advice or rely on this website or use the content as a substitute for consultation with professional advisors.

October 19th, 2009 by     Categories: Wind Downs    
  • http://www.thebrennergroup.com Gunther Hofmann

    Some more alternatives:

    1. Orderly liquidation: After a settlement with creditors, the assets are sold and the company is liquidated in an orderly fashion. At this point, the buyer universe is a lot larger than the typical “strategic buyer”. Also, the value of specific assets might shift depending on the buyer. (customer relationship vs. IP).

    2. Assignment for the Benefit of Creditors (ABC): ABC is an insolvency proceeding governed by state law rather than federal bankruptcy law and is often faster, cheaper, and more controlled.

    3. Workout/Turnaround: Sometimes, a radical turnaround and shift in a company's strategy can yield higher returns than an immediate liquidation. I.e. (for a software company): convert to an open-source/shareware model and dramatically increase the installed base and service revenue; at which point the customer relationship becomes the key asset.

    Some more thoughts on turn-around options for tech companies at http://banner.thebrennergroup.com/2009/04/17/turn

    • http://www.jasonmendelson.com Jason Mendelson

      I am a big fan of ABCs. Done correctly they can take a lot of pain out of the system.

      ———————-
      Jason Mendelson

      Sent from my iPhone
      - please forgive iTypos.

    • http://thevirtuallawyer.blogspot.com RogerGlovsky

      Gunther – The workout/turnaround is a great alternative to winding down the company if the company can survive under pressure long enough to take a new direction. However, in order for the workout/turnaround to be successful, someone has to step up with new money who believes that value can be created by changing markets, repurposing technology or retaining new management. As for the liquidation or ABC, those are actually ways to go about winding down the company rather than provide alternatives to making the decision to wind down the process. We will discuss more about the wind down process in subsequent blog posts.

  • Lee C.

    When I shutdown my first start-up in 1999 it was a relief to finally have a decision and be acting on it. In retrospect it freed all involved to go on to more fruitful pursuits, and stop pushing on a string – just wasn't going to happen. In the end we sold off the technology, liquidated and made disbursements to all the stockholders. Worked out fairly well.

    We also “sold off” our installed base of customers so they would not be left high and dry.

    • http://thevirtuallawyer.blogspot.com RogerGlovsky

      Bringing a conclusion to the process does provide a sense of satisfaction of having tied up loose ends. It also frees up the principals to move on to the next opportunity!

  • Michelle

    Sometimes it is preferable to take the band-aid at once, and get it over with, but this is not a rule. There are some companies that are worth fighting for and worth saving. The main idea might be right but other parts may work poorly. With a new business plan and the right investment it can turn out much more profitable than it ever was. http://www.vcgate.com/

    • http://thevirtuallawyer.blogspot.com RogerGlovsky

      Good point. If you decide to “fight” it means putting in more time and money; and that is the challenge. There is no fighting a declining balance sheet; the company has to turn around before it gets too late. The longer it takes to figure out the right parts, the harder it is to save.

  • http://medicalspamd.com Medical Spa MD

    “When I shutdown my first start-up in 1999 it was a relief to finally have a decision and be acting on it. In retrospect it freed all involved to go on to more fruitful pursuits, and stop pushing on a string.”
    ~ Pushing on a string is absolutely the right way to describe a failing startup. Having been there, I'll attest to that fact.

    • http://thevirtuallawyer.blogspot.com RogerGlovsky

      For many entrepreneurs, ending the battle is a relief. One test as to whether it is time to shut down is whether the battle is getting harder or easier each day. If it is getting harder with no end in sight, it may be time to quit.

  • Brett

    When a corporation shuts down, but, it is in debt, how do you pay back the creditors. I own a construction company with two other gentleman, and, they want to split the equipment and then pay the bank back on our credit line, out of our own pockets. What is the legal thing to do. I want to sell the equipment and pay the bank back because I do not want the equipment and believe I should not have to take a loss for something that is not my idea.

    • http://www.jasonmendelson.com Jason Mendelson

      You really need a lawyer.

  • Len Williams

    It’s true that with a new plan you could save your company. But I think the plan you drew from the first place, when your business was just a start-up, should have been carefully detailed, containing options A, B, C etc and both best and worst case scenarios. It could be difficult to have so many clients all of a sudden, that you cannot satisfy because you’re not prepared for this, but what do you do when they start vanishing and you have no strategy prepared for that? Ok, your plan was very good at the beginning, you found investors interested in your excellent idea, then you tossed it in a drawer. Wrong. The market keeps changing. Adjusting your business plan means is updating your roadmap to success.