Every business owner has their highs and lows, good and bad days, and during those days of exhaustion every business owner has considered throwing in the towel. Sometimes the weight of continually pushing the business up hill turns on us and the financial debt rolls back over us. We all understand and we have all been there. It just a matter of if we want to get back up and push again or quit.
When you consider leaving and closing your business instead of selling it there are a few choices to think about. We have seen those signs in business windows saying “Liquidation Sale”, “Going Out of Business” or “Everything Must Go”. The owner’s choice in this situation is instead of selling the business as a whole, they are going to close it down and sell it in parts.
Liquidation generally means that the company will sell its assets and any sale proceeds will go to pay off their creditors. If there are no creditors or, if there is any money remaining after repayment of debt, then the final proceeds are then distributed to the owner.
The challenge in liquidating is when the sale proceeds do not satisfy the debts on those assets sold. The business owner should negotiate with each debt holder and speak with legal counsel on the ramifications of the difference. I have seen some desperate business owners sell the assets, not pay off the debt, and keep the cash for themselves. There are some very serious legal issues around this and I would strongly suggest any business owner considering liquidation where the debt exceeds the cash value, get legal advice.
Bankruptcy is very different from liquidation. Bankruptcy is a legal process where an individual or company legally declares its inability to pay off debts. Consider this process like you going in front of a judge, on your knees, and saying “uncle” or “I give”. You are asking the courts to tell your debtors that you have no money to pay them back and thus “forgive” the debt you owe them.
The reason why someone would go down this road is when the debt owed is too far in excess of the asset value and there is no way the debt can be repaid. Unfortunately, as in most small business debt cases where the owners have personally guaranteed the company debt, this means that all available assets (both business and personal) are liquidated and the proceeds are distributed to creditors.
There are different chapters of bankruptcy under federal bankruptcy code and they are Chapter 7, which is liquidation of the assets; Chapter 11, which is about the reorganization of the company; or Chapter 13, which relates to work-outs of debts by individuals. Once the courts have legally approved the bankruptcy and the debtor turns over all their assets to the court-appointed trustee, then they are relieved from the payment of any previous debts.
Any business owner that is considering bankruptcy should speak to an attorney. Here is a great piece of advice one bankruptcy attorney gave my client considering bankruptcy. He sat my client down and told him to consider himself a pilot and accept that the plane he is flying is going to crash. There will be a crash landing and the plane will be destroyed. The goal of the attorney is to help talk the pilot through the landing so he is to be able to walk away from the accident. Hopefully he will be able to walk away, with or without injuries he could not promise, but at least he is alive to live another day.
That is a great analogy every business owner needs to think about before they go down this road. I know no one wants to go into bankruptcy but be honest with yourself, your family and close friends when you do. It will be a bumpy, scaring and exhausting crash landing but hopefully at the end you can walk away and start over.
Whether you liquidate your business yourself or go through the legal process of bankruptcy you will need a very good team of legal and tax advisors that understand your situation and the legal process. Please don’t be penny wise and pound foolish on this one. Get good help, listen to them and hold on.