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When to Shut Down Your Company

20 October, 2009

This week we tackle the hardest problem of all: deciding when to shut down your company.

It is not 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. A win-win. The public may never 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?

 


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When to Shut Down Your Company

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