Lesson 9: Exit Strategy
Every journey comes to an end eventually. Whether you’ve run your restaurant for a year or 30 years, there will be a time when you will want to retire, sell or close your doors. This lesson will walk you through the different options when “closing time” finally rolls around.
Exit Strategy
Options
There are six common exit strategies. Each has its advantages and disadvantages.
Liquidation
You’ve given it your best shot. No matter what you’ve tried, you can’t get enough business through the door to make it worthwhile. It’s time to give up on the dream, at least for a moment, and regroup.
Some of the greatest food concepts of all time are in the restaurant wrecking yard. Times change, costs increase, and menus become outdated. You can’t bleed money forever. At some point, you need to put up the “Going Out of Business” sign and call it quits.
If, by some miracle, you don’t have any unpaid debts, employees or legal entanglements, you can “walk away” from the business.
If you have debts, a liquidation can help you pay them off by selling all your fixtures, furnishings, equipment and other business assets. The name of the business itself may be an asset if it has positive brand recognition and a loyal customer base. Your intellectual property and recipes could also be sold to bring in revenue to pay off your creditors.
In a liquidation, any funds derived from a sale of assets go to your creditors first. Any remaining funds can be disbursed to shareholders, partners or business owners. You may want to work with a liquidation firm to maximize the value of assets sold, ensure that employee discharges are handled correctly, and make sure all your legal and financial obligations are settled properly.
Pros
- It’s easy. Everything just comes to an end.
- No negotiations are needed.
- No worries about transferring control.
Cons
- You may leave valuable assets on the table, such as customer lists and the value of any intellectual property, branding or community goodwill.
- If you have any shareholders, they may seek legal action to recoup their investments.
- Everything you’ve worked so hard to build simply goes away as if it never existed.
Unlike most businesses, liquidating over a period of time is nearly impossible since your main sellable asset – the food – is perishable. As such, you don’t have the luxury of having a going-out-of-business sale. There is an end to what’s operationally possible.
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Courses
Introduction
1. Cottage Food Basics
2. The Business Plan
3. Pricing
4. Marketing
5. Food Booths
6. Food Trucks
7. Pop-Ups
8. Brick & Mortar
9. Exit Strategy
Bankruptcy
This is the last resort for any business, especially if you have a business structure where creditors can go after your personal assets to pay outstanding debts. Filing bankruptcy takes courage. It means you did everything else possible to keep the dream alive but, for your own sanity and protection, needed to leave it in the past.
Bankruptcies can be a complex way to terminate your business since they require you to legally file for relief and automatically trigger machinations that protect creditors when debts are greater than available assets.
In most cases, you will need an attorney to guide you through the process and represent you in court proceedings. This is not something you want to tackle on your own.
Bankruptcy Options
Chapter 7
This is a good solution if your business has no future and needs to close. Debts far exceed assets; all left is your skill and expertise. Chapter 7 is used primarily by corporations and LLCs because of its safeguards in protecting and isolating personal assets from business assets.
When a corporation or LLC closes, the corporate officer must liquidate all business assets and distribute the funds to creditors. The closure is filed with the Secretary of State, and the officers must follow specific procedures. There are no provisions that allow you to continue to operate the business.
If you’re a sole proprietor, you can also file Chapter 7. Just remember that you and your business are treated as a single entity so that you will be discharging all qualifying debt – personal and business-related. You may not have to pass the Chapter 7 means test if you have more business debt than personal debt.
As part of the liquidation, a bankruptcy trustee will sell all of the corporate or LLC assets and distribute them to the creditors according to the priorities established by the state’s bankruptcy laws. Since all the assets are sold off, a creditor can’t collect from the company after it’s no longer in operation since nothing of value is left.
Chapter 11
The goal of Chapter 11 is to provide you with a plan to reorganize your business in such a way that you can pay off your creditors. This option is best when you have more value than debts. For example, your brand, intellectual property, or trade secrets have an intangible value that would be lost if the restaurant was sold or liquidated. The more sensible course is to reorganize.
There is a new subchapter of Chapter 11 that speeds up the process and lowers the cost. Known as Subchapter V, it aims to make small business proceedings more expeditious and less costly. It includes provisions that may reduce a creditor’s leverage, requiring them to be more vigilant throughout the bankruptcy proceedings. It is ideal for small businesses that have less than $2.7 million in total debts.
When you file for Chapter 11, you become the “debtor in possession,” meaning you are still in control of your company’s assets and are responsible for managing them responsibly so you can bring the business back out of bankruptcy. A court may also appoint a bankruptcy trustee to monitor your activities and file reports with the courts or bankruptcy administrator.
Chapter 13
This is often referred to as a personal bankruptcy. If you’re a sole proprietor, you can reorganize, renegotiate, or discharge your debts. As a sole proprietorship, you and your business are considered one under the law, so your personal assets become part of the proceedings. Your bankruptcy can remain on your credit report for up to seven years.
Filing Chapter 13 does allow you to keep specific assets as they are considered tools of the trade or are exempted as personal assets. Protections are only up to a certain value and for specific assets. Every state is different, but here’s a link to Washington’s exemption statutes to help you understand what is and isn’t included in a Chapter 13 bankruptcy.