All start-ups and young companies in the technology, media and telecoms space dream of reaching the fabled land of the unicorns by reaching a valuation north of $1 billion.
Unfortunately, many will fall by the wayside before reaching that goal. The uncomfortable truth is that many will end up facing closure, and needing advice on how to best wind down their businesses.
What they need, in other words, is the ‘news-you-hope-never-to-have-to-use’ in this article.
“There is no situation more difficult for the founder of a start-up or early–stage company than an inevitable wind down looming around the corner. Although it will always be difficult for entrepreneurs to come to terms with this undesirable situation, the fact is that this is likely to become reality for up to 75% of start-ups at some point,” Brian Berning, Tax Managing Partner at BDO USA, says.
Scott Rodie, National Practice Leader of BDO Canada Technology and Life Sciences Industry Services Group, agrees.
“Failing badly can ruin your reputation and/or cost you more money. Do not be careless when closing down the company. Try to wind down in an orderly fashion if you can - good advisors and accurate cash flow projections can help here,” he says.
Below is some advice that might help make a very difficult situation a little less painful, and reduce both the financial and emotional costs associated with wrapping up a company.
It is important to note that not all of the advice will apply 100% to every single kind of situation, type of company or country. To ensure that the best exit, I recommend contacting local experts and / or working closely with your corporate financial advisors and certified public accountant.
1: Do not delay the difficult decision
While incredibly difficult and painful, it is important that you do not delay the decision to shut down your company for too long.
The earlier entrepreneurs can accept the inconvenient truth that it is not going to work out, the easier the winding down process will be. You will also find yourself in a much stronger position for the upcoming sale of assets.
“Every business, no matter how hard of times have fallen upon it, has assets. These can be tangible in nature, such as inventory and/or equipment or intangible, such as patents, trademarks, customer lists and other forms of intellectual property. Their value is to some extent dictated by when you decide to close your company,” Brian Berning explains.
2: Gather and review all your documents
Once the decision is reached, it is time to gather and review all your relevant governance documents, as well as all updated financial statements.
The checklist for documents includes all of your corporate documents, such as operating agreements, articles of incorporation, bylaws, shareholder agreements, partnership agreements, employment agreements, etc.
Many of these documents will contain provisions that expressly address what should happen in the event of the company being dissolved.
Knowing what your documents say is the first step in properly shutting down, because these provisions will be binding on the business and cannot be ignored.
3: Inform your stakeholders
Break the news to all your stakeholders. You need to inform them all about the situation, especially regarding any commitments you had. This is partly why it is important to review the paperwork, before facing your stakeholders.
Being fully prepared and knowing what obligations you have is likely to ensure smoother discussions going forward during the liquidation process.
The detailed information you can provide to the stakeholders eliminates confusion and uncertainty during this crucial phase of the wind-down.
4: Seek advice from experts
The next thing you should do is to seek the advice of your legal and financial advisors. They have dealt with similar situations before and will have the experience needed to be able to guide your next steps. This can help you avoid pitfalls.
“Be very careful to avoid potential conflicts of interest - get good legal advice in these cases. One example would be when selling assets to insiders,” Scott Rodie explains.
“If your R&D program got public subsidies, you also need to check legal terms and if any reimbursement might be required. Once all the legal and financial statements are in order, you should make sure that all tax and social requirements have been fulfilled to avoid litigation with the state administration,” Julien Sorba, Partner at BDO France, adds.
One of your next steps should include developing a detailed plan for the wind-down.
Develop a budget around your plan that helps you understand your financial responsibility, such as creditor risks, setting reserves as needed for the remaining capital that can be deployed.
5: Start marketing your assets’ strength and value to maximize the output
Companies in the technology, media and telecoms sector are often strong in regards to levels of intellectual property (IP).
While valuation of tangible assets is relatively straightforward, intangible assets, such as IP, are somewhat trickier. Its value partially depends on the nature of the IP, as well as the age of your company and how far along your R&D and innovation process was.
The valuation of intangible assets can also be affected by the failure’s causes. Did the company fail because of:
• Underestimating the technical gap needed to be overcome and hence failure due to insufficient funding;
• Succeeding on a technical level, but lacking funding to take the product/service/process to market;
• Getting timing wrong in regards to time to market;
• Overestimating the potential market;
There are more reasons that those mentioned above, but to create a full list would result in making the article twice as long.
6: Identify potential buyers
Determining the worth of your intangible assets, how to sell it both tangible and intangible assets, and identifying potential buyers can be a lengthy process.
A good place to start in regards to potential buyers is contacting your former competition, business partners, or even industry influencers.
One interesting new avenue is a new website named Exitround. Exitround is an online matchmaking platform to help funded technology start-ups – some of which are hitting a financial wall – find buyers.
7: Think about keeping some – or all – of your IP
If you are planning to start a new business, post liquidation, you may want to buy back a patent, copyright, or specialized technology to use in the future.
This scenario can get a bit complicated, though.
“If you were to file bankruptcy, the bankruptcy trustee may not let the owners of a corporation purchase the company’s assets. Another option that you have is to donate the IP to a University and keep a percentage of whatever it is, whether a patent, copyright, etc. This option can give you the satisfaction of seeing the IP you created utilized, as well as providing a future payday if it is used for a profitable new venture,” Brian Berning explains.
8: Finalising discussions with partners and investors
In these hard times, you will usually enter into tough discussions between the stakeholders about the final aspects of the winding-down process, the future of the IP and the value of the various stakes.
“More than ever, only one pilot – you as the founder and / or CEO - should be in the cockpit to navigate the shutdown along with any legal representatives required by law. Existing stakeholders should decide whether they want to negotiate or move forward as soon as possible, which is much easier to do with a limited number of negotiators at the table,” Jérôme Halary, Partner and Innovation Advisor at BDO France, says.
9: Managing the end of the relationship with clients, suppliers and employees
Thinking of the future is important, and you should try to preserve your professional network as best possible.
Ensure the best finish to this particular adventure by ending on good terms with all clients, suppliers, employees, etc.
Thank them, and be willing to listen to their critique, worries and frustrations. In relation to employees, try to help them find employment elsewhere.
Most of them will have one question above all others: ‘what went wrong?’
Take that conversation. Be empathetic, listen and ask questions. Their input might be worth gold in relation to the last, and perhaps most important, point.
10: Analyze what went wrong
Many of the world’s most successful entrepreneurs started out with falling flat on their faces.
Bill Gates and Arianna Huffington both failed spectacularly with their early ventures. Steve Jobs was fired from Apple, before returning and turning it into a world-conquering juggernaut.
One of the things these people do better than almost anyone else is to learn from their mistakes.
This requires the best possible input that again in turn gives you the best possible preparation and foundations for your next endeavor.