February 9, 2018
How (Not) to Wind Down a Business
Posted by Michael Hogan
When your business needs to close, it’s almost like a death in the family. You probably feel like running away. But you can’t just check out mentally, because too many people are counting on you. You need to be proactive, so you can leave everyone in a better position, including yourself. So what should―or shouldn’t―you do to achieve the best possible outcome during a business wind-down? Here are the typical mistakes we see principals make, and what to do instead.
Mistake 1 – Assuming it will be easy
After you’ve built up a business, you may think that winding it down shouldn’t be that hard. In reality, it’s not as simple or easy as you would think. An efficient wind-down requires completely different skills that take years of experience to acquire.
It’s also not something to figure out on your own, because you won’t have the time or resources to recover from a mistake. Once you burn through your cash, there’s no chance for a do-over.
Mistake 2 – Not having a plan
Maximizing the value of assets doesn’t have to be a fire sale where your only goal is to get out as soon as possible. Instead, focus on how to monetize your remaining assets in a way that generates the highest return, even if it takes more time.
As you plan, consider all the costs involved. For example, if you’re going to sell your equipment, you may need to pay for storage until it’s sold. By weighing these costs, you can figure out how much money you need and how much time you have.
Also be realistic about the price you’ll receive. You’re on a short time table, so you might not get full book value for every asset. Factor this in when you estimate how much of your obligations you can repay.
Mistake 3 – Not explaining your plan
As you talk with the other parties involved in the wind-down, explain that you’ve got a strategy for monetizing assets and paying them back. You’re not running away from the problem. When people know you have a plan, they’re more willing to work with you to create the better outcome.
Make sure they realize that helping you will also benefit them. Maybe getting a little more inventory from a supplier will help you close one last contract, for example. Instead of demanding more inventory, point out to them that if you can make a final sale, you’ll be able to repay more of their outstanding invoices.
Mistake 4 – Telling people what they want to hear
When your board, suppliers and lenders ask what’s going on, it’s tempting to tell them what they want to hear, so they leave you alone. For instance, you might tell a supplier they’ll get paid in full within two weeks, even though that’s completely unrealistic.
This strategy only works once. After you fail to make good on your first promise, your reputation is ruined, and people won’t believe anything else you say. Instead, you need to give a realistic assessment of where things stand. People might not be happy to hear it, but they’ll respect your honesty.
It’s always better to under-promise and over-deliver, so be conservative with your estimates. If you think it will take 60 days to sell an asset and free up some cash, tell creditors 90 days. You’ll look like a hero if you pay early, and you’ll also buy yourself extra time should something go wrong with the sale.
Mistake 5 – Focusing on the squeaky wheel
Some creditors are going to be more vocal and aggressive about getting paid back. You can’t give the “squeaky wheel” preferential treatment, however, even if it makes your day-to-day life less stressful. Cash is king during a wind-down. If you don’t preserve your resources, you won’t be able to complete your plan, which means you won’t be able to pay back as much to everyone.
You have a fiduciary responsibility to treat all your creditors equally. You can’t pay someone first just because they’re the loudest.
Mistake 6 – Forgetting others are suffering
You might find yourself going through the five stages of grief: denial, anger, bargaining, depression and acceptance. Chances are, your suppliers, lenders and others are feeling the same way. Don’t forget that they’re also taking a hit, even if it’s not as bad as yours.
For instance, you may figure that bank employees deal with financial losses all the time, so why should they get upset about your debt. Remember, the loss is hurting their careers. No one wants to be involved with a bad investment. Show a little empathy, and you’ll find that people are easier to deal with.
Mistake 7 – Going it alone
A business wind-down can be a stressful, miserable experience. You’re constantly dealing with upset people and seeing all your hard work disappear. It takes a certain personality and skillset to thrive in these situations, which is where a wind-down expert comes in.
Look for a wind-down specialist who has experience in your particular industry. They’ll know how to budget your remaining cash, what risks you need to avoid, and how you can get the most value when selling your assets. Also be sure they aren’t a “one size fits all” practitioner. You want someone who’s open to listening to you to understand your specific situation and use the best approach, not just the “standard” one.
In addition, make sure your wind-down expert is somebody you click with, both personally and professionally. You’ll be working in close quarters during this difficult stretch, so it’s important to have someone you are genuinely comfortable with.
You’ll get through this
Winding down your business can be one of the most challenging times in your life, but you will get through it. By being strategic and proactive, you can do so with your head held high, knowing that you worked hard for the best possible outcome in a tough situation.
Not sure where to start with your business wind-down? Check out Armanino’s restructuring team to help get you headed in the right direction.
Michael leads Armanino’s Corporate Finance and Restructuring practices. An accomplished senior-level executive with over 30 years of diverse experience in operations, finance and strategy, he specializes in assessing strategic options, stabilizing and turning around underperforming businesses, and driving exits.
Financially pragmatic, Michael is experienced as both an operator and an advisor, with a long track record of working alongside executive teams, boards, investors, lenders and other parties in interest to improve outcomes. He has extensive experience helping public and private companies with domestic and international operations in a wide variety of industries, including technology (hardware, software, cleantech, biotech, social media, SaaS, ecommerce, semiconductor), telecommunications, manufacturing, distribution, retail, construction and agriculture/wine.