This is the third supporting post, further elaborating on “In Tough Times, your Acquisition Offer Might be an Asset Sale”
3.How will you handle the shutdown of the entity that is left? AND How will you PAY for the shutdown of the entity that is left – and don’t kid yourself it will cost money (accountants, lawyers, your time, some soon to be former employee time, consultants if needed….)
This part of your plan depends on what you decided from Part 2. Have you sold everything of value and all that is left is the technical and legal shutdown? Are there parts of the business that the acquiror didn’t want? If so, are you going to continue running the remaining business, and how can that become profitable? Or are you just going to shut down anyway, and how do you communicate that to existing, and soon to be abandoned clients?
You will need cash in the event of a shutdown.
It is easy to think of an asset sale as an acquisition – you get the cash and you’re done. This is NOT true.
What you’ve done is sold your most valuable asset(s), and brought cash into a shell that has to be disposed of.
Do you need to file for formal bankruptcy to discharge debts? You will need cash to pay for the legal team. Ideally, you are preparing those docs while you are negotiating the asset sale. Any financial liabilities will be a cash sink – and get legal help before you distribute cash to shareholders before paying off debt, even debt from you or guaranteed by you the found! Debt is usually superior to equity in a shutdown or bankruptcy situation.
Don’t forget the accounting – you will have to file the final tax return(s), as well as all 1099’s and W-2s for the final year of operations. Who’s going to do the prep work and who’s going to prepare the actual returns? Guess what, many investors will think that, after the sale is complete and the company is shut down, that YOU, the founder, are responsible for “whatever needs to be done”. Make sure there’s cash in the bank to pay for a whole bunch of people to do the work, inluding you if it comes to that.
If you have severance agreements with employees who are not going with the acquisition, then you need to use cash to take care of those severance packages (unless you propose otherwise in a formal bankruptcy filing).
Each part of the series is available at the links below.