According to the U.S. Bureau of Labor Statistics, approximately 20 percent of new businesses fail during the first two years of being open, 45 percent during the first five years and 65 percent during the first 10 years. The unprecedented financial challenges of COVID-19 have increased the number of business failures and economists project that the number of failures will accelerate in the quarters ahead.
Whether a global conglomerate’s business line or “mom & pop’s” small business, the process of moving past any failure and towards future opportunity includes properly closing a business. The most important part of the process is assessing the alternative methods to wind down a business, choosing the right approach and executing on the plan.
Primary Methods for Effectively Winding Down a Business
The primary methods for winding-down a business in an efficient and effective manner are:
- an out of court dissolution
- assignment for benefit of creditors
- chapter 7 bankruptcy liquidation
Each method has distinctive advantages and disadvantages which are critical to understand when choosing the best approach.
Advantages and Disadvantages of Methods of Winding Down a Business
The following is a summary of the advantages and disadvantages of each method:
| OUT OF COURT DISSOLUTION | ASSIGNMENT FOR BENEFIT OF CREDITORS (MN Law) | CHAPTER 7 BANKRUPTCY | |
| ADVANTAGES | Company Controls Message to Creditors Shortest Period of Time to Conclude Greatest Flexibility in Managing Distributions May Limit Claims or Time Claims May Be Brought Provides Some Notice to Creditors of Conclusion of Business | Process Managed by Independent Assignee That Is Selected by Company Company Designates Assets to be Transferred to Assignee or Excluded Assignee has Responsibility for Running Process Company May Continue To Operate to Preserve Value Creditor Credibility Stay of Certain Claims and Lawsuits Ability to Sell Assets Free and Clear of Liens and Claims Established Priority for Distributions to Creditors and Others Distributions Pro Rata Among Creditors or Others in Same Class Court Approval of Process and Distributions | Bankruptcy Trustee has Responsibility for Running Process Broad Stay of Claims Against Company Broad Ability to Sell Assets Free and Clear of Liens and Claims Established Priority for Distributions to Creditors and Others Distributions Pro Rata Among Creditors or Others in Same Class Court Approval of Process and Distributions |
| OUT OF COURT DISSOLUTION | ASSIGNMENT FOR BENEFIT OF CREDITORS (MN Law) | CHAPTER 7 BANKRUPTCY | |
| DISADVANTAGES | Company Must Manage Wind-Down of Benefit Plans and Filing Final Tax Returns Less Credibility for Creditors May Require Agreement of Any Secured Creditor Such as To Sell Assets No Stay of Lawsuits No Forum to Address Disputes | Company Needs to Identify and Retain Assignee Requires Court Process to Be Initiated U.S. Government Claims May Need to Be Paid Before Distributions to Unsecured Creditors Court Process May Lead to Delays Process Available to Public | Company Immediately Ceases Operations Company Does Not Select Trustee Creates Preference and Other Claims That May Be Pursued Frequently Involves Investigation of Company Insiders Process May Take Months or Years to Conclude Often Results In Limited Distributions Public Process With Detailed Financial Disclosures |
| OUT OF COURT DISSOLUTION | ASSIGNMENT FOR BENEFIT OF CREDITORS (MN Law) | CHAPTER 7 BANKRUPTCY | |
| ESTIMATED COST | Limited Expense | Expense Varies, Often Funded From Continued Operation of Company or Sale of Assets | Limited Expense to Initiate With Expenses of Process Paid From Assets |
ShareholderRyan is a skilled negotiator and regularly resolves issues out of court. He is also a seasoned litigator and represents parties in bankruptcy, receiverships and commercial litigation across the country. He has extensive ...
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