Closing down your business ...hope you don't need to use this post.

Closing down your business

Some folks have been talking to me about closing down a business and how hard the process is, emotionally and physically this article may give you some guidelines...also see Roger's other articles on the subject at: www.askthevc.com.

Article by: Roger Glovsky-who is a founding partner of Indigo Venture Law Offices, a business law firm based in Massachusetts, which provides legal counsel to entrepreneurs and high-tech businesses. Mr. Glovsky is also founder of LEXpertise.com, a collaboration and networking site for lawyers, and writes blogs for iLaw2.com and The Virtual Lawyer.

The primary responsibility for shutting down operations and liquidating assets falls on the managers and/or owners of the business, at least until or unless the creditors or court system takes over. This could come as a nasty shock to some investors. Many angel investors or even venture capitalists enter a transaction with the intent of just contributing money. They may be surprised to learn some day that the management team for the company they invested in have all resigned and that no one is remaining to wind down the business, sell off the assets, or pay down the liabilities. Suddenly, one day the investor or owner receives a call (most likely from a creditor) asking what they plan to do with their company and how they plan to address the outstanding liabilities. Not a happy call for the investor or owner.

Whether you are a manager or an owner faced with winding down a business, the goal of the person winding down the company is to fulfill his or her fiduciary obligations and preserve the management's or owner's business reputation. The first step is to assess the financial situation of the business. The second step is to take note that time is of the essence and the longer it takes to do the first step, the more time, money and reputation it will cost the management or owners.

When you buy an existing business, you typically do what is referred to as "due diligence" to make sure you know what you are buying. Similarly, when you are winding down a business, you must do your due diligence to make sure you know what assets and liabilities the company still has and how best to handle them. This is what I call "reverse due diligence". Reverse due diligence involves all of the same information that a buyer or investor might request for a growing business, but for a different purpose: the purpose is for marshaling assets and managing liabilities to maximize value on the downside. In normal due diligence, a buyer will scrutinize financial information and disclosure schedules looking for hidden liabilities that may detract from the value of the acquired company. In reverse due diligence, the person winding down a business is looking for hidden assets that can maximize value and facilitate the settlement of the company's obligations.

So, what information do you need?

1. Financial Information. Most importantly, you need to get a good handle on the financial situation. Are there current financial statements (e.g., P&L, balance sheet, cash flow) prepared by an outside accounting firm? If not, start with the most recent tax return and review all information relating to income, balance sheet, assets, liabilities, and capital structure. Are there internal financial statements prepared by the company? Is there a Quickbooks file (or other accounting software) that can print a transaction report for the current or prior years? What might be the "off-balance-sheet" assets? Seek help from the company’s accountant and financial advisors to make sure that the financial information is accurate and up to date.

2. Taxes. Make a list of all states in which the company is obligated to pay taxes. What is the process in each state for submitting final tax returns? What tax good standing certificates are required for dissolution? What are the outstanding tax obligations (e.g., payroll taxes, estimated taxes, annual taxes, sales taxes)? What obligations are coming up in the near future? What tax obligations or tax filings will be required after the company ceases operations? What money will you need to reserve for payment of taxes after dissolution?

3. Hard Assets. List all assets, including both "hard" assets and intangible assets. Hard assets include computers, equipment, furniture, products, and inventory. Are the assets leased or owned? Are the assets worth more sold separately or combined with other assets (such as a product line or customer contract)? You may want to start with the most recent balance sheet to identify major assets that have been capitalized. Which assets are most valuable? Which assets can be sold easily (e.g., using brokers, auctioneers, eBay, or Craigslist)? Are there any strategic assets that may be desired by vendors, partners or competitors?

4. Soft Assets. Soft assets are intangibles that include securities, accounts receivable, contract rights, bank accounts and cash. Intangibles also include intellectual property such as patents, copyrights, trademarks, websites, blogs, and domain registrations. Is there technical information or process know-how that employees (or former employees) could document and make available for sale? What is the value of the brand and how can it be transferred? Is there software or technology (or other IP) that could be licensed? Can customer lists be sold?

5. Potential Buyers. Can you identify a specific list of potential buyers? Who might have a strategic or competitive business interest in some or all of the assets? Consider vendors, contractors, customers, strategic partners and affiliated entities. Would business brokers or investment bankers be able to find potential buyers? If not, are there auctioneers or liquidators who would help fire sale the assets?

6. Lenders. What loans or financings has the company entered into? Are there other credit arrangements? Make sure that you review executed (i.e., final) drafts of all documents. What do the documents require? Which creditors or obligations take precedence? What happens in the event of default? Are there any personal guarantees? Can the loan or financing arrangements be renegotiated?

7. Employees. What are the current payroll obligations? How should they be managed during the wind down process? What bonuses, vacation pay [Ed. Note: and sales commissions] and accrued expenses are owed? What payroll taxes will be due? What employee benefit plans need to be cancelled or terminated? How will this affect employees on COBRA? Can you save money by switching to a Professional Employer Organization (PEO)? Are there any other forms of compensation (stock, deferred compensation or other incentives) that have not been documented or paid? What employment contracts exist and what restrictions will remain enforce? Can you or a potential buyer solicit employees? Are you treating all employees fairly and equally? How will your actions affect employees that you might want to hire again for a future venture?

8. Customers. Make a list of all current customers, past customers, and prospective customers. Which customers have outstanding receivables? Are there open orders? Should open orders be cancelled or delivered? Which customers have you collected money from but won't be able to deliver products or services? What prepayments from customers should be refunded? How much of the receivables can be collected after the company ceases operation? Which receivables should be written off as uncollectable? At what point should you notify customers that you intend to cease operations? How long can you hold out for a buyer to take over a product line or business? Are there any long term agreements for services? What goodwill can be salvaged or business reputation maintained by transferring unfinished projects to another service provider?

9. Vendors. Make a list of all suppliers and contractors. Be sure to review current versions of all agreements, including any addendums or renewals. Which vendors do you owe money? What leases are there for real estate or equipment? Are there any long term contracts? Can you negotiate an earlier termination or buy-out of the contracts? Can you get the contract modifications in writing? What are the notice requirements and other obligations upon termination? How many days in advance must notice be given? Are some notice requirements sooner than others? Are there any security deposits or prepayments (e.g., insurance) that will be repaid to the company?

10. Records; Compliance. Review all corporate records, paying particular attention to obligations upon dissolution or liquidation of the company's assets. Make sure that you have current copies of all corporate (or LLC) records including charter, bylaws, stockholder agreements (or in the case of an LLC, the Operating Agreement). Are there any security, investment or other financing documents that affect the owners’ rights or the distribution of assets? Are there any documents that assign responsibility or indemnification upon default of obligations? Are there regulatory filings or other compliance obligations? What licenses or registrations does the company have and how should they be withdrawn or terminated? Are there any environmental issues or other compliance obligations that will continue after operations cease?

Review all of the assets and liabilities carefully. Are the assets worth more or less than the company paid for them? Are there any assets with hidden value (such as websites with significant traffic or popular domain names)? We have had some clients sell domain names alone for more than $500K. Some of these assets may have more value to competitors than they do to the failed business.

After you have gathered the information above, you should be able to make a preliminary assessment as to whether the company's net worth is positive or negative. Be sure to review the assessment with the company's accountant, attorney and other professional advisors in order to determine when to cease operations and to plan for the orderly liquidation of assets. The professionals can help to structure and guide the wind down strategy. There are many financial and legal pitfalls for the unwary. It does not have to be time consuming or expensive, but the assessment does require a trained eye to avoid potential issues that might arise later after the assets have been liquidated and the proceeds disbursed.

The above list is just a sample of the most common items to consider before winding down a business. There are many more items that would be included on a typical due diligence checklist. The financial information and due diligence should be performed with the utmost care and accuracy to make sure valuable assets or significant liabilities are not overlooked. Are there may major items that we have failed to mention? What information did you find the most useful in winding down a business?

Gordon

Some tips on etiquette for business travel to India

With India now having a strong global business presence, which is expanding continuously, it is crucial that as UK business professionals, we are aware of how to behave and interact appropriately with fellow business professionals from this continent.

The subject is huge, and with cultural differences within India itself, it could easily fill a volumes.

However, let me give you my top tips for successful business interactions:

Never touch a person’s head, even to pat a child, the head is the seat of the soul
Beckoning someone with the hand or finger is insulting as is standing with your hands on your hips
Never point your feet at someone. If your shoes or feet touch someone else, make sure you apologise immediately.
The word ‘no’ is considered harsh in Asian culture. Evasive refusals such as ‘maybe’ or ‘I’ll try’ are preferred and regularly used.
Always use formal titles when interacting with Asian clients, however many times you’ve met them.
The use of leather products including belts, handbags and briefcases may be considered offensive.
It is generally not socially acceptable for Asian women to be touched by any male other than husband or child. This is obviously changing as more and more Asian women are entering the corporate world and travelling globally for business, but if in doubt only shake hands with an Asian woman if she offers her hand first.
Asians take themselves very seriously so the UK dry sense of humour and gentle banter that we take for granted is unlikely to be well received.
Be aware of the deeply established caste system and understanding dharma and karma
It is inappropriate for a man to make any comment about a woman’s appearance.
It is considered impolite to address a person who is older or holds a higher status by their first name. In Hindi, the first name is usually followed by “ji” to show respect.

The business etiquette within India is changing rapidly as more and more Asian people are entering the global business arena. But be aware that the above points are very well ingrained in their psyche so always err on the side of caution and be led by your client/colleague. You are far more likely to need to adhere to letter to the above if you are visiting the Continent as opposed to receiving visitors in the UK.

Picked these tips up from Katie Day who is a people changer at personal development consultancy Unlimited Potential. She is also guest lecturer at Warwich Business School. She worked with the European Bank for Reconstruction and Development from 1995 to 1999, advising on cross-cultural exchange.

Growth of the web since 2000, and the opportunities it is bringing

2020 vision for the web

Online copy of newsletter here

The growth of the web since 2000 has been massive and in the 'new' economies - China, Brazil, Russia, India, Eastern Europe that is likely to continue apace. It’s not until penetration reaches that of the phone that the market will mature. That’s lots of growth as the figures below indicate.

WORLD INTERNET USAGE AND POPULATION STATISTICS 2009

World Regions	Est. pop. 2009	Users 2000	Users Latest	Pen %	Inc %	User %
Africa	991,002,342	4,514,400	65,903,900	6.7	1,359.9	3.9
Asia	3,808,070,503	114,304,000	704,213,930	18.5	516.1	42.2
Europe	803,850,858	105,096,093	402,380,474	50.1	282.9	24.2
Middle East	202,687,005	3,284,800	47,964,146	23.7	1,360.2	2.9
North America	340,831,831	108,096,800	251,735,500	73.9	132.9	15.1
South America	586,662,468	18,068,919	175,834,439	30.0	873.1	10.5
Oceania	34,700,201	7,620,480	20,838,019	60.1	173.4	1.2
WORLD TOTAL	6,767,805,208	360,985,492	1,668,870,408	24.7	362.3	100.0

Given this likely growth what will the web look like in 2020?

Well, there are two sides to that coin – the way the technology works and then the ways we use it and, of course, forecast vision is less likely to be accurate than optical.

Technology

According to technology expert and entrepreneur Nova Spivack, the development of the web moves in 10 year cycles.

In the first decade, most of the development focused on the back end. In the second decade, focus shifted to the front end and the era social media, mash-ups and experiments to make the web more interactive. The next cycle will shift focus to the back end again. Then by 2020 focus will return to the front end and we'll see thousands of new ways to use the web.

Some of the predictions for the next 10 years are the:

‘ever present’ web will merge with all other forms of entertainment and everything will be delivered via the web. Everything (phones, fridges, the lot) will connect to the net and you will have a constant connection to the web at work, at home, driving, in the pub or restaurant, in fact wherever you are.

semantic web and artificial intelligence where all information is categorized and stored in such a way that a computer can understand it as well as a human. The web will capable of analyzing data and extrapolating new ideas for you. In fact people already feel that, as one of our readers, Tony Cox, wrote after one of our recent articles: "The Internet is evolving like a primitive brain building neural connections to integrate the myriad of input signals for evaluation, selective storage and sending of response signals. The conscious mind is only aware of that which demands attention, with most work dealt with automatically and subconsciously."

three dimensional web - one single virtual world with buildings, shops and other areas to explore and people to interact with in virtual reality and real online personalities. However, standards for programming and graphical design would be much more complex and expensive.

above or some combination thereof.

Web usage

So what will the backroom developments mean for what we do on the web? Well, Seth Godin has characterised these next developments as:

ubiquity – because it is about activity, not just data, and most human activity takes place offline

identity – because the deliverable is based on who you are and what you do and what you need

connection - because ‘you're nothing without the rest of us’.

We are already seeing some of these changes with the growth of social media and the launch just recently of Google Sidewiki – a new feature of the Google Toolbar that lets you leave comments about any website. When some else running Sidewiki views that web page, they'll see your comments.

But in the future Godin sees much more potent applications. He gives examples of how this will work too, such as:

I'm typing an email to someone, and we're brainstorming about doing a business development deal with Apple. A little window pops up and lets me know that David over in our Tucscon office is already having a similar conversation with Apple and perhaps we should coordinate.

I'm late for a dinner. My GPS phone knows this (because it has my calendar, my location, and the traffic status). So, it tells me, and then it alerts the people who are waiting for me.

Some of this is not so far away. Google Wave has just launched and has a lot of features, such as:

Real-time: In most instances, you can see what someone else is typing, character-by-character.

Extensions: Just like Facebook developers can build their own applications within waves. Google Wave code will be open source, to promote innovation and adoption amongst developers

Wiki functionality: Anything written within a Google Wave can be edited by anyone else

Playback: You can playback any part of the wave to see what was said.

Drag-and-drop sharing: Drag your file and drop it into a Google Wave and everyone will have access.

The Social Issues Research Centre says that the web in 2020 will:

“……….meet human needs more fully than it does at present, with many resulting social and political implications. It will have come to provide a renewed forum for social cohesion and democracy as well as continuing as a platform for information, entertainment, communication, shopping, etc. ……… If a Web application, however complex and sophisticated, does not fulfil a timeless human need then it will not succeed. While technology changes, people in general do not………. We reinvent tribal groups in which we find a true sense of belonging, whether they be the familiar youth subcultures………. or the more staid and respectable………. ‘grown-up’ groups with which we are so familiar………. As basic mechanisms for bonding and social cohesion are eroded in the faceless anonymity of modern towns and cities, we re-create new means for satisfying our timeless needs. In this sense, nothing changes much apart from superficial style. The Web increasingly serves such needs, allowing us to establish and maintain the same social bonds……….”

Hence Marshall McLuhan’s Global Village becomes truly real and as Jeremiah Owyang, says: “people connect to each other – rather than institutions………. Consumers will rely on their peers as they make online decisions, whether or not brands choose to participate……… The community will take charge and that's going to happen whether or not marketers or brands participate………. Social networking will only continue to facilitate the power shift toward the consumer.”

The crucial thing about all of this is that it completely changes the dynamic. For many years now the dynamic has been biased towards companies. As examples, branding and price promises have been two of the ways that companies have been able to maintain profitability whilst ‘reassuring’ consumers, i.e.

The purpose of any brand is to undermine the homogeneity of products so that pretty much indistinguishable items – whether cola or lager or denim or something else – have a substantially different value because they are marked with the label ‘Coca’ or ‘Pepsi’ or ‘Virgin’ or ‘Carling’ or ‘Heineken’ or ‘Budweiser’ or ‘Gap’ or ‘Levi’ or ‘Top Shop’. The advertising industry is dedicated to establishing consumer preference for one brand or another. This provides companies with increased profitability.

With the ‘range’ of goods currently available how could we possibly know about all of them or what they are worth? Our knowledge of the market and its goods is far from perfect, hence advertising campaigns offering that ‘If you find it cheaper elsewhere, we’ll refund twice the difference’.

Clearly, if you had perfect information you would know it was cheaper somewhere else to start with and, if you wished to ‘maximise your utility’ buy it there. This also provides companies with increased profitability.

In the social web market where much more perfect knowledge may exist (like small towns in 1750) then will brands that are really ‘just commodity products’ be able to exploit these situations?

Maybe, but it will take a significant change in attitude from top down to bottom up thinking, thinking which REALLY puts the consumer first ( 'ask not what your community can do for you - ask what you can do for your community' ) and not the CEO’s pay package.

Richard Hill

richardhill@e-crm.co.uk>

...

A dragon from Dragon's den that I like

A Good Dragon

In the past I have been a tad disparaging of the BBC 2 program "dragons den" I still am, but more so about the companies producers for selecting prospective entrepreneurs who should not be there, I feel sorry for them, they have some good ideas, some crap, but the good ones are poorly presented with the wrong preparation before hand, if they had spent sometime with an experienced Entrepreneur, or a company like www.go.uk.com , they would have brought much richer presentations and better deals to the Dragons. Anyway back to the article I noticed in www.startups.co.uk it was an interview with one of the better Dragons, Peter Jones, he brings smart money to a deal and stays involved, hands on, now this can be a good thing or bad, depending how it works out in the business, but generally it is a good thing, Smart money is a multiplier. The article is below, a good read and some good ideas, something I am passionate about, helping Entrepreneurs to be a success.

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Peter Jones

As one of only two original Dragons’ Den panellists still on the BBC2 hit show, Peter Jones has seen his fare share of budding entrepreneurs run their ideas past him. But having just launched his new Enterprise Academy, for which funding came from both the public and private sector, he’s really putting his money where his mouth is. Startups spoke to Peter about his ambitions for the academy, why he thinks Britain’s entrepreneurial mindset is in dire need of a change, and what he really thinks about his fellow Dragons.

You’ve just opened the doors for the September term of your new Enterprise Academy. What’s the journey been like?
I first wrote about the introduction of an academy for enterprise back in 2006 in my book Tycoon. From inception to launch it’s been three years but it was only the latter part of 2007 that we started to make real headway. It’s been amazingly refreshing working with the government on this. We’ve clearly hit a nerve and I feel very lucky to have established Britain’s first enterprise academy.

Is launching the academy your proudest moment so far?
From a career perspective it’s definitely up there in the top three. It’s something I’ve always wanted to do. But my absolute proudest moment is becoming a dad. Nothing can beat that – not even the best deal of my life.

What are your long-term goals for the academy?
We’re going to change the complete landscape of enterprise learning in this country and start with a cultural shift. I truly believe that anybody and everybody can become a successful entrepreneur but first they have to change their belief system. Being typically British we always ask ‘Can I?’ but we will be teaching the students the meaning of ‘I Can’. That might sound flippant but it’s at the heart of where we need to be. We clearly have a lack of skills when it comes to entrepreneurship in this country and we need to change that.

The academy will offer complete support from a mentoring based system where seriously successful entrepreneurs will lay down the foundations of how they made it. But also, all our tutors are successful enterprising people in their own right. It’s very difficult to find a business man or woman that also has teaching experience but we’ve done it.

What’s the single most important entrepreneurial skill?
One of the things about being an entrepreneur that we often don’t like to accept is that it’s a lonely road. You’re continually motivating people and patting others on the back. Although you’ll always need specific people to go out and do a multitude of things for you, a big part of being an entrepreneur is the ability to understand the overall business from a helicopter’s perspective and then get each of the components working with applied focus to the best of their ability.

Do you have a favourite Dragon’s Den investment?
I don’t have a favourite but I am lucky enough to have the most successful Den investment. Who’d have predicted that a singer songwriter from Jamaica would walk up the stairs singing about his product and he would end up a multimillionaire. Reggae Reggae Sauce now generates 12-14 million bottles a year and has licensed out the brand to a range of different things. It’s become a brand that’s right up there, and the next step it to take it over to the States.

Are any of your investments purely financial transactions?
No. I don’t have any investments that I’m not personally involved in. I’m not a person that likes to just give money. I just don’t see the point in that. I’m a people investor and I’ve active in all deals to varying degrees.

Which other Dragon do you enjoy working with the most?
I haven’t had the opportunity to work with Deborah yet despite sitting next to her in the Den, but I do get on really well with her. Theo and I work together a lot. We’re friends and we know each other well. He likes to jump on the back of a lot of my investments and likewise, I often like to follow his lead.

Much to everyone’s, even my, shock and horror, I also work well with Duncan. I couldn’t describe in words what I used to think of him, but over the last 18 months I’ve really started to understand what he’s all about. I respect him because he’s straight talking but also a really charming guy, and he’s become a good friend.

What about James?
James is a nice guy but I like to call him the cat – as in copycat. If I set up a website, he copies it. If I decide to set up my own fashion label, he’ll do one too. He hasn’t got a shred of fashion sense in his body. He’ll go into a house and think the flowery curtains would look good on him. My message to James would be to stop dressing like the interior design of property and learn about true fashion. He needs to go back to copying me but I can’t see him in stripy socks. He’s not that cool.

Can money buy you happiness?
Yes. Without a doubt. Money gives you choices. I’ve been in both camps and I’d much rather have money than not. It’s great to walk into your garage and see a lovely Ferrari in there. Money can make you happy as long as you remember it isn’t everything.

What’s your biggest tip for business success?
For a dream to become reality you need to make it real enough to believe in. If you’re pitching an idea to somebody, make it real to whoever you’re aiming the pitch at.

Gordon Whyte

PLUS Market an alternative to the AIM Market

Thinking of an IPO, have a look at your options, an AIM listitng will cost you £200k a year a PLUS listing will cost you £50k, thats a lot of cash for a new listed company. The Post below takes you through the PLUS market.

PLUS Markets is rapidly gaining favour among advisers and CEOs of ambitious, entrepreneurial companies. James Harris finds out why

The word around the markets is that PLUS, the small- and mid-cap stock exchange, has fared better than others, and proved resilient in the recessionary storm. As a result, the market is attracting much more interest.

Companies on PLUS tend to be capitalised at less than £50 million. This is seen as a factor in the market’s growth as it means these ventures are on a market with similar sized businesses, which helps increase their profile and visibility among investors. ‘Our focus on growth companies is meeting a real need in the market,’ explains PLUS Markets’ Vivienne Cassley. ‘Companies can trade on our market knowing they won’t be competing against lots of billion-pound businesses.’

Recent successes include 3D Diagnostic Imaging, a developer of scanning technology. The company has raised more than £2 million since it was admitted to PLUS in April, while business training company Winning Pitch has seen its turnover increase by 43 per cent since its December 2007 listing.

The total market capitalisation of the companies quoted on PLUS (around 200 at the end of August) increased by 34 per cent to over £2.5 billion in the first half of 2009. While set up to attract entrepreneurial-sized companies, it’s fair to say that PLUS also has its fair share of heavy hitters, not least RAK Real Estate, which listed in February via a reverse takeover with a market cap of £600 million. The next biggest company on the market is football club Arsenal Holdings, valued at £470 million. ‘A lot of the new entrants have tended to be more established companies,’ observes Karen Gilbert, also at PLUS Markets.

Strictly business

Many cite a lighter touch to regulation and the lower fees as a major factor in why PLUS is managing to tempt business away from the Alternative Investment Market (AIM), the junior market of the London Stock Exchange. While AIM fees and compliance can cost up to £200,000 a year, the average annual cost of a listing on the PLUS-quoted market is a more modest £50,000.

But maintaining the quality of the companies on the market is key to PLUS’s success, says Cassley: ‘Regulation is appropriate to the size of our companies. Everything is there to protect investors but we keep it simple. The emphasis is on allowing companies to generate returns for their shareholders while not tying them up with red tape.’

The exchange is also gaining ground internationally. Around ten per cent of the market consists of non-UK organisations, and as Gilbert notes, ‘International companies on PLUS are from all over the world and from many different sectors. While our focus is very much on building the market for growth companies in the UK, international companies are also important to our business.’
One of the thriving international companies on the market is China CDM, a carbon emissions broker admitted to PLUS in December 2006. The company’s market cap has soared from £25 million to £86.3 million, and it has raised £15 million since coming to market.

The growing popularity of PLUS means it is now seen less as a gateway to AIM and more as an important market in its own right. ‘With four new advisers joining the market this year and a really strong pipeline of companies, we are really building momentum,’ says Cassley. ‘People are taking notice and advisers are adding PLUS to their toolbox.’

To e-mail Vivienne Cassley click here
Capital Markets,
Standon House,
21 Mansell Street,
London E1 8AA
Tel: 020 7553 2033