Where to Start When Winding Down a Business?

February 25, 2021

By Ryan T. Murphy

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:

  1. an out of court dissolution
  2. assignment for benefit of creditors
  3. 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

View All Blog Posts