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The last thing any entrepreneur wants to do is shut a company down – but sometimes things don’t work out. Over the past 2 years, I’ve been working on closing one of our portfolio companies. It’s been more painful than I would have guessed.

I’m the CEO/President/Chairman of this company. There are no employees and the company hasn’t been operational in 3 years. I’m moving our company into a state called Assignment for the Benefit of Creditors or ABC. The company isn’t operating and now it’s time to settle debts and shut the thing down. Closing the company means we won’t have to pay fees to keep the company registered in Delaware, state and federal income taxes, and directors’ insurance

Here are the lessons I’ve learnt the hard way.

  1. Paper everything. Keep every record: payroll, contracts, share purchases, agreements (consulting and otherwise), tax returns. You’re going to need it all. My company has many agreements with other companies that are partnerships and joint ventures. There are all kinds of provisions for revenue sharing, control of the entity and insurance risks.
  2. Hire someone to manage your finances, part-time, as soon as you can. You have to keep your house in order. When you shut the company down, it’s critical to know who owes you money (employees, vendors, others) and who owes you money (customers).  Plus, if you play your cards right, there are some great tax benefits you can use or sell.
  3. Hire an attorney you trust to ensure that all your contracts and agreements protect you and the shareholders of the company (employees and investors).
  4. Make sure you have a drag along clause in your term sheet that allows either a board majority or a shareholder majority to force the company to be sold or be shut. Drag along clauses are important if you have lots of shareholders. In my case, there are lots of small (< 1%) shareholders. Getting a hold of them 10 years after their first investment and encouraging to sign a document for a company they have long since forgotten about is a waste of everybody’s time.
  5. Shut the company down as soon as possible – when everything is fresh in people’s minds.
  6. Hire a reputable experienced firm. I hired two firms – the first, less expensive, didn’t move the process forward at all. The second, better known, but 3x more expensive, has things tied up in just a few weeks.

The faster you can shut the company down, the faster you can move onto the next thing. I’d love to hear any stories about shutting companies down and if others have tips/tricks.

 

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