"Chapter 15SUCCESSION PLANNING AND STRATEGIES FORHARVESTING AND ENDING THE VENTURELEARNING OBJECTIVES1To understand the planning that is necessary to allow for the effective succession of ownership or leadership ina business.2To examine the options in providing for an exit strategy, such as the sale of the business to employees (ESOP)or to an external source.3To illustrate differences in alternative types of bankruptcy under the Bankruptcy Act of 1978 (amended in 1984and again in 2005).4To illustrate the rights of creditors and entrepreneurs in different cases of bankruptcy.5To provide the entrepreneur with an understanding of the typical warning signs of bankruptcy.6To illustrate how some entrepreneurs can turn a bankrupt business into a successful business.412OPENING PROFILEMAGGIE MAGERKOwww.84lumber.comOne of the major issues for an entrepreneur is succession of a family-owned business. Maggie Magerko notonly faced financial issues but also a battle with her father who was the founder of the company 84 Lumber.The stakes involved in the transition from father to daughter was a financial crisis for the company due to thecollapse of the housing market in 2009. Father Joseph Hardy and daughter Magerko were in a heated battle overwhether the company should file for bankruptcy protection. Even Magerko’s friends and business advisors were arguing for bankruptcy protection. Magerko, however, had other ideas and decided that she wanted to try to turnthe company around. In order to carry out her plan, she had to sell everything she owned in order to turn 84Lumber into a profitable company. Another bad year would not only force the company into bankruptcy but heras well. On paper, she was basically out of money. Six years later, she not only turned the company around withsome drastic cutbacks and closings of retail stores but also managed to attain a net worth in 2015 estimated at$1.2 billion.Part of her success was due to a comeback of the housing market. More importantly, her decisions to close halfof the 500 stores and lay off 6,000 of the 9,600 employees helped her attain her goals of transforming 84Lumber.Magerko actually started her career at the age of five when she often skipped school to ride shotgun in herfather’s car. Over the years, he taught her how the business was run, including how to prepare and understandfinancial documents. Together, they would skirt the areas where successful stores were located to find newlocations. They figured that each store could cover a 10-mile radius so they would drive out 20 miles to find anew location. The company strategy in the early years was to charge low prices and keep costs down. Joe Hardybelieved that expansion should occur without debt to finance this growth.Magerko attended West Virginia University but eventually dropped out in 1985 after only two semesters.Around this time, father Joe Hardy started being reckless with his money and purchased a hunting lodge namedNemacolin for $3 million. Following the purchase, he poured a significant amount of money to expand thelodge into a full service resort, with a conference center, spa, and driving range. In 413addition, he appointedMagerko to be in charge of running the spa and her brother in law in charge of managing the place. SoonMagerko and her brother in law were at odds over employees and she told her father that he had to make achoice between her brother in law and her to run the business. She won and began to manage the entire lodgebusiness. By this time, the family’s succession plan began to unravel, as two of Magerko’s brothers who ownedlarge chunks of stock in 84 Lumber began to argue over who should run the business when Joe Hardy steppeddown. Eventually, the arguments led to Joe Hardy buying back the stock and firing both of the sons. Magerko’stwo sisters were also not interested in the lumber business and with no one to succeed him, he called a meetingwith lawyers to decide on whether to sell the business to an outsider. At this point, Magerko argued to thelawyers and her father that she deserved a chance to run the business. Not wanting to sell to an outsider, JoeHardy relinquished the reins of 84 Lumber to Magerko. He proceeded to transfer nearly all of the ownership of84 Lumber to Magerko. The decision tore the family apart as Hardy and his wife divorced and Hardy stoppedspeaking to his sons. Magerko still seeks her father’s advice, even though his role is limited, as she owns 96percent of the company.Magerko often looks back at those difficult early years and wonders how they were able to maintain 84 Lumberas a successful business. After taking over the reins, she abandoned her father’s decision to avoid debt, and in2002, she purchased 22 stores from a bankrupt retailer. By 2006, she had $425 million in unpaid customerreceivables and $318 million in outstanding loans to builders. That was about the time the housing marketbegan to drop and resulted in the confrontation with her father and advisors over whether to declare bankruptcy.Her determination in closing stores and laying off employees finally began to generate enough cash to cut thecompany’s debt. New lines of business, fewer competitors (many of them went bankrupt), and a rise in housingstarts all gave her the confidence that 84 Lumber was on the mend. She also made the decision to add new high- tech saws that take computerized drawings of houses and then determine the most efficient way to cut supportsand boards to be used in construction. Each board and support is stamped to inform the builder where the itemgoes in the construction of the house. This technology produces a minimum amount of scrap, thus saving cost inthe construction. With all of these changes, the company increased operating profits by 48 percent in 2013 toover $100 million. Today, it is one of the largest privately held building material retailers in the United Stateswith stores in 30 states employing more than 4,200 associates. In addition to selling lumber, siding drywall,windows, and other supplies, the company sells plans to construct decks, garages, and houses as well as1 professional installation services. 414AS SEEN IN BUSINESS NEWSWHEN SHOULD I SELL MY BUSINESS?Determining the right moment to sell your business is often a difficult and traumatic decision. In someinstances, the decision is easy, especially if the company has been bleeding cash and there is no opportunity tosalvage it. On the other hand, if the business is thriving and the entrepreneur is in good health, the decision maybe more difficult. There are many factors that need to be considered in making this decision.First and foremost, the entrepreneur needs to determine if there is a family member who is capable and willingto run the business. As stated in this chapter, the success rate when businesses are transferred to a familymember are not very favorable (only 30 percent survive). If there is no family member to succeed theentrepreneur, then the decision is to either sell or continue to run the business for a longer number of years.Rahim Fazal, the founder of the social network platform Involver, believes that the best time to sell is when themarket is ripe and the growth curve of the business is very positive. He also argues that if you are not growingand prospects are not good, then it is a good time to get out of the business. RamitSethi, a serial entrepreneur,believes that the worst thing an entrepreneur can do is be stuck in a business where there is no future. Hispreference would be to either have the business succeed or fail fast so you can get out without dragging on formany years. Sam Hogg, a venture capitalist, states that many entrepreneurs are able to leave their businesseswith a significant amount of cash. However, if the business is running out of gas but there is still some value inthe business, then it is a good time to sell.When an entrepreneur decides to sell, the amount will usually be based on the value of the company. This isusually an amount equal to or a multiple of earnings before interest, taxes, depreciation, and amortization. Thus,when the time is close to selling the company, the entrepreneur should look for ways to increase value by suchmeans as diversifying products and customers as well as cutting costs to boost gross margins and profits.Experts who sell businesses believe that the reason that many deals fail is because the entrepreneur is unrealisticabout the value of his or her company. Thus, it is recommended to get a certified valuation of the businessbefore proceeding with a sale of the company debt as long as it is not in my company’s name?Source: See, Joe Worth, ?Reading the Signs,? Entrepreneur (October 2014), p. 110; J. D. Roth, ?Quittin’ Time,?Entrepreneur (December 2014), p. 88; and Sam Hogg, ?Endgame,? Entrepreneur (April 2014), p. 69.This book has taken an in-depth view of the entire entrepreneurial process, from the idea to a business plan andthen successful funding and growth strategies. However, the entrepreneur should also be prepared for a numberof important issues that he or she may face in later years of the operations of the venture. We saw from theopening profile in this chapter that Maggie Magerko and her family had many crises that involved thesuccession and direction of the business after the housing market decline. Typically, entrepreneurs are facedwith the issues of whether or not to sell their business, have a family member or trusted employee succeedthem, try to change the strategy and harvest any opportunities, or declare bankruptcy. These exit strategies arethe topics of discussion in this chapter.EXIT STRATEGYEvery entrepreneur who starts a new venture should think about an exit strategy. A number of possible exitstrategies will be discussed in the following paragraphs. Exit strategies include an initial public offering (IPO),private sale of stock, succession by a family member or a nonfamily member, merger with another company, orliquidation of the company. The sale of the company could be to employees (an ESOP) or to an external source (a person or persons, or a company). The IPO, private sale of stock, and merger options are discussed elsewherein this book (see Chapters 12 and 14).415Each of these exit strategies has its advantages and disadvantages, which are discussed in the following and inChapters 12 and 14. The most important issue is that the entrepreneurs have an exit strategy or plan in place atthe start-up stage, instead of waiting until it may be too late to effectively implement a desirable option.SUCCESSION OF BUSINESSBy 2020 millions of baby boomers will retire, causing a significant gap in the workforce. This will be a criticalissue for small businesses that are looking to find successors. Only about 60 percent of businesses have a2 succession plan in place. For very small businesses, this percentage is likely to be a lot lower. In the nextsections, we will focus on important issues that can help the entrepreneur plan for the succession of the businessto either a family member, an employee, or an external party. Table 15.1 provides a summary of important tipsthat should be considered in any succession plan.TABLE 15.1 Succession Planning Tips? Allow sufficient time for the process by starting early.? Estimate the firm’s value or hire a consultant to do it for you.? Evaluate potential successors on their merit—not on whether they remind you of yourself.? If family members are being considered, make sure they have the skills and motivation necessary tocarry on the business.? Provide a transition period so that the successor can learn the business.? Consider options such as employee stock option plans (ESOPs) for a management succession.? Set a date for completion of the transition and stick to it.If there is no one in the family interested in the business, it is important for the entrepreneur to either sell thebusiness or train someone within the organization to take over. Each of these transfer possibilities is discussedin the following sections.Transfer to Family MembersSuccessfully passing down a business to a family member faces tough odds. Research by the Family BusinessInstitute indicates that only 30 percent of family businesses survive into the second generation and only 123 percent survive into the third generation. This data clearly supports the need for a succession plan.An effective succession plan should also be communicated clearly to all employees. This is particularly relevantto key personnel who may be affected by the succession transition. The solution to minimize the emotional andfinancial turmoil that can often be created during a transfer to family members is a good succession plan.An effective succession plan needs to consider the following critical factors:? The role of the owner in the transition stage: Will he or she continue to work full time? Part time? Orwill the owner retire?? Family dynamics: Are some family members unable to work together?? Income for working family members and shareholders.? The current business environment during the transition.416 ? Treatment of loyal employees.? Tax consequences.The transfer of a business to a family member can also create internal problems with employees. This oftenresults when a son or daughter is handed the responsibility of running the business without sufficient training. Ayoung family member’s chances of success in taking over the business are improved if he or she assumesvarious operational responsibilities early on. It is beneficial for the family member to rotate to different areas ofthe business to get a good perspective on the total operation. Other employees in these departments or areas willbe able to assist in the training and get to know their future leader.It is also helpful if the entrepreneur stays around for a while to act as an advisor to the successor. As stated inTable 15.1, however, there should be a set date for when this transition will end. Although having theentrepreneur act as an advisor during the transition stage can be helpful to the successor in making businessdecisions, it is also possible that this can result in major conflicts if the personalities involved are notcompatible. In addition, employees who have been with the firm since start-up may resent the younger familymember’s assuming control of the venture. However, if the successor works in the organization during thistransition period, he or she can justify assumption of the future role by proving his or her abilities.Transfer to Nonfamily MembersOften, family members are not interested in assuming responsibility for the business. When this occurs, theentrepreneur has three choices: train a key employee and retain some equity, retain control and hire a manager,or sell the business outright.Passing the business on to an employee ensures that the successor (or principal) is familiar with the businessand the market. The employee’s experience minimizes transitional problems. In addition, the entrepreneur cantake some time to make the transition smoother.The key issue in passing the business on to an employee is ownership. If the entrepreneur plans to retain someownership, the question of how much becomes an important area of negotiation. The new principal may preferto have control, with the original entrepreneur remaining as a minority owner, stockholder, or consultant. Thefinancial capacity and managerial ability of the employee will be important factors in deciding how muchownership is transferred. In many cases, the transfer or succession of a venture can take many years to meet allthe requirements of the parties involved. Since evidence indicates that most entrepreneurs wait until it is toolate, it is important to begin the process long before there is a need to sell or transfer the ownership of thebusiness.Jeff Braverman believes that his family business is one of the exceptions to the above statistic. Nuts.com wasstarted by his grandfather in 1929 as the Newark Nut Co. and had many years of success. By 2002, the businesshad passed to Jeff’s father and uncle and was in a serious decline. After graduating and working in Wall Street,Jeff decided to return to the family business over the objection of his father who felt there was no future in thenut business for him. Braverman relented and started by expanding the company Web site, increasing spendingon online ads, and improving customer service. He then purchased the Nuts.com domain name and proceeded to4 build the company sales to over $20 million.If the business has been in the family for some time and the succession to a family member may become morelikely in the future, the entrepreneur may hire a manager to run the business. However, finding someone tomanage the business in the same manner and with the same expertise as the entrepreneur may be difficult. Ifsomeone is found to manage the business, the likely problems are compatibility with the owners and willingnessof 417this person to manage for any length of time without a promise of equity in the business. Executive search firms can help in the search process. It will be necessary to have a well-defined job description to assistin identifying the right person.In nonfamily business situations, succession planning may take on a slightly different approach. In thesebusinesses, a key senior manager or group of managers may be stepping down or leaving the company. Sincethere are no family members involved, there may be a need to consider replacements from either external orinternal sources. For a partnership, the process may be clearly outlined in the partnership agreement and couldsimply involve a predetermined choice. However, there could also be a need to go outside the partnership andfind a successor for the partnership. In this instance, as well as in an S corporation or an LLC, where there may5 be only a small number of shareholders, the succession plan should consider the following important issues:? Senior management of the company must be committed to any succession plan. The strategy must beone that everyone shares.? It is important to have well-defined job descriptions and a clear designation of skills necessary to fulfillany and all positions.? The process needs to be an open one. All employees should be invited to participate so that they will feelcomfortable with the transition and thus minimize the possibility of their leaving the company.The last option is to sell the business outright to either an employee or an outsider. The major considerations inthis option are financial, which will likely necessitate the help of an accountant and/or a lawyer. This alternativealso requires that the value of the business be determined (see Chapter 12).OPTIONS FOR SELLING THE BUSINESSThere are a number of alternatives available to the entrepreneur in selling the venture. Some of these arestraightforward, and others involve more complex financial strategy. Each of these methods should be carefullyconsidered and one selected, depending on the goals of the entrepreneur.Direct SaleThis is probably the most common method for selling the venture. The entrepreneur may decide to sell thebusiness because he or she wants to move on to some new endeavor or simply decides that it is time to retire. Asale to a larger company that can infuse much-needed capital may also provide opportunities for the company togrow and reach larger markets. If the entrepreneur has decided to sell the business but does not need to sell6 immediately, there are a number of strategies that should be considered early in the process.? A business can be more valuable if it is focused on a narrow, well-defined segment. In other words, alarger share in a small market niche can be more valuable than a smaller share in a large market.? The entrepreneur should concentrate on keeping costs under control and focus on higher margins andprofits.? Get all financial statements in order, including budgets and cash flow projections.? Prepare a management documentation of the business explaining how the business is organized and howit operates.418? Assess the condition of capital equipment. Up-to-date or state-of-the-art equipment can enhance thevalue of a company.? Get tax advice, since the sale of a corporation will involve different tax considerations than those for apartnership, LLC, or S corporation.? Get nondisclosures from key employees.? Try to maintain a good management team, allowing them to have day-to-day contact with key customersto lessen the firm’s dependence on owner–customer relations.? There is no substitute for advance preparation and planning. One of the important considerations of any business sale is the type of payment the buyer will use. Often,buyers will purchase a business using notes based on future profits. If the new owners fail in the business, theseller may receive no cash payment and possibly may have to take back the company, which is struggling tosurvive.Business brokers in some instances may be helpful, since trying to actually sell a business will take time awayfrom running it. Brokers can be discreet about a sale and may have an established network to get the wordaround. Brokers earn a commission from the sale of a business. As an alternative, there are now Web-basedservices that can assist in the sale of a business. Exitround and CapGain Solutions offer online options to post acompany for sale. A five-year comprehensive plan can provide buyers of the business with a future perspectiveand accountability of the value of the company (see Chapters 7 and 8).As indicated earlier, an entrepreneur may find that selling out to a larger company can provide much-neededresources to achieve important market goals. It has also become a more common exit strategy given that IPOs,the more traditional growth funding option, have become more rare given the current economic environment.Probably, the most experienced entrepreneurs in selling a business and using the money to start new businessesare serial entrepreneurs. They typically build a business sell it or go public and then move on to another idea orventure. There are many historically famous serial entrepreneurs such as Thomas Edison, Henry Kaiser, TedTurner, Richard Branson, and Oprah Winfrey to name a few. With the rapid growth in technology, there havebeen many new serial entrepreneurs that have successfully started and sold multiple businesses. MichaelBronner is a good example. He is the founder of Digitas and Upromise. Digitas is a global interactive marketingagency employing over 3,000 people. Digitas was purchased by PublicisGroupe in 2006. Upromise wasfounded by Michael to help make college more attainable for middle-class families. Upromise is the largestprivate source of college funding in America, with 10 million families enrolled in the free service. Upromisewas purchased by Sallie Mae in 2006. After selling both of these companies, his son Nicky at the age of 13 wasdisturbed when his father took away half of his halloween candy because it was bad for him. Nicky then askedhis father to make candy that would not have corn syrup, hydrogenated fats, or artificial ingredients. Michaeltook his son’s request seriously when he realized that the candy industry represented around $30 billion in sales.With the help of a former Spanish chef, he and Nicky developed a line of candy and launched the companyUnreal Candy. The candy-coated chocolates, caramel nougat bars, and peanut butter cups that were developedare available in 25,000 locations and in 500 natural food stores. They all have at least one-third less sugar andmore protein and fiber than the existing products. His son Nicky, who was home schooled, is playing animportant role in managing the business. More than likely, he will follow in his father’s footsteps to also7 become a serial entrepreneur.The role of an entrepreneur who sells to an employee or passes the business on to a family member may varydepending on the sale agreement or contract with the new owner(s). Many buyers will want the seller to stay onfor a short time to provide a smooth transition. Under these circumstances, the seller (entrepreneur) shouldnegotiate an 419employment contract that specifies time, salary, and responsibility. If the entrepreneur is notneeded in the business, it is likely that the new owner(s) will request that the entrepreneur sign an agreement notto engage in the same business for a specified number of years. These agreements vary in scope and mayrequire a lawyer to clarify details.An entrepreneur may also plan to retain a business for only a specified period of time, with the intent to sell it tothe employees. This may be achieved using an employee stock option plan (ESOP) or through a managementbuyout, which allows the sale to occur to only certain managers of the venture.Employee Stock Option Planemployee stock option plan (ESOP) A two- to three-year plan to sell the business to employees Under an employee stock option plan (ESOP), the business is sold to employees over a period of time. TheESOP establishes a new legal entity, called an employee stock ownership trust, that borrows the money againstfuture profits. The borrowed money then buys the owner’s shares and allocates them to individual employees’retirement accounts as the loan is paid off. The ESOP has the obligation to repay the loan plus interest out of thecash flow of the business. Typically, these ESOPs are a way to reward employees and clarify the successionprocess. In addition, ESOPs result in significant stock values for employees, provided that the companycontinues to succeed.Presently, there are about 11,500 ESOP companies in the United States, of which approximately 3,000 arewholly owned by the ESOP. ESOPs account for about 50 percent of the nation’s 10 million employees (about8 10 percent of the private sector workforce). In addition, about 330 (or 3 percent) are publicly traded companies.The ESOP has a number of advantages. First, it offers a unique incentive to employees that can enhance theirmotivation to put in extra time or effort. Employees recognize that they are working for themselves and hencewill focus their efforts on innovations that contribute to the long-term success of the venture. Second, itprovides a mechanism to pay back those employees who have been loyal to the venture, particularly duringmore difficult times. Third, it allows the transfer of the business under a carefully planned written agreement.Finally, the company can reap the advantage of deducting the contributions to the ESOP or any dividends paidon the stock.ESOPs, due to a new law passed in 1996, are now possible for S corporations. However, there are someimportant differences in the tax treatment between the C corporation and the S corporation because of the pass- through feature of the S corporation (see Chapter 9). Because of the new tax law, the S corporation pays noincome tax on the portion of the stock owned by the ESOP.However, in spite of its favorable attributes, the ESOP has some disadvantages. This type of stock option plan isusually quite complex to establish. It requires a complete valuation of the venture to establish the amount of theESOP package. In addition, it raises issues such as taxes, payout ratios, amount of equity to be transferred peryear, and the amount actually invested by the employees. The agreement also must specify if the employees canbuy or sell additional shares of stock once the plan has been completed. Clearly, because of the complexity ofthis type of plan, the entrepreneur will need the advice of experts if this type of plan is selected. A simplermethod may be a more direct buyout by key employees of the venture.Management BuyoutIt is conceivable that the entrepreneur only wants to sell or transfer the venture to loyal, key employees. Sincethe ESOP described earlier can be rather complicated and expensive, the entrepreneur may find that a direct salewould be simpler to accomplish.420ETHICSINVOLVING EMPLOYEES, BANKERS, AND BUSINESS ASSOCIATES IN THEPROBLEMWho should be made aware when a venture is in trouble? How much responsibility does the entrepreneur haveto his or her employees? How much should you tell your banker? Should clients be made aware of yourproblems? These are all legitimate yet difficult questions that an entrepreneur may struggle with when thebusiness is on the verge of bankruptcy. Some may feel that their only responsibility is to their family and themselves. Trying to get out of the dilemmawith the least effect on your personal reputation and financial well-being could, in fact, make matters worse.Ethically and morally, the entrepreneur is the leader of the organization, and trying to avoid responsibility willnot rectify the situation.In fact, there is evidence to indicate that involving your employees, banker, or other business associates canactually improve matters. Employees may take pay cuts or stock options to stay on with the company and try toturn the business around. Bankers can be your financial best friend and can recommend ways to save moneyand generate more cash flow. Your clients and suppliers can also support turnaround efforts by helping provideneeded cash during the crisis. One example was an entrepreneur who ran out of cash to produce a product beingsold by a large supermarket chain. A meeting with the important client that revealed the situation (brought onby a competitor’s lawsuit that was settled) led to a simple solution. The supermarket appreciated the honesty ofthe entrepreneur and agreed to prepay for all orders so that there would be sufficient cash to produce theproduct.The entrepreneur needs to consider the past efforts of employees who made him or her successful in the firstplace. Thus, the best solution is participation. Get help rather than taking the selfish and perhaps immoralalternative. Honesty is the best strategy.Management buyouts usually involve a direct sale of the venture for some predetermined price. This would besimilar to selling one’s house. To establish a price, the entrepreneur would have an appraisal of all the assetsand then determine the goodwill value established from past revenue.Sale of a venture to key employees can be for cash, or it can be financed in any number of ways. A cash sale isunlikely if the value of the business is substantial. Financing the sale of the venture can be accomplishedthrough a bank, or the entrepreneur could also agree to carry the note. This may be desirable to the entrepreneurin that the stream of income from the sale would be spread out over a determined period of time, enhancingcash flow and lessening the tax impact. Another method of selling the venture would be to use stock as themethod of transfer. The managers buying the business may sell nonvoting or voting stock to other investors.These funds would then be used as a full or partial payment for the venture. The reason that other investorswould be interested in buying stock or that a bank would lend the managers money is that the business iscontinuing with the same management team and with its established track record.Other methods of transferring or selling a business are through a public offering or even a merger with anotherbusiness. These topics are discussed in Chapter 14. Before determining the appropriate selling strategy, theentrepreneur should seek the advice of outsiders. Every circumstance is different, and the actual decision willdepend on the entrepreneur’s goals. Case histories of each of the preceding methods can also be reviewed to beable to effectively determine which option is best for the given circumstances.BANKRUPTCY —AN OVERVIEWFailure is not uncommon in many new ventures, especially in light of the poor global economic environment,the wars in Iraq and Afghanistan, and the continued battle against 421terrorism. According to the SmallBusiness Administration, about half of all new start-ups fail in their first years. The failures are personallypainful for the entrepreneur and too often could have been prevented if the entrepreneur had paid more attentionto certain critical factors in the business operation. It is important to understand the issues involved inbankruptcy since it does occur and there may even be an opportunity to use the bankruptcy options to get thecompany back on solid financial ground.Prior to the tightening of the bankruptcy laws by Congress in 2005, bankruptcies were running at about 1.6million per year. In 2006, total filings dropped to about 618,000, a definite reflection of the new laws. However, from 2006 to 2010, bankruptcy filings again increased to approximately 1.5 million in 2010. From 2010 through2014, both business and nonbusiness bankruptcy filings decreased from 1.5 million in 2010 to approximately910,000 in 2014. Business filings only during this same period also decreased from 58,000 in 2010 to 27,000 in2014. It should be noted that some of the nonbusiness filings could include proprietorships that resulted inpersonal bankruptcy.It is also important to note that business bankruptcy filings are divided by chapter filings. The most commontype of business bankruptcy is Chapter 7, or liquidation which accounted for about two-thirds of the total in2014. Chapter 11 bankruptcy provides an opportunity for a business to reorganize, prepare a new business plan(acceptable to the courts), and then, with time and achievement of new goals, to return to normal businessoperation. They represented about 22 percent of the total business filings. The remaining business bankruptcies(about 11 percent) are Chapter 13 filings, which allow creditors to be repaid in an agreed-upon installment plan.9 Each of these are discussed in more detail below.As stated before, bankruptcy may not always mean the end of a business since it can offer the entrepreneur anopportunity to reorganize under Chapter 11 or merge with another company. The results of each bankruptcyfiling can be quite distinct because of the nature of the business or the uniqueness of an industry. Some of thefollowing examples describe the possible mix of results or experiences that can occur from a bankruptcy filing.Although a Chapter 11 filing is designed to allow a company to reorganize and then emerge with its operationsagain, there have been some serious concerns given the new restrictions signed into law in 2005. The SharperImage filed for Chapter 11 bankruptcy in February 2008. Its intent was to close 90 of its 184 stores to savesignificant operating costs. However, because the new law has lessened the time that Chapter 11 firms canremain under court control, the management of The Sharper Image felt that there was not enough time tofinance the restocking of the remaining stores, so the company instead chose liquidation to retain some value inthe assets. Recently, Radio Shack filed for Chapter 11 bankruptcy after many months of negotiations withcreditors and bondholders. Their plan is to close many retail stores and sell off assets and continue as acobranded business with Sprint Corporation. Sprint’s plan is to sell Radio Shack products as well as its mobileproducts and services in a store within a store concept. Over the past few years, Radio Shack had been unable to10 compete with online competitors.In February 2004, disaster struck for 72 franchise stores when Ground Round Grill & Bar announced that it wasfiling for bankruptcy. The franchise stores were owned by local proprietors under a license from the chain. Thecompany also owned 59 restaurants. Founded in 1969, the restaurant had been a pioneer in the casual diningindustry but now was faced with debt to unsecured creditors of between $10 million and $50 million. Sell-offsof a number of the restaurants had provided some funds, but any ability to survive the bankruptcy hit a snagwhen financing was delayed and the company defaulted on its loan payments. The franchisees, however, madesome quick and innovative decisions and decided to organize themselves into a cooperative. With this neworganization, the 422Independent Owners Cooperative, LLC, they were able to raise some internal and externalfunds to buy the brand from the bankruptcy court. As of 2015, the franchisees have recouped their investmentsand have been able to turn a profit. The cooperative now operates 30 restaurants located in 13 states. The newbusiness model of a cooperative seems to be working as a number of the original franchise owners have now11 opened new restaurants.Even though many Chapter 11 filings end up as liquidation (Chapter 7), there are those that do survive.Equipment rental company Ahern Rentals, not only emerged from Chapter 11 but was able to repay all thecreditors in full. Ahern Rentals is the largest privately owned construction equipment rental company in theUnited States. CEO Don Ahern had filed Chapter 11 mainly because he had invested more that 6,000 pieces ofmachinery for a Los Vegas project that once completed left him with all the unused equipment and the nation ina major recession. With the recession and branches of the business losing money, his debt exploded to $620million resulting in his filing for Chapter 11. Having fought off a hostile takeover and with the construction12 business recovering, he was able to emerge successfully from bankruptcy. "