Time to Act
Charlie Goodrich 


Many of the critical questions in a wind down relate to employees. Who to keep, in what capacity and for how long? These decisions are significant, but never easy.  

In today's newsletter, I share four essential considerations when faced with the question of who to keep and who to lose in a business wind down. 
Your comments are always welcome. Just click "reply" to send them to me.
Charlie Goodrich 

Founder and Principal

Goodrich & Associates
November 2013 Vol. 2 No. 11
In this issue...
Who to Keep and Who to Lose in a Business Wind Down
Heard on the Street
About Us
Goodrich & Associates
[email protected]
Who to Keep and Who to Lose in a Business Wind Down
I am often called in to wind down the remnants of what's left of a business. This may involve a bankruptcy, a liquidation, a sale or some other urgent situation in which the company in question is about to be shuttered.

Typically, when I arrive, the major assets have already been sold for the benefit of secured creditors - what's left is the tidying up of final affairs so that ghosts don't come back to haunt management, directors and investor/owners.

Many of the critical questions in a wind down, of course, relate to employees. Which, if any, to keep? How should they be compensated? How long should they remain in some capacity or form?

These decisions are significant. Keep too many people or pay them too much and their costs will eat up the proceeds from the liquidation. Jettison key resources, on the other hand, and it will be difficult or impossible to complete the wind down.

The "best" answer, naturally, is always a function of the particular situation. That said, this month I share four essential considerations:
  1. Assess what needs to be done. While seemingly obvious, this first step is often neglected in the rush to cut costs.

    In a bankruptcy in which I was involved, for example, the goal was to get a plan of liquidation approved with a Plan Administrator tasked with the final wind down, distribution to creditors and other typical matters. The peculiarities of the case suggested that Bankruptcy Court confirmation was not expected anytime soon, so the company was responsible for much of its own wind down.

    Knowing this, we retained the credit manager on payroll for a month; an older staff accountant near retirement until the liquidating plan became effective, to maintain books and records (eventually as a contractor); and the business General Manager, to ensure a smooth transition to the buyer of the bulk of the assets as required in the sale agreement and to dispose of salesmen's cars and look over several pieces of real estate.

    A complete liquidation checklist is beyond the scope of this article, but typically, a few remnant assets need to be monetized; recoveries through litigation assessed and pursued; a whole slew of final tax returns prepared and disputes with creditors resolved. So as in the above example, a credit person was needed as was an operations manager familiar with the remnant real and physical assets. As in this case, access to people with company-specific information is usually needed in a wind down.

    One item that is often overlooked in assessing what needs to be done is wrapping up workers compensation plans. Also, leased premises often need to be vacated and records and files boxed and sent to storage.

    This list is not complete and there are many other potential needs. Step one, however, is always deciding what needs to be done so you can then determine who should stay and in what capacity.
  1. Move needed employees to a contract or 1099 basis quickly.

    Payroll costs money to run and, typically, benefit plans with their wind down needs and costs can't begin until payroll is over. So make employees independent contractors and pay and give them 1099's instead of W-2s.

    How people are paid does not usually affect motivation/retention, but it helps to pay them more on an hourly basis as contractors then they made as employees. (Note that for various legal reasons, moving existing employees to contractor status may be problematic in some states.)
  1. Weigh the trade-off between internal and external (contract) resources.

    One of the challenges in a wind down is motivating staff to get the needed work done. Knowing the end is near, they understandably seek (and often find) other employment. Working on the liquidation then becomes a low priority.

    An alternative to using existing employees is to use outside service providers, either already in use or retained just for the liquidation. For example, a bookkeeping service can be used instead of retaining the accountant. Motivation and a new job is never an issue with these outside service providers, however transition costs and, perhaps, higher costs from a tax preparer or other service might be.

    I worked on a liquidation recently in which only a small staff remained when I arrived. I ended payroll that week and reached agreements with the remaining staff on a contract basis. Since the organization already had a contract part time treasurer/controller, and because the former CEO had already shifted to contract, the transition was smooth. Fortunately, the company had a good third party administrator for the 401(k) plan. The part time contract treasurer had traditionally done the taxes, but when he had some significant family matters to address, we were able to use the public accountant to do the tax returns.

    In another example, I was retained to wind down the remnants of a factor that financed companies by buying their accounts receivables. Since the financials were maintained by the Controller on an early cloud version of Quickbooks, and because accounting for a factor is rather unique and there were some licensing concerns about moving the accounting to a bookkeeping service, the Controller was retained on a contract basis to keep the books and records and support the public accounting firm in its preparation of the tax return. Unfortunately, the Controller quickly found another job and keeping the books and records for my client became a low priority. Quite frankly, I think she took the assignment to keep her former boss and CEO happy. In hindsight, even though there would have been cost to transition to a bookkeeping service, the effort, in this case, would have likely been cost justified.
  1. Fire the financial people last.

    Almost always, final sales, payroll and income tax returns need to be prepared and filed. Typically, these final returns cannot be prepared until there is no more economic activity. That means payroll is over, all assets have been liquidated or abandoned and any remaining funds distributed to creditors. So, maintaining access to the people resources needed to get this done until the very end (or to support external services in getting it done) is therefore essential.

    In many cases, the bookkeeper can help wind down employee benefit plans, particularly if they are all maintained by third party administrators, as well as help collect receivables so they can be more fully utilized in a wind down.
In the end, and however you decide to manage the specifics of a company wind down, remember to think before you simply fire everyone. Many existing staff - particularly those with their hands on the financial records - will be necessary in ensuring a smooth and orderly process through the organization's final days.

Heard on the Street
Instead of our usual link to a recent article on the state of the economy, this month's Heard On The Street takes a slightly different approach: An explanation of the differences between journalism and analysis... or why the "news," "media," "blogosphere," etc., never seem to get "it" right.

Read this fascinating article from Stratfor, a global intelligence company, on why their analysis rarely matches up with the current media story.

About Us
Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent financial problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.

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