July 28, 2023
Ep 1 - Calling it Quits
Why do business owners decide to close down their businesses?
Since Kate is currently deep in the middle of a summer project about failure, she naturally wanted to talk about business closures.
In today's episode John and Kate discuss:
- the number one reason they see business owners closing
- what happens after you make that decision, and how to ensure a graceful wind down
- the biggest pitfall they wish all business owners considered whether they are thinking about closing or not.
Show Notes:
- Enough is Enough, a Summer of Failure on Kate's Substack
- about Wanderwell
- about Unlawyer
To learn more about Whiskey Fridays and read further essays by Kate on the topics we discuss go to katetyson.substack.com
Transcript
Episode 1 - All Combined
===
Kate: [00:00:00] This is Kate Tyson and welcome to the first episode of Whiskey Fridays, the show where my colleague John Gerber and I pour ourselves one and discuss the ins and outs of creative business ownership. I hope, if you're listening to this today, that what we're about to talk about does not apply to you. I hope you are happy, thriving, and feeling so, so good about all the work you're doing in the world.
For our first Whiskey Fridays episode, John and I dive into the thorny and emotional topic of deciding to shut down your business. We discuss how and why business leaders make that decision, the logistics of winding it all down, and what pitfalls to watch for along the way.
And I should say that even though John and I are going to talk about business closures today, most of our work [00:01:00] is working with thriving businesses. But we've also worked with a lot of businesses that do close,
So even though we hope this isn't something you're considering right now, we also both believe it's okay to throw in the towel. Your business does not need to last forever, and so it's best to go into the process knowing what to expect.
John: why do people finally close, Kate?
Kate: I have a theory, actually.
John: course you do. So,
Kate: Well, wait, wait, wait. Let's back up. John, what are you what are you drinking?
John: I am drinking tequila.
Kate: This is Whiskey Fridays and you're drinking tequila.
John: It's, it's my new diet.
And you know what? It's also better for my hangover. it's called DOBLE, D O B E L. we'll share some, you'll like it.
Kate: you're kind of ruining the whole title [00:02:00] of our deal here, but that's fine.
John: You know what? I will do better next time.
Kate: Alright, um, I'm drinking Maker's Mark.
John: Oh, good.
Kate: Kharina does not like Maker's Mark, but I got it because it was on sale at the liquor store,
John: is there any other way to choose it? I mean, every, every once in a while, it's like, all
right, I'm, I'm getting the stuff that I really want. But for the most part, it's like, what's good and on sale.
Right.
Kate: Yeah. Totally.
John: double
was like 10 off a bottle. So I
bought two.
Kate: Nice. Alright.
we're talking about closing businesses, And, I have a theory. about this. Because, you know, there's like a million reasons why people close their businesses, but I actually think that there's sort of one main reason, especially in with the folks that we deal with that close our businesses, which is that [00:03:00] working for years and years and years with no end in sight. really
takes its toll, and,
there's certain like made it points and those are things like paying yourself or profit or like having some semblance of your life back after working too much for too many years.
Um, but I, but I think it's really that, like, people don't know where they're trying to get to always, So there's sort of this like hamster wheel exhausting treadmill marathon thing and at some point people run out of steam And that's actually why they close.
It's because they can't rally another time. Do you think that's right?
John: I agree with that. I do. You and I have seen a lot of other reasons why people. Dissolve their businesses, like relationship issues. like we've seen a lot of business divorce as the, as the reason why people don't continue their [00:04:00] business. But I think the fatigue issue is huge.
Um, especially cause like you start out and the enthusiasm of creating your business and being in startup mode carries you a long way, but at some point, if you don't see. A way outta that. and, it requires that same level of energy to like do what you need to do every day, but only to sort of just keep the business afloat as opposed to actually starting something or growing something and building then the enthusiasm just isn't there.
And, and, um, the pandemic did that to a lot of people, right? Because they. they were fighting, fighting, fighting during that time just to survive. And at some point after years, like, there's no, energy for that anymore.
Kate: You know, during the pandemic and with [00:05:00] everybody fighting so hard to just survive, there's all this adrenaline that's keeping people in the fight. And then there was also at the same time. relief funding, uh, PPP loans, EDAL, stuff like that, that ended up floating people through the upheaval, at least for a little bit.
And I think now we're getting to this point where a lot of that, both, both the adrenaline that kept up the fight and the, funding that floated people, that's all running out. And so, like, I'm seeing a lot more actual upheaval and closures now than a year ago, I'm wondering if you're seeing that too in your practice.
John: I am.
Kate: are you having more conversations with people that are... that are running out of steam than you were
a year
ago.
John: Yeah, exactly what we just said. Like, they fought the battle and they, like, tried and at this point they're just like, Fuck it. [00:06:00] I'm done. In fact, I got an email from somebody I don't even know today that said, that said, Hey, I'm thinking about dissolving my company. We took an EIDL loan.
It got us through the pandemic. But like, we're, we're, we're just done same deal. So can you, can you tell us how to run that process? Right.
Which kind of goes to, I think kind of goes to one of your questions for today. Okay.
Kate: How does, how does that go to one of my questions for today?
John: Well, I, I know you wanted to talk about entrepreneurs being optimistic and, issues that they have around why, why do we do this in the first place? Like, why do, why do people have to get themselves in the position where this stuff becomes so risky?
Kate: Yeah, you know, I did talk to our dear friend and now former client, I guess she's still your client for a little bit, [00:07:00] um, Heather Thomason of Primal Supply Meats last week, and, you know, a lot of what we talked through and she talked about was just how long and difficult it was to make the call. And, and my point to her was like, is that there isn't usually, I mean, sometimes people really do get the rug pulled out from under them, you know, or there's an illness or something catastrophic happens, like, like a flood, like a flood.
Yeah, that would end it. But, you know, if things aren't in a, let's say disaster mode. and I would argue Heather was not in a disaster mode. if you're not in a disaster mode, then often it's you know, it's not a case where you get a really clear signal that says, It's, it's time, like you need to call this and there's certainly signs along the way like your [00:08:00] debt ratios or something like that, that would be indicators on, on the way along the roadside, uh, as you're moving along.
But, you know, I think one of the things she and I talked about in depth and in depth is, Just how hard it is to call it. so, I wanted to talk more about how do you, how do you make this decision? Cause we've, you and I have both seen people just fucking agonize over it.
John: agonists like crazy.
Kate: And like, talk about it, and talk about it, and talk about it. And... like, it's really painful!
John: It's very painful, but like, like you said, there's no, there's a lot of times no obvious reason. So like. I, I was dealing with one actually today and their scenario is, it's a small company. They probably do anywhere from like [00:09:00] 000 of like net cash at the end of the year that they can pay the owners, the two of them here, not just one.
So like the two owners might be making, I don't know, 30, 40 grand in a, in a good year. Right. Right. and they have. 800, 000 in SBA debt. So like they're faced with this prospect, the business works, quote unquote, you know, they're, they're not losing money. Um, they're making this sort of minimal kind of salary.
I guess they like what they're doing, but like to your point, there's no obvious, like it can continue. But for how long, if you're that person and, that's what you're doing on a good year, just to just sort of like get to a decent year, like how long do you keep doing that? I mean, even if you took all your money, all your free cash flow and paid your SBA loan and didn't make anything, it would take you 10 years or more to pay it off.
Like, yeah. So I think that's, I don't know, I think [00:10:00] that's kind of a not uncommon situation that these Entrepreneurs are in,
Kate: Yeah. And you couldn't see my face, but I was, like, grimacing when you were saying those, those, those circumstances
John: is it, is it familiar?
Kate: yeah, because it, and I think this is, uh, This is, this is in some sense, maybe the Heather conundrum is like, you're, you're getting by, but then what?
John: and the enthusiasm you had at the beginning when you're doing a startup, like that pulls you through this kind of stuff for a while because you're growing and you can see the future and you have all these ideas and this kind of stuff, like the pandemic put a, put a real hard line on that for a lot of, and then all they were doing is fighting this fight just to get to the point sort of in the, Example that I gave you, I don't think we can talk specifically about particular, you know, clients, at least not that we're going to put on.[00:11:00]
Tape right
Kate: not, not in the public's
John: not in the public sphere, but but yeah Her situation is good example of that and and I think that goes to your point of like if you're the person in that decision? How long do you keep going
Kate: Yeah.
John: How do you recognize when the fatigue is just like enough already and like fucking I'm not doing this anymore.
Kate: And I think some of what's hard is that, like I, wrote in my notes to you, entrepreneurs are naturally optimistic. Like, we have to be. Otherwise, why would we do this shit half the time? Um, like you have to believe in things that are impossible to create something new. so, you know, if that's how you're wired, And even if things like these guys that you're talking about, that you're talking to today, I'm sure that they see optimistic signs all the time. [00:12:00] Like, they could be feeling bleak about this, I'm just projecting all this on them right now, but they could be feeling really bleak about this, but then...
Maybe they have some like, client win, or customer win, or sales pick up, or their team feels really good. You know, there's like, stuff along the way that can be like, Oh, well, but maybe if I just get over this next mountain. Then it'll all be okay.
John: So you get the little with breadcrumbs
Kate: Yes, yes, it's like breadcrumbs. And then, I don't think those ever disappear. It's like they make it sparser. Like, like you're, there, they were a few feet between the breadcrumbs, and now there's like ten feet between the breadcrumbs. But you're still like looking out for those breadcrumbs. And then, the other things are sunk fallacy costs, like you've put so much work into this.
John: yes. And then there is the actual [00:13:00] risk of stopping. Like, in this example that I gave, they have hundreds of thousands of dollars of secured, personally guaranteed SBA debt. So that means if they stop, I mean, who knows how long it takes the SBA to get around to getting to you, but at some point they will and that's out there.
so you're like, I could keep going and just sort of putt putt and do this thing. And I, and I might be feeling like I hate it at this point because it's just so oppressive and the breadcrumbs are getting even further and further apart or whatever. Um, but if I don't keep doing this, I'm kind of hosed.
Kate: I think the other big one that I hear a lot from folks is just the, the obligation to employees, to customers, to community.
Like that feeling like you're responsible for livelihoods, you're responsible for your customers, your clients, and then your community, sometimes your vendors, like, you know, you're in this [00:14:00] ecosystem that you've built around you and then you're, you are going to solely or in a partnership be responsible for letting all those people down.
John: not a good feeling. Alright, so those are reasons.
I think you deal with this front end piece more than I do. Because I often get the call where people say, well, I've decided to shut my thing.
Kate: Yeah,
John: With you, I think it's more. Oh, I'm thinking about it.
Kate: yeah, I think the real question I was trying to ask, and I don't know that I have a really good, I was trying to think if I had a good answer to it. And I don't have a clean answer to it. And the question that I don't have a clean answer to is how do you make this decision easier or sooner or
less, you know, in a less, backbreaking way.
and I think some of it, I mean, I would say the big mistake that I see, or like the thing that I wish I could save more people from, and [00:15:00] you probably do too, is that they leave more gas in the tank. I think a lot of folks would get to this point of thinking about closing or actually closing, and they've been running on fumes for a while.
John: Mm hmm.
Kate: and so, you know, they're out of juice.
And I would say that both, you know, that happens both on the like personal energetic level where you are so burnout that you just kind of fall over one day and it's done or the business runs out of cash or is too close to running out of cash.
John: Mm hmm. Mm hmm.
Kate: problem with that is the longer you wait when you know, you probably are going to close or you're thinking about it, the fewer options you probably will end up having in terms of actually winding it down gracefully
and with like great care,
John: hmm.
Kate: because most people, when you've gotten that far, if you're gonna end it, you want to do it on your terms.
And not on the lender's terms or somebody [00:16:00] else's terms or outside of your control. And so I think some of it is that, there's this advice blog that I've been reading for years. That's awesome. Called, Captain Awkward. and the woman that writes it has this, principle.
I think it's called the She is, She is above principle? I don't quite remember. But it's usually about, dump that motherfucker. Kind of scenarios where you've let this bad relationship play out too long and you're wondering when that person's going to change.
And so the principle is basically like, I
mean, it's not dissimilar.
John: Right, like, um, I'm, like, I'm seeing that.
Kate: So, this principle says, if nothing else changes, how long will you put up with this?
John: Mm hmm. Mm
Kate: Three months? Four months? A year? Two years? that kind of question. Um, [00:17:00] can help, being more rational about the actual objective facts before you, because often, you know, emotions take over and you're tired.
and so, and I've done this with clients where we set a baseline of cash cushion. And once they start dipping below that, I'm like. Red alert, red alert, red alert.
John: That's a good one.
Kate: Well, it's a good one. Cause it's like, you know, how much cash do you want to be able to divvy up?
Pay things, pay your team. And, and this works best. I would say like some of the clients have done this with lately don't have debt. So it's a cleaner, decision.
John: Mm hmm. Mm
Kate: Uh, because they're not worried about repaying anybody. It's more about, we have obligations to our team, we want to make, if we're going to call this.
And then we also want to walk out with a certain amount of cash. And we don't want to, we don't want to go below a certain number. And so I think that [00:18:00] one, if you're on the edge, that's a really good way to benchmark it, is just every month, check your cash on hand. And name, whatever your number is and if you start to dip below that consistently,
like you're going to start seeing that number go down and down and that would give you a clear indicator.
John: I like that. And it definitely gives you the options that you're going to want to have if you're in a wind down,
Kate: Yep. And then the other one, and this is interesting back to the sort of nobody can call it for you. Cause I know, and again, to preview my conversation with Heather, she felt like she got to this moment where she wanted somebody to tell her. She had to stop. And nobody would do that for her. And... You, you wouldn't do that for her!
John: wanted to, you wouldn't either.
Kate: No! Because we can't![00:19:00]
John: I wanted to. There were definitely times where I wanted to be like, you know what? And sometimes I'd be on the phone with her and I'd be like, well, it sounds to me like you're ready to, you know, pull the... But I never just said, you know what, just fucking do it.
Kate: And why, why is that? Because I have an answer. But I'm wondering what your answer
John: I don't know, mine's probably wishy washy, but it's, it's not my job. It's, you know, I mean... It may be it is my job. You know, I, I do consider it that I'm a, you know, an advisor to my clients and I should actually help them make a decision where I would say like, here's my advice on your decision. Um, but I just backed off on it because I felt like in that situation, you know, I wanted to make sure that we had analyzed all the different scenarios and so that whatever decision she made, she had all the information.
You know, and knew really where to go, you know, um, but never just said, okay, we [00:20:00] did that. Now I think you should pull of plug.
Kate: Yeah.
John: What
about you?
Kate: I think I would say the same thing. And, and I would add that I think, I think it's tricky. Because, like I said, there's certain indicators, like I try and basically set up, very objective financial indicators for people, and then also reflect back to people what I'm hearing about their levels of fatigue and burnout and how much shit they're going through.
John: Right.
Kate: But I do think it, it feels like as somebody that's paid to be in an advisorship relationship with somebody, like it's, it is not my job to tell them to pull the plug. Like I do think there's a little bit of an ethical quandary there where you may know that they're close, but you can't push them over the edge.[00:21:00]
John: And like, if it was a relationship breakup, right? Like, do you want your friend to say, You know, ditch that person, or do you want them to just kind of like get to where you're talking about? So
Kate: Well, you might not listen.
John: yeah, you definitely might not listen, and you just might not like that piece of advice.
It's very, it's very personal, so. But yeah, so that's it, that is a little bit of a dilemma, and I, and I do recall on several occasions feeling like, I should just tell her how I'm feeling, you know, I can do this, you know.
Kate: so maybe we can switch gears to after you make that decision,
John: Okay. Yeah,
Kate: you know, it's not over now, all this stuff has to happen. we referenced, closing gracefully.
John: yes, yeah. It does. Um...
Kate: And, so I kind of want to turn it to you because [00:22:00] you, again, like, as we've been saying, I tend to do the like deep emotional pre mortem, kind of work, and then people come to you because, you know, when you do, when you do close, you need a lawyer and an accountant on your team.
John: But I do think your point of, like, wanting to do an orderly or a wind down that in a way that they want to do it, I see that being a, an overriding goal, um, that overrides even sort of the strictly legal stuff. like, the ideas that you're talking about, about reserving.
Funds or having the ability to pay employees and that kind of thing It really comes into play as you're trying to figure out how to actually do the wind down
Kate: When people come to you at are there certain things that... You're really, you're like praying and hoping they haven't done,
John: Well,
Kate: what are you, hoping that they show up to that conversation having done?
John: well, there's [00:23:00] the obvious one, which is that if they have no personal guarantees, no personal liability, then it's easy. If they have personal liability, that changes the whole equation. Right?
Kate: And that's like, um, I took out a loan and my house is on the line,
John: it usually looks like I need it alone. I got it from the SBA. So I have to personally guarantee it and probably mortgage my house to secure the personal guarantee. Or I had to sign a lease, because I was, you know, expanding my business or starting my business and to get the space, the landlord required me to personally guarantee the lease,
Right, which again means my personal assets are on the hook, or I took out a shit ton of credit card debt. And, of course, even though the credit card might say the company's name on the bottom of it, it's really a [00:24:00] personal obligation, So, you know, I know 1 of the questions that we wanted to talk about was like, what kind of resources do you need to help you through this process?
And I think having a bankruptcy lawyer is really important. I'm not a bankruptcy lawyer. As, you know, I know enough to say some things, but, um, having a real bankruptcy lawyer is important because while. with the kind of companies we're talking about, the likelihood of the company actually filing for bankruptcy is super low.
because, you know, any of these creditors could, come after the company. The company has whatever assets it has, and that's it. And you're not on the hook for it. Going back to the question of what is the one thing that is the game changer. If somebody has the personal guarantee, then.
You have to, you have to worry about what the impact is going to be.[00:25:00] So like, if you haven't personally guaranteed a lease or a loan and maybe you don't have any credit card debt your bankruptcy lawyer is gonna say if you want to give the landlord the keys and walk away You, you can do that because they're going to have all the assets that you have your business that are in there on their property.
You probably don't have much of anything else, or it's owed to a lender. that's, that's that.
Kate: Right.
John: Um, I don't even know if I can think of a situation where it's actually gone down like that to,
you know, I think, um, I mean, this is obvious, but like when this is happening they need to have a plan about how it's gonna all go down. And I'm not talking about the dissolution plan, which is like the formal legal plan that you end up filing with the corporation bureau and all that kind of stuff.
I'm talking about a wind down plan you know, make a decision about when it's going to be the last day of operations. [00:26:00] Look at your cash, look at what, if you got the inventory, like how long it's going to take. Sell that off or whatever work in process customer agreements that you have that you can still make money on and then There's a date and that's my last day and then you work backwards from that and from there you can figure out How much cash did I have?
Did I, like, go below, below my red line and, like, what, how far is that going to go? If I can wind up these customer agreements and bring in some more revenue, if I can sell some assets or inventory, whatever your business is, Um, I'll know by that last day kind of what I have or maybe what I'm going to have.
And then you can say, All right, how do I wanna, how do I wanna allocate, right?
Kate: how do you make those decisions,
John: how do you, how do you make those decisions? I mean, you already touched on it. I think most people make those decisions based on the relationships that they have and the ones that exist and whether or not they want to preserve them in the future.
I[00:27:00]
Kate: Yeah.
John: mean, some of them you have to do, right? you're going to, no matter what, reserve money so that you can make payroll for your employees for the time that they work. That's a, that's a given. Right? But maybe you're able to reserve something more as either a stay bonus to keep them through that last day, or something to cushion the blow, you know, when you have to let them go after that last day.
Right? Um,
Kate: That's sort of the best case scenario.
John: that is the best case scenario. But you have to at least have money to pay the payroll.
Kate: Yep.
John: Um, bad stuff happens when you don't pay people for when they
work.
Yeah.
they can come with wage claim, like it's just not good.
And you have, and you would have personal liability potentially for that, and it's just not good. And plus it's not right. So. Yeah, um, and same thing with taxes, you know, if you have sales tax and other taxes that the company has incurred You want to make sure you get those?
After [00:28:00] that, you know, people typically prioritize things that they have a personal liability
So I guess my point is, you're making decisions about what from the pot of cash you have, how you want to do it. Um, you, you want to as much as possible pay the relationships that you're, you want to pay. Would you have particular suppliers? Like we were talking about you know, that you want to take care of.
Um, but you have to balance that. There is sort of a legal thing. You have to balance that against the rights of your creditors, in particular, if you have secured creditors, because, you know, secured creditors have the legal right to get paid. First, essentially your assets are theirs once you default on their debt, which presumably you've done during this process,
right?
Kate: Right.
John: So you want to be able to Do all this stuff, but you need to be able to justify it as transactions that are essentially in the ordinary course, as part of an orderly wind down and not, you know, [00:29:00] paying people who don't have priority over your secure creditor.
Kate: Right. And then what if you don't have enough money? Obviously, in an ideal world for your creditors and your lenders and your employees, like, you would have, you would close and you'd have abundant resources, but that's never the case because otherwise you wouldn't be, ending it. Yeah, you'd be doing something different. So, when there isn't enough of a pot to go around to everything you have an obligation to, how do you sort that out? And
John: Well, I mean, I'm making the assumption that there's not enough money to pay everybody
Kate: Cause that's usually what happens.
John: it's always what happens. You might be selling the company and selling it for some. You know, going concern value and then getting something for yourself at the end, right? Or whatever, but like, that is the question, how deep, how deep of a problem are we talking about?
You know, like
Kate: Well, like you said, uh, 800, 000 to the SBA. That's pretty deep.
John: that's [00:30:00] very deep, but, but what will happen if, if the main partner in that deal decides, he's not doing it anymore. That company has enough cash in it, kind of where, like, cause they haven't specifically followed your advice, but they will have enough cash to pay their employees, to pay their company taxes.
And maybe nothing else, right? Maybe they could pay some personal credit card debt that they have. So what happens is that the, the creditor, everybody else isn't going to get paid.
Kate: Yeah.
John: Um, so then the question is, you know, is the debt personally guaranteed or not? If it's not personally guaranteed.
Then the entrepreneur can basically walk away and just be like, well, you know, the company is an empty shell at this point. Creditors can bring their claims against it, and
Kate: They're not going to get anything.
John: they will get nothing, and I don't have anything to lose on that, right? but the whole equation flips when they have personal [00:31:00] debt.
Kate: Right. And then generally, correct me if I'm wrong, lawyer John.
Um, I mean, you're, you're essentially then looking at personal bankruptcy.
John: You, it depends who the creditor is. You know, like, if, if the creditor is the SBA, if the creditor is the government, probably. that's what the advice that I've heard from bankruptcy lawyers over and over on that one. Not, not because the SBA is going to catch up with you right away. Like, it's sort of a little bit of a timing issue.
You might wait. But, however many years it takes them, like,
they're gonna, and I think they're mandated to, and, so they're, so at some point they're gonna find you and come after you. And at that point, they could get the judgment, and you'll... you know,
you might not have any assets to satisfy that judgment and there are ways that those could be protected potentially under Pennsylvania law, for example, but, um, but it still doesn't mean that like they won't do it and that your only way to really get that off you is to, have the [00:32:00] bankruptcy.
So yeah. Thank you. So let's back up if you're okay with it for a question and be like, okay, so now let's back up to that, that question, which is before all this stuff like, okay, so how do we get ourselves in this situation if we're the optimistic entrepreneur and like,
Kate: What should, what should you not
John: well, I don't know if you should not do it, but like, what's the choice you have to make when you want to do something?
So again, this is sort of more in the upfront planning part of, of life, you know, where the company is typically growing, right? Because they. Are going to sign a new lease or they're going to get some debt that's going to allow them to do something like what's that decision making process look like?
Kate: right. so these folks with the 800, 000 SBA loan. There was some point in the last few years of pandemic where you know, whatever upheaval they were experiencing, because there had to be some, especially for that size of loan, because that's
John: Mm hmm.
Kate: a bigger one. [00:33:00] Um, Where, and, and I would say, you know, the thing about those pandemic EDA loans was the terms seemed really good. And maybe it not even seemed really good. I would say they were good. Like, 3%, 30 years, you can't really get a bank loan on those terms.
John: Yeah.
Kate: So, and I certainly experienced this with folks applying for those where there's something about that long timeline that makes it seem sort of inconsequential.
John: Right.
Kate: Which in, in a way it's almost the opposite's true because it's like, actually, you're going to be with this thing for a long time, unless you pay it off sooner.
John: Yes.
Kate: So, and I think that's the like, that moment of you need this lifeline of cash to keep the business going is an ongoing concern. But to do that, [00:34:00] you're creating this big hole
that, you know, if you picture like profit is like a little bit of dirt at a time, you're just going to be shoveling profit into that hole for however long it takes.
And maybe there's some like really good year and you can bring a dump truck of dirt, but like, there's other years where you might just have, teaspoons, but that is like a hole. That's going to be part of your business for as long as that loans there.
John: Right. And it's also going to be this cloud over you personally because if the hole doesn't get filled. Something happens and your backhoe breaks down, so you can't put any more dirt in the hole. Um, you have this cloud hanging over you, where you've signed stuff, you've mortgaged your house, and I guess where I'm going with it a little bit, you tell me what your opinion is on it, is that even though, like, I have [00:35:00] conversations with people about what the implications are of this, and like, we talk it through, and like, you know, if I, if I'm part of that deal, sometimes I, I get it after this is already in place.
I think it's, it's abstract. It's sort of like your thing about the 30 years just seems like whatever. I think this idea, this personal guarantee of what it can do for you to your life is abstract.
Kate: Right. And the alternative is, the alternative is you close and you haven't done everything it takes, quote unquote,
John: true.
Kate: you had a, you had an option available to keep it going and you didn't take it. And I think that decision is really hard.
John: That's a tough one.
There was one thing I did want to say that, that, when we're talking about the wind down plan I jumped into it about like what your cash look like and who you're gonna pay And I do think so long as you're not doing something that's gonna like subject you to liability to your creditors is really all about relationships and reputation That you want to [00:36:00] preserve, um, sort of side note on the plan is along the way, you also have to plan out who you tell and when,
Kate: Yeah, exactly.
John: and that's really important to, you know, and again, I think driven by the same thing, um, relationships and reputation, you know, um, so for example, you know, you're, you're going to want to tell your employees as early as possible, right, because you're going to be respectful and try to give them as much time to do something about it as possible.
Right. Right? But you know, as soon as you tell your employees, it becomes public, right? So there's, so there's an issue there. Same thing with your customers and suppliers. Like, you want to, you want to give them time to transition, but you need them maybe to get to your end date.
Kate: Right.
John: Yeah. Yeah.
And, um, similar to like deciding who gets paid like you would think that you know Wow, if I owed 800, 000 to somebody like they should probably know right away, [00:37:00] right?
Kate: Tell the SBA last.
John: Yeah, like it's you know, they're gonna have their rights No matter what, you know what I mean?
They have a contract they have their rights no matter what you probably don't care about them the same way you care about your employees your customers and your suppliers
Kate: hope you don't care about the SBA the same way that
John: You
know what I mean? And same thing, and same thing with your landlords probably, you know what I mean?
Like they might get pissed, they will get pissed off, like why didn't you tell me sooner? And you can deal with that, but there's really no reason to.
Kate:
John: you know, you know, we're, this decision making process is actually really interesting to me because I'm risk averse and you know, I, I have a tough time. Is that a legal characteristic? Like, I feel like that's a good lawyer
yeah lawyers tend to be pretty risk averse people bill by the hour. I mean, how, how much, how, you know, less risk averse can you be? Like, I [00:38:00] do the work, I'm getting paid for every six minutes. So, um, but you know, we, we jumped into what we've been seeing over the last few years a lot, which is the companies aren't doing well and they're getting these loans to kind of pull them out. There's also this scenario where it's actually like, An opportunity, if you're in retail or you're a gym or whatever, and you have the chance to get a new location and maybe in a new city.
But to do that, like that's where the personal guarantee on the lease comes. So this, so we're totally just in like growth optimism, you know, go, go, go, go, go, go, go, right.
Kate: I know I've been very colored by, well, the summer of failure that I am, uh, studying, but also I think, you know, the last week or so of flooding and just seeing what's happening. I thank you for reminding me that sometimes it's, it's because good things are happening, which is totally true.
[00:39:00] not taking the loan because you're in survival mode is really hard, not taking on the debt or the personal guarantee because you're in thriving mode, that's way harder.
John: Yeah,
yes.
Kate: I mean, that's like standing before, your success mountain and being like, Mmm, I can see it up there, but you know, I'm good, I'm good.
Yeah, we're just gonna chill down here. And nobody does that.
John: No. I mean, how can you say no when, when that's what you've been like hoping for?
Kate: But, you know, that doesn't guarantee everything's gonna keep going well forever, or you're gonna get up onto that mountain and not realize you didn't want to be there.
John: And, and it can take the whole thing down,
Kate: That's true.
John: take the entire mountain that you built.
Kate: how do we want to wind this down?
John: Orderly.
Kate: With, with an orderly wind down plan.
John: wind down. I [00:40:00] yes.
All right. So what were the takeaways from this
Kate: I think there's a couple takeaways. One, part of what we're talking about is almost, like, mile markers. On a path. there's one where you start to have that feeling that it might be done or you might be done, you're in that sort of limbo of, should I keep going or not?
And so I think that's one and that can I, that can be happening because you don't love it anymore, because you're burnt out because It's sustaining, but it's not thriving, and that's not tenable long term. So I think there's different markers on there, and the takeaway, if I were to offer one around that, is don't drag that period out, because limbo is the worst.
And, so, you know, and that can look like gathering your advisors, that can look like getting the right metrics in front of you, that can look like taking two days to disappear and like, [00:41:00] stare at a,
creek somewhere in the
woods. Like, go to your therapist. Yeah, like, pull in all of your emotional support and resources and...
Get your, get your people around you.
John: I I think that's key that earlier decision is better for you and for what you're ultimately gonna want to do I would say, given just the impact of a personal Obligation like just make sure you really have your eyes open about what the Real consequences of that are.
And I guess the other thing for me is like, you know, there are legal requirements on the wind down, but doing it orderly, as we've described it, where, where relationships. Get prioritized is okay. and hopefully you can make it work.
Kate:
John: The paperwork plan is going to be very strict. The wind down plan is going to be what hopefully you want it to be [00:42:00] more like what you want it to be. Let's put it that way.
Kate: Yeah.
Cool.
John: Okay.
Kate: You know what I want to talk about next time?
John: I was going to ask, what do you want to talk about time?
Kate: I kind of want to talk about partnerships and divorces.
John: Oh yeah, for sure.
Kate: Yeah. Because it's kind of related to this.
John: well, cheers, John.
cheers Kate.
Kate: I'll talk to you next time.
John: Can't wait.
Kate: Thanks for listening to Whiskey Fridays. Our next episode will be an interview I did with Heather Thomason of Primal Supply Meats, who we mentioned in this episode. Heather and I talk about her decision to shut down her multi million dollar butcher business after seven years. To receive updates on new episodes and my writing exploring new possibilities in business and economics, visit katetyson.
substack. com. Whiskey Fridays is a collaboration between [00:43:00] myself, Kate Tyson, of Wanderwell Consulting, and my friend and colleague, John Gerber, of Unlawyer. This episode was edited by me, with much hand holding and indispensable wisdom from Sean McMullen of Yellow House Media.
===
Kate: [00:00:00] This is Kate Tyson and welcome to the first episode of Whiskey Fridays, the show where my colleague John Gerber and I pour ourselves one and discuss the ins and outs of creative business ownership. I hope, if you're listening to this today, that what we're about to talk about does not apply to you. I hope you are happy, thriving, and feeling so, so good about all the work you're doing in the world.
For our first Whiskey Fridays episode, John and I dive into the thorny and emotional topic of deciding to shut down your business. We discuss how and why business leaders make that decision, the logistics of winding it all down, and what pitfalls to watch for along the way.
And I should say that even though John and I are going to talk about business closures today, most of our work [00:01:00] is working with thriving businesses. But we've also worked with a lot of businesses that do close,
So even though we hope this isn't something you're considering right now, we also both believe it's okay to throw in the towel. Your business does not need to last forever, and so it's best to go into the process knowing what to expect.
John: why do people finally close, Kate?
Kate: I have a theory, actually.
John: course you do. So,
Kate: Well, wait, wait, wait. Let's back up. John, what are you what are you drinking?
John: I am drinking tequila.
Kate: This is Whiskey Fridays and you're drinking tequila.
John: It's, it's my new diet.
And you know what? It's also better for my hangover. it's called DOBLE, D O B E L. we'll share some, you'll like it.
Kate: you're kind of ruining the whole title [00:02:00] of our deal here, but that's fine.
John: You know what? I will do better next time.
Kate: Alright, um, I'm drinking Maker's Mark.
John: Oh, good.
Kate: Kharina does not like Maker's Mark, but I got it because it was on sale at the liquor store,
John: is there any other way to choose it? I mean, every, every once in a while, it's like, all
right, I'm, I'm getting the stuff that I really want. But for the most part, it's like, what's good and on sale.
Right.
Kate: Yeah. Totally.
John: double
was like 10 off a bottle. So I
bought two.
Kate: Nice. Alright.
we're talking about closing businesses, And, I have a theory. about this. Because, you know, there's like a million reasons why people close their businesses, but I actually think that there's sort of one main reason, especially in with the folks that we deal with that close our businesses, which is that [00:03:00] working for years and years and years with no end in sight. really
takes its toll, and,
there's certain like made it points and those are things like paying yourself or profit or like having some semblance of your life back after working too much for too many years.
Um, but I, but I think it's really that, like, people don't know where they're trying to get to always, So there's sort of this like hamster wheel exhausting treadmill marathon thing and at some point people run out of steam And that's actually why they close.
It's because they can't rally another time. Do you think that's right?
John: I agree with that. I do. You and I have seen a lot of other reasons why people. Dissolve their businesses, like relationship issues. like we've seen a lot of business divorce as the, as the reason why people don't continue their [00:04:00] business. But I think the fatigue issue is huge.
Um, especially cause like you start out and the enthusiasm of creating your business and being in startup mode carries you a long way, but at some point, if you don't see. A way outta that. and, it requires that same level of energy to like do what you need to do every day, but only to sort of just keep the business afloat as opposed to actually starting something or growing something and building then the enthusiasm just isn't there.
And, and, um, the pandemic did that to a lot of people, right? Because they. they were fighting, fighting, fighting during that time just to survive. And at some point after years, like, there's no, energy for that anymore.
Kate: You know, during the pandemic and with [00:05:00] everybody fighting so hard to just survive, there's all this adrenaline that's keeping people in the fight. And then there was also at the same time. relief funding, uh, PPP loans, EDAL, stuff like that, that ended up floating people through the upheaval, at least for a little bit.
And I think now we're getting to this point where a lot of that, both, both the adrenaline that kept up the fight and the, funding that floated people, that's all running out. And so, like, I'm seeing a lot more actual upheaval and closures now than a year ago, I'm wondering if you're seeing that too in your practice.
John: I am.
Kate: are you having more conversations with people that are... that are running out of steam than you were
a year
ago.
John: Yeah, exactly what we just said. Like, they fought the battle and they, like, tried and at this point they're just like, Fuck it. [00:06:00] I'm done. In fact, I got an email from somebody I don't even know today that said, that said, Hey, I'm thinking about dissolving my company. We took an EIDL loan.
It got us through the pandemic. But like, we're, we're, we're just done same deal. So can you, can you tell us how to run that process? Right.
Which kind of goes to, I think kind of goes to one of your questions for today. Okay.
Kate: How does, how does that go to one of my questions for today?
John: Well, I, I know you wanted to talk about entrepreneurs being optimistic and, issues that they have around why, why do we do this in the first place? Like, why do, why do people have to get themselves in the position where this stuff becomes so risky?
Kate: Yeah, you know, I did talk to our dear friend and now former client, I guess she's still your client for a little bit, [00:07:00] um, Heather Thomason of Primal Supply Meats last week, and, you know, a lot of what we talked through and she talked about was just how long and difficult it was to make the call. And, and my point to her was like, is that there isn't usually, I mean, sometimes people really do get the rug pulled out from under them, you know, or there's an illness or something catastrophic happens, like, like a flood, like a flood.
Yeah, that would end it. But, you know, if things aren't in a, let's say disaster mode. and I would argue Heather was not in a disaster mode. if you're not in a disaster mode, then often it's you know, it's not a case where you get a really clear signal that says, It's, it's time, like you need to call this and there's certainly signs along the way like your [00:08:00] debt ratios or something like that, that would be indicators on, on the way along the roadside, uh, as you're moving along.
But, you know, I think one of the things she and I talked about in depth and in depth is, Just how hard it is to call it. so, I wanted to talk more about how do you, how do you make this decision? Cause we've, you and I have both seen people just fucking agonize over it.
John: agonists like crazy.
Kate: And like, talk about it, and talk about it, and talk about it. And... like, it's really painful!
John: It's very painful, but like, like you said, there's no, there's a lot of times no obvious reason. So like. I, I was dealing with one actually today and their scenario is, it's a small company. They probably do anywhere from like [00:09:00] 000 of like net cash at the end of the year that they can pay the owners, the two of them here, not just one.
So like the two owners might be making, I don't know, 30, 40 grand in a, in a good year. Right. Right. and they have. 800, 000 in SBA debt. So like they're faced with this prospect, the business works, quote unquote, you know, they're, they're not losing money. Um, they're making this sort of minimal kind of salary.
I guess they like what they're doing, but like to your point, there's no obvious, like it can continue. But for how long, if you're that person and, that's what you're doing on a good year, just to just sort of like get to a decent year, like how long do you keep doing that? I mean, even if you took all your money, all your free cash flow and paid your SBA loan and didn't make anything, it would take you 10 years or more to pay it off.
Like, yeah. So I think that's, I don't know, I think [00:10:00] that's kind of a not uncommon situation that these Entrepreneurs are in,
Kate: Yeah. And you couldn't see my face, but I was, like, grimacing when you were saying those, those, those circumstances
John: is it, is it familiar?
Kate: yeah, because it, and I think this is, uh, This is, this is in some sense, maybe the Heather conundrum is like, you're, you're getting by, but then what?
John: and the enthusiasm you had at the beginning when you're doing a startup, like that pulls you through this kind of stuff for a while because you're growing and you can see the future and you have all these ideas and this kind of stuff, like the pandemic put a, put a real hard line on that for a lot of, and then all they were doing is fighting this fight just to get to the point sort of in the, Example that I gave you, I don't think we can talk specifically about particular, you know, clients, at least not that we're going to put on.[00:11:00]
Tape right
Kate: not, not in the public's
John: not in the public sphere, but but yeah Her situation is good example of that and and I think that goes to your point of like if you're the person in that decision? How long do you keep going
Kate: Yeah.
John: How do you recognize when the fatigue is just like enough already and like fucking I'm not doing this anymore.
Kate: And I think some of what's hard is that, like I, wrote in my notes to you, entrepreneurs are naturally optimistic. Like, we have to be. Otherwise, why would we do this shit half the time? Um, like you have to believe in things that are impossible to create something new. so, you know, if that's how you're wired, And even if things like these guys that you're talking about, that you're talking to today, I'm sure that they see optimistic signs all the time. [00:12:00] Like, they could be feeling bleak about this, I'm just projecting all this on them right now, but they could be feeling really bleak about this, but then...
Maybe they have some like, client win, or customer win, or sales pick up, or their team feels really good. You know, there's like, stuff along the way that can be like, Oh, well, but maybe if I just get over this next mountain. Then it'll all be okay.
John: So you get the little with breadcrumbs
Kate: Yes, yes, it's like breadcrumbs. And then, I don't think those ever disappear. It's like they make it sparser. Like, like you're, there, they were a few feet between the breadcrumbs, and now there's like ten feet between the breadcrumbs. But you're still like looking out for those breadcrumbs. And then, the other things are sunk fallacy costs, like you've put so much work into this.
John: yes. And then there is the actual [00:13:00] risk of stopping. Like, in this example that I gave, they have hundreds of thousands of dollars of secured, personally guaranteed SBA debt. So that means if they stop, I mean, who knows how long it takes the SBA to get around to getting to you, but at some point they will and that's out there.
so you're like, I could keep going and just sort of putt putt and do this thing. And I, and I might be feeling like I hate it at this point because it's just so oppressive and the breadcrumbs are getting even further and further apart or whatever. Um, but if I don't keep doing this, I'm kind of hosed.
Kate: I think the other big one that I hear a lot from folks is just the, the obligation to employees, to customers, to community.
Like that feeling like you're responsible for livelihoods, you're responsible for your customers, your clients, and then your community, sometimes your vendors, like, you know, you're in this [00:14:00] ecosystem that you've built around you and then you're, you are going to solely or in a partnership be responsible for letting all those people down.
John: not a good feeling. Alright, so those are reasons.
I think you deal with this front end piece more than I do. Because I often get the call where people say, well, I've decided to shut my thing.
Kate: Yeah,
John: With you, I think it's more. Oh, I'm thinking about it.
Kate: yeah, I think the real question I was trying to ask, and I don't know that I have a really good, I was trying to think if I had a good answer to it. And I don't have a clean answer to it. And the question that I don't have a clean answer to is how do you make this decision easier or sooner or
less, you know, in a less, backbreaking way.
and I think some of it, I mean, I would say the big mistake that I see, or like the thing that I wish I could save more people from, and [00:15:00] you probably do too, is that they leave more gas in the tank. I think a lot of folks would get to this point of thinking about closing or actually closing, and they've been running on fumes for a while.
John: Mm hmm.
Kate: and so, you know, they're out of juice.
And I would say that both, you know, that happens both on the like personal energetic level where you are so burnout that you just kind of fall over one day and it's done or the business runs out of cash or is too close to running out of cash.
John: Mm hmm. Mm hmm.
Kate: problem with that is the longer you wait when you know, you probably are going to close or you're thinking about it, the fewer options you probably will end up having in terms of actually winding it down gracefully
and with like great care,
John: hmm.
Kate: because most people, when you've gotten that far, if you're gonna end it, you want to do it on your terms.
And not on the lender's terms or somebody [00:16:00] else's terms or outside of your control. And so I think some of it is that, there's this advice blog that I've been reading for years. That's awesome. Called, Captain Awkward. and the woman that writes it has this, principle.
I think it's called the She is, She is above principle? I don't quite remember. But it's usually about, dump that motherfucker. Kind of scenarios where you've let this bad relationship play out too long and you're wondering when that person's going to change.
And so the principle is basically like, I
mean, it's not dissimilar.
John: Right, like, um, I'm, like, I'm seeing that.
Kate: So, this principle says, if nothing else changes, how long will you put up with this?
John: Mm hmm. Mm
Kate: Three months? Four months? A year? Two years? that kind of question. Um, [00:17:00] can help, being more rational about the actual objective facts before you, because often, you know, emotions take over and you're tired.
and so, and I've done this with clients where we set a baseline of cash cushion. And once they start dipping below that, I'm like. Red alert, red alert, red alert.
John: That's a good one.
Kate: Well, it's a good one. Cause it's like, you know, how much cash do you want to be able to divvy up?
Pay things, pay your team. And, and this works best. I would say like some of the clients have done this with lately don't have debt. So it's a cleaner, decision.
John: Mm hmm. Mm
Kate: Uh, because they're not worried about repaying anybody. It's more about, we have obligations to our team, we want to make, if we're going to call this.
And then we also want to walk out with a certain amount of cash. And we don't want to, we don't want to go below a certain number. And so I think that [00:18:00] one, if you're on the edge, that's a really good way to benchmark it, is just every month, check your cash on hand. And name, whatever your number is and if you start to dip below that consistently,
like you're going to start seeing that number go down and down and that would give you a clear indicator.
John: I like that. And it definitely gives you the options that you're going to want to have if you're in a wind down,
Kate: Yep. And then the other one, and this is interesting back to the sort of nobody can call it for you. Cause I know, and again, to preview my conversation with Heather, she felt like she got to this moment where she wanted somebody to tell her. She had to stop. And nobody would do that for her. And... You, you wouldn't do that for her!
John: wanted to, you wouldn't either.
Kate: No! Because we can't![00:19:00]
John: I wanted to. There were definitely times where I wanted to be like, you know what? And sometimes I'd be on the phone with her and I'd be like, well, it sounds to me like you're ready to, you know, pull the... But I never just said, you know what, just fucking do it.
Kate: And why, why is that? Because I have an answer. But I'm wondering what your answer
John: I don't know, mine's probably wishy washy, but it's, it's not my job. It's, you know, I mean... It may be it is my job. You know, I, I do consider it that I'm a, you know, an advisor to my clients and I should actually help them make a decision where I would say like, here's my advice on your decision. Um, but I just backed off on it because I felt like in that situation, you know, I wanted to make sure that we had analyzed all the different scenarios and so that whatever decision she made, she had all the information.
You know, and knew really where to go, you know, um, but never just said, okay, we [00:20:00] did that. Now I think you should pull of plug.
Kate: Yeah.
John: What
about you?
Kate: I think I would say the same thing. And, and I would add that I think, I think it's tricky. Because, like I said, there's certain indicators, like I try and basically set up, very objective financial indicators for people, and then also reflect back to people what I'm hearing about their levels of fatigue and burnout and how much shit they're going through.
John: Right.
Kate: But I do think it, it feels like as somebody that's paid to be in an advisorship relationship with somebody, like it's, it is not my job to tell them to pull the plug. Like I do think there's a little bit of an ethical quandary there where you may know that they're close, but you can't push them over the edge.[00:21:00]
John: And like, if it was a relationship breakup, right? Like, do you want your friend to say, You know, ditch that person, or do you want them to just kind of like get to where you're talking about? So
Kate: Well, you might not listen.
John: yeah, you definitely might not listen, and you just might not like that piece of advice.
It's very, it's very personal, so. But yeah, so that's it, that is a little bit of a dilemma, and I, and I do recall on several occasions feeling like, I should just tell her how I'm feeling, you know, I can do this, you know.
Kate: so maybe we can switch gears to after you make that decision,
John: Okay. Yeah,
Kate: you know, it's not over now, all this stuff has to happen. we referenced, closing gracefully.
John: yes, yeah. It does. Um...
Kate: And, so I kind of want to turn it to you because [00:22:00] you, again, like, as we've been saying, I tend to do the like deep emotional pre mortem, kind of work, and then people come to you because, you know, when you do, when you do close, you need a lawyer and an accountant on your team.
John: But I do think your point of, like, wanting to do an orderly or a wind down that in a way that they want to do it, I see that being a, an overriding goal, um, that overrides even sort of the strictly legal stuff. like, the ideas that you're talking about, about reserving.
Funds or having the ability to pay employees and that kind of thing It really comes into play as you're trying to figure out how to actually do the wind down
Kate: When people come to you at are there certain things that... You're really, you're like praying and hoping they haven't done,
John: Well,
Kate: what are you, hoping that they show up to that conversation having done?
John: well, there's [00:23:00] the obvious one, which is that if they have no personal guarantees, no personal liability, then it's easy. If they have personal liability, that changes the whole equation. Right?
Kate: And that's like, um, I took out a loan and my house is on the line,
John: it usually looks like I need it alone. I got it from the SBA. So I have to personally guarantee it and probably mortgage my house to secure the personal guarantee. Or I had to sign a lease, because I was, you know, expanding my business or starting my business and to get the space, the landlord required me to personally guarantee the lease,
Right, which again means my personal assets are on the hook, or I took out a shit ton of credit card debt. And, of course, even though the credit card might say the company's name on the bottom of it, it's really a [00:24:00] personal obligation, So, you know, I know 1 of the questions that we wanted to talk about was like, what kind of resources do you need to help you through this process?
And I think having a bankruptcy lawyer is really important. I'm not a bankruptcy lawyer. As, you know, I know enough to say some things, but, um, having a real bankruptcy lawyer is important because while. with the kind of companies we're talking about, the likelihood of the company actually filing for bankruptcy is super low.
because, you know, any of these creditors could, come after the company. The company has whatever assets it has, and that's it. And you're not on the hook for it. Going back to the question of what is the one thing that is the game changer. If somebody has the personal guarantee, then.
You have to, you have to worry about what the impact is going to be.[00:25:00] So like, if you haven't personally guaranteed a lease or a loan and maybe you don't have any credit card debt your bankruptcy lawyer is gonna say if you want to give the landlord the keys and walk away You, you can do that because they're going to have all the assets that you have your business that are in there on their property.
You probably don't have much of anything else, or it's owed to a lender. that's, that's that.
Kate: Right.
John: Um, I don't even know if I can think of a situation where it's actually gone down like that to,
you know, I think, um, I mean, this is obvious, but like when this is happening they need to have a plan about how it's gonna all go down. And I'm not talking about the dissolution plan, which is like the formal legal plan that you end up filing with the corporation bureau and all that kind of stuff.
I'm talking about a wind down plan you know, make a decision about when it's going to be the last day of operations. [00:26:00] Look at your cash, look at what, if you got the inventory, like how long it's going to take. Sell that off or whatever work in process customer agreements that you have that you can still make money on and then There's a date and that's my last day and then you work backwards from that and from there you can figure out How much cash did I have?
Did I, like, go below, below my red line and, like, what, how far is that going to go? If I can wind up these customer agreements and bring in some more revenue, if I can sell some assets or inventory, whatever your business is, Um, I'll know by that last day kind of what I have or maybe what I'm going to have.
And then you can say, All right, how do I wanna, how do I wanna allocate, right?
Kate: how do you make those decisions,
John: how do you, how do you make those decisions? I mean, you already touched on it. I think most people make those decisions based on the relationships that they have and the ones that exist and whether or not they want to preserve them in the future.
I[00:27:00]
Kate: Yeah.
John: mean, some of them you have to do, right? you're going to, no matter what, reserve money so that you can make payroll for your employees for the time that they work. That's a, that's a given. Right? But maybe you're able to reserve something more as either a stay bonus to keep them through that last day, or something to cushion the blow, you know, when you have to let them go after that last day.
Right? Um,
Kate: That's sort of the best case scenario.
John: that is the best case scenario. But you have to at least have money to pay the payroll.
Kate: Yep.
John: Um, bad stuff happens when you don't pay people for when they
work.
Yeah.
they can come with wage claim, like it's just not good.
And you have, and you would have personal liability potentially for that, and it's just not good. And plus it's not right. So. Yeah, um, and same thing with taxes, you know, if you have sales tax and other taxes that the company has incurred You want to make sure you get those?
After [00:28:00] that, you know, people typically prioritize things that they have a personal liability
So I guess my point is, you're making decisions about what from the pot of cash you have, how you want to do it. Um, you, you want to as much as possible pay the relationships that you're, you want to pay. Would you have particular suppliers? Like we were talking about you know, that you want to take care of.
Um, but you have to balance that. There is sort of a legal thing. You have to balance that against the rights of your creditors, in particular, if you have secured creditors, because, you know, secured creditors have the legal right to get paid. First, essentially your assets are theirs once you default on their debt, which presumably you've done during this process,
right?
Kate: Right.
John: So you want to be able to Do all this stuff, but you need to be able to justify it as transactions that are essentially in the ordinary course, as part of an orderly wind down and not, you know, [00:29:00] paying people who don't have priority over your secure creditor.
Kate: Right. And then what if you don't have enough money? Obviously, in an ideal world for your creditors and your lenders and your employees, like, you would have, you would close and you'd have abundant resources, but that's never the case because otherwise you wouldn't be, ending it. Yeah, you'd be doing something different. So, when there isn't enough of a pot to go around to everything you have an obligation to, how do you sort that out? And
John: Well, I mean, I'm making the assumption that there's not enough money to pay everybody
Kate: Cause that's usually what happens.
John: it's always what happens. You might be selling the company and selling it for some. You know, going concern value and then getting something for yourself at the end, right? Or whatever, but like, that is the question, how deep, how deep of a problem are we talking about?
You know, like
Kate: Well, like you said, uh, 800, 000 to the SBA. That's pretty deep.
John: that's [00:30:00] very deep, but, but what will happen if, if the main partner in that deal decides, he's not doing it anymore. That company has enough cash in it, kind of where, like, cause they haven't specifically followed your advice, but they will have enough cash to pay their employees, to pay their company taxes.
And maybe nothing else, right? Maybe they could pay some personal credit card debt that they have. So what happens is that the, the creditor, everybody else isn't going to get paid.
Kate: Yeah.
John: Um, so then the question is, you know, is the debt personally guaranteed or not? If it's not personally guaranteed.
Then the entrepreneur can basically walk away and just be like, well, you know, the company is an empty shell at this point. Creditors can bring their claims against it, and
Kate: They're not going to get anything.
John: they will get nothing, and I don't have anything to lose on that, right? but the whole equation flips when they have personal [00:31:00] debt.
Kate: Right. And then generally, correct me if I'm wrong, lawyer John.
Um, I mean, you're, you're essentially then looking at personal bankruptcy.
John: You, it depends who the creditor is. You know, like, if, if the creditor is the SBA, if the creditor is the government, probably. that's what the advice that I've heard from bankruptcy lawyers over and over on that one. Not, not because the SBA is going to catch up with you right away. Like, it's sort of a little bit of a timing issue.
You might wait. But, however many years it takes them, like,
they're gonna, and I think they're mandated to, and, so they're, so at some point they're gonna find you and come after you. And at that point, they could get the judgment, and you'll... you know,
you might not have any assets to satisfy that judgment and there are ways that those could be protected potentially under Pennsylvania law, for example, but, um, but it still doesn't mean that like they won't do it and that your only way to really get that off you is to, have the [00:32:00] bankruptcy.
So yeah. Thank you. So let's back up if you're okay with it for a question and be like, okay, so now let's back up to that, that question, which is before all this stuff like, okay, so how do we get ourselves in this situation if we're the optimistic entrepreneur and like,
Kate: What should, what should you not
John: well, I don't know if you should not do it, but like, what's the choice you have to make when you want to do something?
So again, this is sort of more in the upfront planning part of, of life, you know, where the company is typically growing, right? Because they. Are going to sign a new lease or they're going to get some debt that's going to allow them to do something like what's that decision making process look like?
Kate: right. so these folks with the 800, 000 SBA loan. There was some point in the last few years of pandemic where you know, whatever upheaval they were experiencing, because there had to be some, especially for that size of loan, because that's
John: Mm hmm.
Kate: a bigger one. [00:33:00] Um, Where, and, and I would say, you know, the thing about those pandemic EDA loans was the terms seemed really good. And maybe it not even seemed really good. I would say they were good. Like, 3%, 30 years, you can't really get a bank loan on those terms.
John: Yeah.
Kate: So, and I certainly experienced this with folks applying for those where there's something about that long timeline that makes it seem sort of inconsequential.
John: Right.
Kate: Which in, in a way it's almost the opposite's true because it's like, actually, you're going to be with this thing for a long time, unless you pay it off sooner.
John: Yes.
Kate: So, and I think that's the like, that moment of you need this lifeline of cash to keep the business going is an ongoing concern. But to do that, [00:34:00] you're creating this big hole
that, you know, if you picture like profit is like a little bit of dirt at a time, you're just going to be shoveling profit into that hole for however long it takes.
And maybe there's some like really good year and you can bring a dump truck of dirt, but like, there's other years where you might just have, teaspoons, but that is like a hole. That's going to be part of your business for as long as that loans there.
John: Right. And it's also going to be this cloud over you personally because if the hole doesn't get filled. Something happens and your backhoe breaks down, so you can't put any more dirt in the hole. Um, you have this cloud hanging over you, where you've signed stuff, you've mortgaged your house, and I guess where I'm going with it a little bit, you tell me what your opinion is on it, is that even though, like, I have [00:35:00] conversations with people about what the implications are of this, and like, we talk it through, and like, you know, if I, if I'm part of that deal, sometimes I, I get it after this is already in place.
I think it's, it's abstract. It's sort of like your thing about the 30 years just seems like whatever. I think this idea, this personal guarantee of what it can do for you to your life is abstract.
Kate: Right. And the alternative is, the alternative is you close and you haven't done everything it takes, quote unquote,
John: true.
Kate: you had a, you had an option available to keep it going and you didn't take it. And I think that decision is really hard.
John: That's a tough one.
There was one thing I did want to say that, that, when we're talking about the wind down plan I jumped into it about like what your cash look like and who you're gonna pay And I do think so long as you're not doing something that's gonna like subject you to liability to your creditors is really all about relationships and reputation That you want to [00:36:00] preserve, um, sort of side note on the plan is along the way, you also have to plan out who you tell and when,
Kate: Yeah, exactly.
John: and that's really important to, you know, and again, I think driven by the same thing, um, relationships and reputation, you know, um, so for example, you know, you're, you're going to want to tell your employees as early as possible, right, because you're going to be respectful and try to give them as much time to do something about it as possible.
Right. Right? But you know, as soon as you tell your employees, it becomes public, right? So there's, so there's an issue there. Same thing with your customers and suppliers. Like, you want to, you want to give them time to transition, but you need them maybe to get to your end date.
Kate: Right.
John: Yeah. Yeah.
And, um, similar to like deciding who gets paid like you would think that you know Wow, if I owed 800, 000 to somebody like they should probably know right away, [00:37:00] right?
Kate: Tell the SBA last.
John: Yeah, like it's you know, they're gonna have their rights No matter what, you know what I mean?
They have a contract they have their rights no matter what you probably don't care about them the same way you care about your employees your customers and your suppliers
Kate: hope you don't care about the SBA the same way that
John: You
know what I mean? And same thing, and same thing with your landlords probably, you know what I mean?
Like they might get pissed, they will get pissed off, like why didn't you tell me sooner? And you can deal with that, but there's really no reason to.
Kate:
John: you know, you know, we're, this decision making process is actually really interesting to me because I'm risk averse and you know, I, I have a tough time. Is that a legal characteristic? Like, I feel like that's a good lawyer
yeah lawyers tend to be pretty risk averse people bill by the hour. I mean, how, how much, how, you know, less risk averse can you be? Like, I [00:38:00] do the work, I'm getting paid for every six minutes. So, um, but you know, we, we jumped into what we've been seeing over the last few years a lot, which is the companies aren't doing well and they're getting these loans to kind of pull them out. There's also this scenario where it's actually like, An opportunity, if you're in retail or you're a gym or whatever, and you have the chance to get a new location and maybe in a new city.
But to do that, like that's where the personal guarantee on the lease comes. So this, so we're totally just in like growth optimism, you know, go, go, go, go, go, go, go, right.
Kate: I know I've been very colored by, well, the summer of failure that I am, uh, studying, but also I think, you know, the last week or so of flooding and just seeing what's happening. I thank you for reminding me that sometimes it's, it's because good things are happening, which is totally true.
[00:39:00] not taking the loan because you're in survival mode is really hard, not taking on the debt or the personal guarantee because you're in thriving mode, that's way harder.
John: Yeah,
yes.
Kate: I mean, that's like standing before, your success mountain and being like, Mmm, I can see it up there, but you know, I'm good, I'm good.
Yeah, we're just gonna chill down here. And nobody does that.
John: No. I mean, how can you say no when, when that's what you've been like hoping for?
Kate: But, you know, that doesn't guarantee everything's gonna keep going well forever, or you're gonna get up onto that mountain and not realize you didn't want to be there.
John: And, and it can take the whole thing down,
Kate: That's true.
John: take the entire mountain that you built.
Kate: how do we want to wind this down?
John: Orderly.
Kate: With, with an orderly wind down plan.
John: wind down. I [00:40:00] yes.
All right. So what were the takeaways from this
Kate: I think there's a couple takeaways. One, part of what we're talking about is almost, like, mile markers. On a path. there's one where you start to have that feeling that it might be done or you might be done, you're in that sort of limbo of, should I keep going or not?
And so I think that's one and that can I, that can be happening because you don't love it anymore, because you're burnt out because It's sustaining, but it's not thriving, and that's not tenable long term. So I think there's different markers on there, and the takeaway, if I were to offer one around that, is don't drag that period out, because limbo is the worst.
And, so, you know, and that can look like gathering your advisors, that can look like getting the right metrics in front of you, that can look like taking two days to disappear and like, [00:41:00] stare at a,
creek somewhere in the
woods. Like, go to your therapist. Yeah, like, pull in all of your emotional support and resources and...
Get your, get your people around you.
John: I I think that's key that earlier decision is better for you and for what you're ultimately gonna want to do I would say, given just the impact of a personal Obligation like just make sure you really have your eyes open about what the Real consequences of that are.
And I guess the other thing for me is like, you know, there are legal requirements on the wind down, but doing it orderly, as we've described it, where, where relationships. Get prioritized is okay. and hopefully you can make it work.
Kate:
John: The paperwork plan is going to be very strict. The wind down plan is going to be what hopefully you want it to be [00:42:00] more like what you want it to be. Let's put it that way.
Kate: Yeah.
Cool.
John: Okay.
Kate: You know what I want to talk about next time?
John: I was going to ask, what do you want to talk about time?
Kate: I kind of want to talk about partnerships and divorces.
John: Oh yeah, for sure.
Kate: Yeah. Because it's kind of related to this.
John: well, cheers, John.
cheers Kate.
Kate: I'll talk to you next time.
John: Can't wait.
Kate: Thanks for listening to Whiskey Fridays. Our next episode will be an interview I did with Heather Thomason of Primal Supply Meats, who we mentioned in this episode. Heather and I talk about her decision to shut down her multi million dollar butcher business after seven years. To receive updates on new episodes and my writing exploring new possibilities in business and economics, visit katetyson.
substack. com. Whiskey Fridays is a collaboration between [00:43:00] myself, Kate Tyson, of Wanderwell Consulting, and my friend and colleague, John Gerber, of Unlawyer. This episode was edited by me, with much hand holding and indispensable wisdom from Sean McMullen of Yellow House Media.
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