Surviving a Bankruptcy Liquidation – Boring Startup Stuff

Surviving a Bankruptcy Liquidation

What I wish I had known before my $48M startup was liquidated through receivership

A Survival Guide By Alan Martin


I can’t shake the idea that what I’ve learned might change the life of another founder or leader who is in the same abyss I was in three years ago. So, here it goes. To anyone whose business is being liquidated through receivership, or headed inevitably toward it, this survival advice is for you.


I founded a startup and served as CEO as we grew from zero to $48M+ in annual revenue. At just under ten years in, we lost it all through receivership when we couldn’t repay a bank loan as quickly as we had promised. It was more painful than I could have imagined, and the aftermath is still brutally present. But the outcome could have been better in very important ways had I been able to talk to the post-receivership version of myself, for even five minutes. Despite having a board of directors, mentors, and legal counsel, I didn’t understand how the receivership playing field was designed, and to a large degree, neither did they. Watching a game is different than playing it, and what I learned came from going through it with zero degrees of separation.

Let me get two things out of the way. First, this article isn’t a complaint. Our lender made a decision that was within the rights we gave them when we borrowed from them. Second, this article isn’t about the lessons that could have prevented this in the first place.

This is tactical insight and advice for that lonely founder or leader who is past the catastrophic point of no return. The five insights and three survival tips that follow will make the outcome survivable on a human level. 


The insights below will help you understand the playing field from the inside, and give you context for the tactical survival tips at the end.

Insight One

You’ll work with new people, and you need to understand their roles

Receivership doesn’t start as receivership. It starts as forbearance and you’ll be handed off to employees of your bank you’ve never worked with before. They’ll likely come from central operations, and you’ll be assigned one person who heads up your account. I’ll refer to this person as “The Bank Rep” from here on out.

The Bank Rep is very different from you. They’ve chosen a career that ends organizations by way of established liquidation protocols and legal protections. Their thinking has been outsourced to processes and legal layers, and they are not paid to consider creative ideas for a better outcome. They drive the process, but they recruit help almost immediately in the form of a hired financial consultant they already know or have worked with in the past. I’ll refer to this financial consultant as “The Consultant” from here on out.

The Bank Rep trusts The Consultant to learn your business at the ground level in a pre-receivership setting, and to be their lead advisor. Nothing you say carries much weight with The Bank Rep. You defaulted on their loan. They’ll look to The Consultant for final recommendations from this point on.

The Bank Rep will position The Consultant as someone you hire. They’ll give you a short list of firms to choose from. You’ll conduct the hiring interviews and you’ll pay the bill (this is one of the few expenses the bank will allow after forbearance and during receivership). The Consultant will move fast, compete for your business, and you’ll spend a lot of time with them. They’ll say they work for you, but it’s a mistruth. Just follow the money: The Bank Rep approves company funds to pay them, and also funnels lucrative future jobs to them if they perform well. As a result, The Consultant wears the lens The Bank Rep gives them. They work for The Bank Rep.

Understanding the relationship between The Bank Rep and The Consultant is more important than it seems. When forbearance ends and legal receivership begins, The Consultant transforms from financial consultant, to the full-blooded court-ordered receiver who liquidates the company. The Bank Rep positions themself behind the legal protection of The Consultant (now turned receiver) in this formal setting, all the while influencing their behavior and outcome.

The mistake I made was believing that The Consultant was in truth our financial consultant and that they could be persuaded to understand the business and available paths of value creation that did not result in liquidation. It wasn’t true. They only had to learn enough to become an effective receiver that could open and close the legal receivership in the least amount of time, reducing The Bank Rep’s legal exposure while getting them what they wanted. This leads to the second thing I wish I would have known: how different their goals were from what I understood them to be.

Insight Two

Their goals are different than you think.

I held a belief throughout the pre-receivership process that The Bank Rep wanted to maximize their return of capital. I was wrong. Their goal was more clinical: to capture what value remained in the least amount of time, while narrowly navigating a legal framework which reduces the chances of lawsuits afterward. In other words, time and risk-weighted legal navigation outweighed the absolute return of capital.

Notice how different our mindsets were. As a founder, my framework for value was value creation…creating more value than exists currently. Their framework for value was incurring the least amount of further damage in the shortest possible period of time…simply to fence off existing value, not create more.

As you spend energy within your value framework, you’re probably wasting your time and you’ll be confused at the lack of receptivity. The long term outlook is gone. There is no more value to create. Once the path of receivership has been chosen, learn to be narrow and clinical. There are very specific things you need to walk away with which might save your life, and your energy is better spent on those things (tactical recommendations are at the end).

Insight Three

They lie.

The most surprising part of the receivership process was the lying and deceit. It never occurred to me that given this was a legal procedure, anyone would be anything but honorable. My naiveté sounds off the charts even as I write this today. Indeed, I was carefully and intentionally misled by The Consultant to preserve more capital for The Bank Rep. I learned a hard lesson. They are not there to tell the truth. Affording myself a measure of cynicism would have served well during this process.

What did they lie about? Money, of course. They confirmed budgets and told me verbally they had made payments that were never actually made, and that they never intended to make. They carefully omitted critical information from all conversations, writing, and reports, in the hopes I wouldn’t learn of the actual decisions they had made regarding payees during the receivership period. Depending on the payee (i.e. state governments), this can have devastating effects on you personally, post receivership.

Insight Four

They avoid written communication.

Both The Bank Rep and The Consultant will avoid writing because it can cost them dollars throughout the process, and be used against them in litigation afterward. I found it surprising, but not suspicious, that we always ended up on the phone even after I had begun dialogue in email. I owed it to the nuance of a process I had never been involved in, and to the personalities involved. I came to learn only later that there was almost no written record of the multitude of critical decisions they made. The lack of written record left no legal defense to try and repair the damage they caused. Clear written communication is your defense. It establishes accountability and eliminates the ability for maneuvering after the fact.

Insight Five

The company will land back in your hands.

Imagine your company is a car in motion. During receivership, the receiver pulls you out of the driver’s seat and leaves you at the side of the road. They take control and start driving. Along the way they strip off every valuable part and sell it until the car is a rolling worthless shell. You assume at this point that the car rolls itself right into the junkyard to be recycled and never seen again. You’re wrong.

You get pulled back into this coasting shell of a car, and it becomes your responsibility. But the car has no engine so it can’t be propelled anywhere. It has no steering so it can’t be directed. And it has no brakes so it can’t be stopped. What does it have? You. A single occupant without even a seat belt, who is now accountable for an uncontrollable hunk of metal that may still have a shocking amount of momentum.

The company will land back in your hands and it’s far from over. The receiver does not wind the company down. They hand it back with every asset and capability stripped, but every administrative responsibility still attached. There are tax returns to file. There are employment accounts to close. Every administrative, legal, employee, financial, or tax thing your company has ever attached itself to, is still attached. You have to prepare for this because you can’t escape it. There’s no resigning. There’s no ignoring. There’s nobody to replace you. It’s just you, and an administrative juggernaut that grew to surprising proportions alongside your business.

Below are three specific survival tips that are key to living to fight another day. It goes without saying that I’m not a lawyer. I’m just a brother in arms who has faced the animal you’re now up against and I believe these survival tips will save you.

Survival Tip One

Trade your cooperation for the things you need to survive

Your cooperation is valuable. You hold key insights to the business, its financials, its operations, and its relationships to parties — even the most likely buyers of your assets. Even though the receiver has removed your authority, they need your cooperation to move fast and improve their outcome. In other words, it’s time to make a deal.

Trade your cooperation for three things:

1) A complete release from any personal guarantee you may have given the bank in the past. Liquidating your business is enough. They don’t need your primary home and other assets that may put your family on the street. Absolve your personal guarantee on day one.

2) A guaranteed wind down plan. Ensure they keep your bookkeeper, controller, or whoever is closest to the day to day administration of the company on payroll long enough to completely wind down the business. Include in this plan enough cash to prepare and file final partial year tax returns, pay final franchise taxes, close out payroll accounts in all states, and the like. Assume the costs are higher than you think, because they are, and that the wind down process will take longer than you think, because it will. Be willing to return to the bank any unused funds once the process is complete, but secure the funds from the outset.

3) A declaration from the receiver that they will pay all sales and use taxes of the company, regardless of the period in which they were incurred. Sales and use taxes are of particular concern because they are not company funds. They are trust funds. If not paid, they can fall on you, the former CEO or other officer of the company, personally. You will have to litigate on a state by state basis if the receiver doesn’t pay the taxes the business owes at closing. The receiver is the only one that can pay, because they control the cash. Make the payment of sales and use taxes for all periods part of the legal receivership order. They will exploit this loophole if you do nothing.

Keep in mind that of the paths your banking partner could have taken for their return of capital, they chose the utter liquidation of the company. That choice comes with responsibility and consequences. If they are unwilling to provide the items above, I would cease cooperation at almost any cost. The burden of these things crashing down on you could upend your life for a period of time, or worse. These loose ends can be tied off if the receiver provides the resources to do it. You have the leverage to get this, no matter what you think or how you feel.

 Survival Tip Two

Put every important communication in email

Written communication is your defense. Never allow even one moderately important decision to exist verbally. Each time a decision is made in a live discussion, follow it up with an email to The Bank Rep and The Consultant detailing what was discussed and decided, stating who is accountable, and ask for written confirmation from them. You will have many budget discussions as The Bank Rep and The Consultant determine exactly what cash can be spent, where. These discussions will happen live. Every time, follow it up with an email that clearly states the approved spend, and more importantly, clearly states the items they have rejected. Without written communication, those discussions never happened. If they don’t respond, make it clear in further writing, that you can’t and won’t help without written confirmation.

Survival Tip Three

Check their work yourself

If they’ve committed to pay certain expenses, and most importantly, the type of expenses that do not get absolved with receivership, like outstanding payroll, payroll taxes, and sales and use taxes, follow up with the taxing authorities and confirm that those payments have indeed been made before the receivership closure hearing. The only one that can validate this work is you. Be meticulous and trust no one other than yourself and the verification you receive from the taxing authority. The downside of a miss here can be catastrophic. It’s worth the time to do it right.

Closing thoughts

If you’re reading this as the founder or leader it was written for, don’t underestimate how disadvantaged you are. You’re in a process with professionals who have done this dozens or even hundreds of times. For you, this is the first. They know it, and they’ll use the massive information and experience asymmetry to their advantage.

Having said that, please don’t lose hope. Use these tips to create a survivable outcome, and live to build another meaningful product and company. The world needs you to keep creating, and next time you’ll have more experience and empathy on your side.


This article was reprinted with full permission from Alan Martin. Please view the original here.


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