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5 Legal Strategies Failing Startups Should Consider

Nowadays, many startups don’t make it past the initial stages. According to data from the U.S. Bureau of Labor Statistics, approximately 20% of new businesses do not survive beyond their first two years, 45% fail within the first five years, and 65% close within ten years. Only 25% of new companies make it to 15 years or more. This high failure rate underscores the importance of understanding the legal strategies available to struggling startups.

The good news is that there are several legal avenues that can provide relief and a potential pathway to recovery for failing business owners. Still, unfortunately, many companies are unaware of these options, which could make a significant difference in their survival and future success. Hence, this post aims to shed light on these strategies.

Let’s explore five legal strategies that can offer a lifeline to struggling startups.

Bankruptcy Protection

Under United States law, bankruptcy protection allows businesses to reorganize or discharge debts under federal court supervision. It’s a legal process designed to help failing businesses restructure their obligations, providing a fresh start or orderly liquidation. There are different types of bankruptcy, but Chapter 11 is commonly used by businesses to reorganize while continuing operations.

A business has to submit a petition to the bankruptcy court to file for Chapter 11 bankruptcy. This petition includes detailed financial information, a list of creditors, and a proposed reorganization plan. The court will then review the petition and, if approved, will oversee the reorganization process.

During this period, the business must negotiate with creditors to restructure its debts. If you’re worried about your current financial status, don’t worry. Securing financing with a low credit score, say a 550 credit score loan within a day, is now easier than before, thanks to increasing alternative financing solutions on the market. Unlike traditional finance, such financing options are more lenient towards struggling borrowers.

Business Restructuring

Business restructuring involves reorganizing the company’s structure, operations, or finances to improve efficiency and profitability. This process can include downsizing, merging with another company (more of this later), or altering the product or service line. It’s often undertaken to avoid bankruptcy by improving efficiency and profitability and can be a proactive measure to address underlying issues.

First, thoroughly analyze the company’s financial health and operational efficiency. Identify areas that require changes, such as reducing overhead costs or divesting non-core assets. Develop a detailed restructuring plan outlining the steps to be taken and the expected outcomes. Implement the plan in stages, monitoring progress and making adjustments as needed.

Note that while not always governed by a specific set of laws, restructuring involves various legal and regulatory considerations. These include employment laws, contract laws, and sometimes tax regulations. Due to the complexity of these issues, legal assistance is often required.

Mergers and Acquisitions (M&A)

Mergers and Acquisitions (M&A) involve combining with or acquiring another company to enhance competitiveness, diversify products, or gain market share. For failing startups, merging with a stronger company or being acquired can provide the resources and stability needed to survive and grow.

Identify potential merger or acquisition partners that align with the business’s goals and values. Conduct due diligence to assess the target company’s financial health, operations, and cultural fit. Negotiate terms and structure the deal, ensuring all legal and regulatory requirements are met. Finally, integrate the businesses, focusing on seamless operational and cultural integration.

Intellectual Property (IP) Monetization

Intellectual Property (IP) monetization involves leveraging the company’s intellectual property assets, such as patents, trademarks, or copyrights, to generate revenue. This can include licensing agreements, selling IP assets, or using them as loan collateral. It’s a way to unlock the value of intangible assets, providing much-needed capital for struggling businesses.

To process IP monetization, identify all company-owned IP assets and assess their market value. Develop a strategy for monetizing these assets, such as identifying potential licensees or buyers. Negotiate and finalize agreements, ensuring that all legal aspects, such as IP rights and usage terms, are clearly defined. Finally, implement the agreements and manage ongoing relationships with licensees or buyers.

Debt Negotiation and Settlement

Debt negotiation involves negotiating with creditors to reduce the total debt owed or alter the payment terms. Settlement, a form of negotiation, usually results in the debtor paying a lump sum that is less than the total amount owed. These strategies aim to make debt more manageable and avoid legal actions like foreclosure or repossession.

Start by assessing the total debt and identifying the creditors with whom to negotiate. Prepare a clear proposal that outlines the financial difficulties faced by the business and the proposed settlement or new payment terms. Contact the creditors and present the proposal, negotiating mutually acceptable terms. Once an agreement is reached, ensure that all terms are documented in writing.

Final Thoughts

It’s important to remember that what’s listed here is not a one-size-fits-all solution. While companies may face similar issues, they often require different approaches depending on their specific financial situations and capabilities. Navigating these complexities can be challenging for struggling startups, so seeking professional help to avoid costly mistakes is highly recommended.

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