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Chapter 15 FINANCIALLY TROUBLED VENTURES: TURNAROUND OPPORTUNITIES? FOCUS We direct attention in this chapter toward recognizing and managing financial distress. An inability to pay creditor obligations as they come due typically poses a major financial threat and certainly distracts the venture from its primary mission. A successful entrepreneur copes with such financial distress and finds a way to turn the situation around. The alternative to a successful turnaround is venture liquidation. LEARNING OBJECTIVES 1. Explain financial distress faced by troubled ventures 2. Define and describe insolvency 3. Describe how troubled ventures emerge from financial distress 4. Describe how private reorganizations and liquidations take place 5. Describe reorganization under Chapter 11 of the U.S. bankruptcy laws 6. Describe liquidation under Chapter 7 of the U.S. bankruptcy laws CHAPTER OUTLINE 15.1 VENTURE OPERATING AND FINANCING OVERVIEW 15.2 THE TROUBLED VENTURE AND FINANCIAL DISTRESS A. Balance Sheet Insolvency B. Cash Flow Insolvency C. Temporary Versus Permanent Cash Flow Problems 15.3 RESOLVING FINANCIAL DISTRESS SITUATIONS A. Operations Restructuring B. Asset Restructuring C. Financial Restructuring 15.4 PRIVATE WORKOUTS AND LIQUIDATIONS A. Private Workouts B. Private Liquidations 15.5 FEDERAL BANKRUPTCY LAW A. Bankruptcy Reorganizations B. Reasons for Legal Reorganizations C. Legal Reorganization Process D. Bankruptcy Liquidations SUMMARY 244
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Chapter 15: Financially Troubled Ventures: Turnaround Opportunities? DISCUSSION QUESTIONS AND ANSWERS 1. What are the three types or methods of restructuring available when trying to turn around financially troubled ventures? The three basic types/methods are: (a) operations restructuring, (b) asset restructuring, and (c) financial restructuring 2. Identify major factors that cause ventures to get into financial trouble. Ventures get into trouble by mishandling strategic issues, failing to unite management on key initiatives, and having poor finance and accounting practices and controls. Since we are primarily examining entrepreneurial finance, we concentrate on the finance and accounting origins of vent5ure troubles, including overextension of credit, excessive use of financial leverage (borrowed funds), and lack of adequate cash planning and financial forecasting. Factors that cause ventures to get into financial trouble are very similar to those that bring about venture failure. The U.S. Business Administration found that two-thirds of business failures are due to either economic factors (inadequate sales, insufficient profits, etc.) or financial factors (excessive debt, insufficient financial capital, etc.). 3. What is meant by financial distress? Financial distress refers to when cash flow is insufficient to meet current debt
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This note was uploaded on 12/05/2009 for the course FIN Fin 595 taught by Professor Shabbir during the Spring '09 term at CSU Dominguez Hills.

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