Even with all the effort, time and financing you put into a business, for reasons that might be out of your control, the business fails. However, some entrepreneurs believe their business ideas may still work and will create a successor company from the ashes of the first company. Although successor companies may succeed, there are important pros and cons to think about if you want to form one.
As Chron.com explains, after the liquidation of a business, the owners or leadership of the business may rejoin in a successor company, where they can choose to offer the same products and services they did in the previous company. A successor company might absorb some of the assets of the old company, which saves the new company from having to rebuild completely from the ground up. These assets may include the equipment or the property maintained by the old business.
A successor company can also absorb many or all of the employees that worked for the previous company. This gives a successor company an advantage since it does not have to spend time and effort finding and training new employees. Coupled with the assets accumulated from the old company, the successor company stands a better chance of making a profit out of the gate.
However, a successor company with too many ties to an old company might cause it to absorb the debts and liabilities of the previous company. Many successor companies are free of such liabilities, but sometimes a court rules that a successor company is actually a continuation of the previous company. Judges may determine this if they discover evidence that the successor company was set up simply to avoid liabilities and debts.
The leadership of a successor company may take lessons from the failed company and improve the successor company to avoid the previous pitfalls that caused the last operation to go under. However, if a previous company failed, the public may wonder how the successor company will fare any better and might be reluctant to give the new company a chance. This scenario may also keep investors away from the successor company.
A successor company is not free from risk. Nonetheless, some business owners believe their company deserves a second chance in another form. Some prominent companies, such as Verizon, started out as successor companies. So, the possibility exists that local business owners may find success as well.