Honorable Burial: When Winding Down a Portfolio Company is the Best Restructuring Option

Not every business can be fixed or sold. When a portfolio company is no longer viable, private equity firms are often faced with a tough but necessary choice: shut it down.

In these situations, a well-executed wind-down—what we sometimes call an “honorable burial”—can be the best path forward. It’s a way to responsibly close the books, reduce risk, and protect the fund’s broader interests.

Bankruptcy is one option, but it’s not always the right one. A wind-down carried out under state law can often achieve the same goals with less cost, less complexity, and more control. Done right, it allows a fund to move on—cleanly, quickly, and with integrity.

Why not bankruptcy?

Chapter 7 and Chapter 11 are often viewed as the default paths for a distressed company. And there are cases where they make sense, particularly when litigation is active, stakeholders are at odds, or the business needs the tools of a court-supervised process.

But bankruptcy can also be expensive, slow, and very public. Once a company enters bankruptcy to liquidate, the process is out of management’s hands. A trustee will take over key decisions. Every action is subject to court oversight. And every filing is open to the public.

By contrast, a state-law wind-down is usually faster and more flexible. It allows for a more discreet resolution, and—critically—it keeps control with the owners or a trusted advisor. For many funds, it’s a better fit when the goal is to shut down a non-performing company in an orderly and professional way.

What a wind-down involves

Winding down a company under state law is not as simple as turning off the lights. It’s a structured process that requires planning, judgment, and coordination across legal, financial, and operational fronts.

Key steps include:

• Corporate approvals. The board and shareholders (or managers and members, in the case of an LLC) must authorize the dissolution in accordance with governing documents and state law.
• Notification and compliance. Most states require formal notice to creditors, tax authorities, and regulators. Final tax returns must be filed. Licenses must be closed out.
• Creditor management. Debts need to be resolved, whether through full payment, negotiated settlements, or a court-approved process. If handled poorly, creditors may pursue litigation or raise claims against the fund or its principals.
• Asset disposition. Remaining assets—cash, equipment, receivables, IP—must be identified, valued, and sold or distributed. In some cases, assets may be transferred to other portfolio companies.
• Employee matters. WARN Act compliance, severance obligations, and benefit terminations must be managed carefully to avoid exposure.
• Wind-down reserves and risk management. Reserves may need to be set aside for contingent liabilities. Tail insurance coverage may be appropriate for directors and officers.

Every wind-down is different, but these are the fundamentals. Missing any one of them can create headaches later on, especially if tax authorities, creditors, or former employees aren’t properly addressed.

Risks of doing nothing

In some cases, a portfolio company is no longer active, but no formal steps are taken to wind it down. The entity sits dormant—no revenue, no operations, but still legally alive.

This can create real problems. States may impose penalties for failing to file annual reports or pay franchise taxes. Former employees may assert claims. Vendors may sue. If a director or officer remains listed on public records, their personal exposure may increase. And if the company owns IP, lease rights, or other residual assets, those can quietly lose value or disappear.

Inactive companies still carry risk. That’s why a strategic wind-down is often far safer than letting a zombie company drift.

Why timing matters

A wind-down works best when it’s done early—before cash runs out, before creditors sue, and before reputational damage sets in. The longer a company stays in limbo, the fewer options remain.

When action is taken early, a fund can manage the process on its own terms, resolve obligations efficiently, and preserve value where it still exists. In short: the sooner the better.

A disciplined, respectful exit

Winding down a company isn’t a sign of failure. It’s part of the business cycle. Not every investment pans out. What matters is how a fund handles it, especially in today’s environment, where scrutiny is high and stakeholders are quick to assign blame.

Handled properly, a wind-down sends a different message. It shows discipline. It reflects strong governance. And it helps protect the brand, reputation, and relationships that matter for the long term.

An honorable burial may not be easy, but it’s often the right thing to do.

If you have any questions or require assistance, please contact David Dragich.