Realizing you need to file for bankruptcy is agonizing and nerve-racking. Business owners are grappling with the emotional issues of managing a failing company – firing employees or reducing compensation, failing to pay vendors, defaulting on loans, and not meeting customers’ needs. The passion owners have for their businesses sometimes prevents timely decisions in crisis situations. Here are some tips that will help you navigate the difficult decision to file for bankruptcy.
You are not alone
You are not the first company to file for bankruptcy. For the past five years, more than 20,000 businesses per year have filed. And many more businesses were liquidated in other court processes or just closed the door. The Bureau of Labor estimates that only 30% of businesses survive 10 years. This pandemic, just like the Great Recession, will force many companies out of business (bear in mind that 60,000 companies filed for bankruptcy in 2009). There is no shame for your circumstance. You are to be admired for taking the risk of being an entrepreneur, providing employment, and helping other businesses thrive, and for many more positive impacts you have made. You have done something most folks never even try.
Ask for help
You need outside help due to the emotional strain. Reach out to your attorney, accountant, and others whose advice you value. You will need a skilled attorney with bankruptcy experience, which brings a different skill set than that of your corporate attorney. You might consider engaging an investment banker who can help analyze the financial condition and seek a buyer or capital for your company. This team of advisors can provide guidance if you need to file for bankruptcy.
Act now; do not wait
Your biggest opportunity to engineer a successful turnaround is now. Waiting for a miracle – the big order, new customers, a new source of funding, etc. – is not prudent. Plan for the worst, and then work hard to create a better future. No one envies your position, but all are expecting you to lead and make the difficult decisions. Your employees, customers, suppliers, and lenders will all support you if you are truthful and decisive in addressing your company’s financial crisis.
Your three choices
You have three choices – reorganize, liquidate, or sell. These options are intertwined in certain circumstances; for example, selling your company in bankruptcy can be part of your reorganization plan. The choice you make is dependent on the viability of your business. The ability to reorganize or sell is dependent on your business’s ability to demonstrate profitable operations in the future. If you cannot prove your company will achieve profitability, then liquidation is your path. Most owners want to reorganize, as the thought of selling or liquidating is too painful.
Assess your situation
Making the best decision is based on a thorough analysis of your company’s prospects for returning to profitability. If you want to reorganize and bring in additional funds, your projections will need to be based on believable assumptions. You should expect strong vetting by creditors, lenders, and investors. This is where having a strong team of advisors is important. Additionally, conversations with customers, suppliers, and your lenders will help you understand their future support. You may need to renegotiate leases, contracts, vendor terms, and lender agreements to create a viable turnaround scenario. You should expect that renegotiating your terms will come with consideration from both sides – a give-and-take scenario. Your ability to achieve new terms will be based on your relationships and whether folks trust you. This is where acting quickly and decisively will help you build credibility.
Asking yourself the difficult questions is critical to assessing your situation. This is especially important if you have personal liability through guarantees. Minimizing your personal exposure can impact your course of action. However, in a bankruptcy, this might conflict with what is best for the creditors. Again, your team of advisors will provide you with guidance.
Only about 25% of businesses file for reorganization, and many of these result in the sale of the company.
Determine your goals
Understanding your company’s prospects will help you set realistic goals for the outcome of a bankruptcy. Your goals will assist your advisors in recommending the best strategies for success.
The goal of full repayment is honorable but not realistic in most situations. Therefore implementing a course that returns the most funds to creditors and lenders will be widely supported. Keeping your employees on board can be challenging yet achievable, if done quickly with support from your lenders. Release from personal liability is dependent on the nature of your guarantees and negotiations with your creditors.
Do not expect to have ownership in the company if you ask creditors or lenders to reduce the amount you owe. If liabilities are impaired, then all equity value is destroyed. In this circumstance, your route to ownership is with the injection of equity funds, warrants, or performance-based incentives if the equity is provided by an investor.
PCE has helped many companies prepare for and go through this process. Please contact us to discuss how we can help.