Julianne Frank Featured in Sun Sentinel
From credit-card debt to mortgage refinance, the problems faced by small-business owners are similar to those of many South Florida consumers — but bigger.
Many small-business owners have developed bad habits, said lawyer Julianne Frank, who specializes in business distress. She has to do “tough love” with clients who pay employees’ wages through cash advances on their credit cards or ignore a vendor lawsuit for nonpayment — until their accounts are frozen.
During the recession, “what these clients perceived as the worst-case scenario was not even close,” says Frank, a Founder and Counsel Emeritus in Markarian & Hayes in Palm Beach County.
For businesses in financial distress, the options usually are some combination of the following:
Trim expenses including some employees and office space. When business owners come to Frank, they often insist they can pull out of their financial hole if she can just buy them time. Frank reviews their businesses and makes recommendations, which may include laying off some workers and cutting expenses.
Mom-and-pop businesses are often too close to their businesses to see what they need to do to save them, she says. They are emotionally tied to the business and their employees, often longtime workers or family members.
Get rid of an expensive mortgage. A refinanced mortgage at a variable rate was causing problems for Yujel Akdeniz, who has operated an 85-year-old rug-cleaning company in West Palm Beach since 1996. Hatfield restores antique rugs and has clients in Palm Beach and even around the country.
Then in 2009, Bernie Madoff’s multibillion-dollar Ponzi scheme wiped out the life savings of many people, including thousands of South Florida investors. As a result, “people were not in the mood to deal with rug restoration,” Akdeniz says.
But it was when his wife, Robin, fell seriously ill that Akdeniz says he fell three months’ behind on mortgage payments. With late fees on top of his monthly payment, he couldn’t catch up.
Hatfield filed Chapter 11 bankruptcy reorganization in March 2009, and only a year later, the company is out of bankruptcy with a mortgage payment nearly half the original. His wife has recovered, and Hatfield was able to keep its 12 employees. Without the Chapter 11 filing, “we would have been out of business,” Akdeniz says.
Find capital to rebuild. Small-business owners in financial trouble — even those who aren’t — have found little access to capital during the recession. Now that the economy is starting to improve, they especially need capital to market their products or services.
“That’s only going to come from bringing in outside equity or partners,” Frank says.
Another strategy is to join forces with the competition. “There are four other guys feeling the exact same pain. Why don’t you swallow your pride and get them together? Join forces with whatever little capital you have,” Frank often recommends.
Close the existing firm, and open a new separate entity. This can be tricky as creditors of the existing business will likely file a lawsuit. But through careful structuring, the business can sell the most valuable part of the business to the business owner’s new firm, Frank says.
“You have to do this as if the new business is completely separate from you. It may require hiring a separate lawyer for the new business,” she says.
File Chapter 11 bankruptcy reorganization. Be ready with a “white knight” ready to buy the business out of bankruptcy. “The creditors will be paid out of proceeds that are coming upstream from the sale of the business,” Frank says.
This option means the owner loses the business, but Chapter 11 also can help a business turn around by reducing vendor debt. Mike and Dorothy Zanetti, co-owners of Mastercare Shutter in Hobe Sound, opted to file for bankruptcy reorganization to keep their hurricane-shutter business operating. The company’s sales had fallen from a peak of $4 million in 2006 to $700,000 in recent years.
“We’re tied to the construction industry. Our sales fell considerably and we got behind on payments. We were forced with hard decisions on whether to close the doors or keep it going,” Mike Zanetti says.
The Zanettis decided they wanted to pay back their vendors, and remain in business. They worked with Frank to come up with a 15-year repayment plan. In January, they made their first quarterly payment to creditors under their court-approved reorganization.
Change the way your business operates. Mastercare Shutter now pays cash on delivery for materials, using less credit, and saves more for a rainy day.
“It comes down to looking at your business and not being complacent when you’re having a regular year. It’s being a little more frugal and more involved. It’s so easy for money to filter out the door, and it doesn’t need to,” Zanetti says.