Saving the Troubled Business: Issues in Chapter 11
This site is dedicated to the business owner who finds him or herself facing seemingly insurmountable financial challenges. Whether your problem is real estate investments facing foreclosure, a retail or service operation with unmanageable debt, a construction company facing judgements and lawsuits, an internet company facing declining sales, or any other business confronting distress, we hope you will find some of your answers here.
IS CHAPTER 11 THE PROPER MEDICINE?
Your business may be sick and on the verge of financial calamity and Chapter 11 may be the medicine .
What are the root causes of the distress?
Here are typical reasons for business distress: bad management, economic downturn, unanticipated competition, excessive debt, infighting, poor marketing. If management is bad or the principals are at war, Chapter 11 may not be the answer..No amount of number crunching or court edicts are going to turn around a business when its internal cancer is the people involved. Chapter 11 works best when the problems are a numbers game…where bandages over the bleeding can be applied to give the business time to heal.
Are the prime players “all in”?
It is hard enough running your business. Now add a whole new full time job to your daily grind. That is effectively what Chapter 11 requires. The investment of time and energy that management must devote to the process is substantial. The lawyer is the guide or conductor–the real work is in the trenches and must be done by the insiders. If you are not willing to contribute some serious overtime to the effort, you will diminish the chances that your law team can be effective for you. If your lawyer has to play “dentist”…constantly pulling teeth to get what she needs from you to do her job…you will find that you will handicap your chances for success. Be prepared for a highly interactive exercise…if your heart and head are not into saving your business, the pain in your pocketbook will not be enough to pull you through.
Who owns What?
Very often, business distress encompasses several related entities. For example, the owners may have an interest in the real estate that houses the entity that operates their business. Cash flow issues may be causing upstream payments toward the real estate loans to fall behind. These issues can add complication to the Chapter 11 process, because filing for just the business may not protect the business from losing its location…thus mandating the filing of multiple Chapter 11’s. This adds expense, and of course creates procedural and sometimes ethical issues to the equation. Multiple filings and case consolidation require a careful analysis of each entity as if it were filing on its own, and the seeking of a global non-conflicting resolution.
The two most important words: Exit. Strategy.
Too often Chapter 11 cases fail, and a primary cause of failure is inadequate preparation. The excel spreadsheet is the single most important tool in the lawyer’s arsenal, and if they do not use it, you should question your investment in them. Competent Chapter 11 counsel works with your financial manager to discern the fixed operating numbers of the business, the value of the encumbered assets, how much of the debt will be left at the end, and what it will take to get to the exit point. Milestones and waypoints along the way should be plotted, and the expectations monitored to compare with projections as the case unfolds. The lawyer who is first pondering the reorganization plan as the case unwinds will rarely be steering their client into a safe harbor.
The Beautiful Tools of Chapter 11
Chapter 11 is a powerful medium. Using it, your lawyer can: *Reduce loan balances on secured (collateralized) debt to the distress value of the collateral *Pay very small amounts of unsecured debts (general payables) over very long periods of time *Completely eliminate debt owed to certain creditors *Cancel contracts and leases that are burdensome *Surrender burdensome assets. Much of the foregoing can be done in many instances without the consent or vote of certain creditors.
How do I find the right lawyer?
Experience, credentials, and track record are your keys. Ask how many cases the lawyer has filed and what percentage have successfully confirmed. Ask to talk to other clients who have gone through the process. Ask about the tools we have described above.