Whistle past the Graveyard, Not into It: Grave Mistakes That Small Businesses Make in Difficult Times (Part 1—Waiting Too Long to Obtain outside Help)

Financially distressed small businesses—no matter the industry—seem to make many of the same mistakes before and during difficult times.  In the coming weeks, I am going to write a few short posts identifying and describing some of these mistakes.  Not every distressed business makes these mistakes, but if you’re a business owner, or if you advise one, or if you’re married to one, you should be cognizant of these issues.

1.       Waiting Too Long to Get Outside Help

Perhaps the most common mistake made by distressed businesses is waiting too long to get outside help.  The business undertakes heroic efforts to stay on top of its debt service—which is admirable and often necessary—instead of using a portion of its funds to retain a financial advisor and attorney to fundamentally address and hopefully solve the problems experienced by the company.  Often, a small business owner has worked years to build up a nest egg for retirement.  All too often, when times get rough, that business owner will pour his or her retirement funds back into supporting the business.  The owner hopes that this influx of capital will enable the business to “just get past the next [insert number] of weeks.”  As the weeks turn into months and additional personal funds are transferred , the business is under constant pressure from its lenders, landlords, and vendors, and the owner is distracted from doing what he or she does best (i.e., delivering a great product or service).  Often, the storm is weathered, the situation improves, and the business turns the corner, although the owner has substantially less financial security for retirement.  Sometimes, however, the business never turns the corner, the owner’s retirement funds are depleted, personal credit cards are at their limits, the personal residence has a mortgage or home equity loan against it, and the business cannot even afford a Chapter 11 turnaround.  The owner and his or her spouse feel that they have lost all that they have worked for.  Had the owner sought outside professional assistance earlier, then a Chapter 11 or out-of-court workout may have bought time necessary to permit the business to turn the corner (instead of using the owner’s retirement accounts, personal credit, and personal assets).  Two types of assistance are often helpful for a struggling business: (1) an outside financial consultant and (2) a business bankruptcy lawyer.

A competent financial consultant might help in a number of ways: (1) a comprehensive “health check” of the business, (2) developing and implementing a plan back to profitability, (3) finding potential investors or other outside financing, or (4) finding a buyer.   The financial consultant’s business health check might include:

• a review of historical financials and the identification of new risks and opportunities
• a review of external elements beyond the control of the business, such as the factors affecting the industry, the business/economic environment, the competition, technology, the customers, and the owners
• a review of the strategic plan of the business
• a review of the accounting competences of the business, as well budgeting and forecasting
• a review of operations including production, logistics, and vendor relations
• a review of sales, marketing, and other business development
• a review of the efficiencies of HR and the competencies of management and others in key positions

After understanding the business, the consultant will make recommendations and then work with management to execute on them. 

The business bankruptcy lawyer can also assist in a number of ways.  The attorney can assist in negotiations with creditors so that there is not a rush to the courthouse to dismantle the business.  Further, the fact that the business has retained competent bankruptcy counsel can lend credibility to a situation where trust has been diminished to due previously broken promises.  The attorney can assist in many ways, including the following:

• help creditors understand that bankruptcy can leave them with few options, that they have a stake in the survival of the business, and that litigation will ultimately benefit no one but the lawyers 
• put together the plan of reorganization which maximizes value for the creditors and other stakeholders--showing how and when the business intends to pay its debts and compare the proposed plan to less desirable alternatives 
• draft agreements, review forbearance agreements, and draft or review other documents relating to creditor relations, a wind-down, a sale, or investment
• analyze documents to determine the creditors’ relative legal priority to payment
• analyze potential transactions and transfers to determine whether they may run afoul of fraudulent transfer statutes, preference statutes, corporate statutes, or other potentially applicable law
• negotiate smaller payments and gain time from creditors so the business plan can be implemented for the benefit of all stakeholders
• manage any threatened or actual litigation
• formulate an exit strategy to possibly disentangle the owners from the business
• assist the business and its owners in preparing for the worst, so that their assets are protected to the fullest extent in the event of a bankruptcy filing

Unfortunately, too many business owners wait far too long to obtain outside help.  For example, without receiving outside legal counsel, a business owner might put a half million dollars into his business to buy time from creditors because a turnaround takes longer than anticipated.  Eventually, the owner’s personal financial resources are depleted and the business either liquidates or lands in a Chapter 11 filing.  At that point, there’s a good chance that the owner and his spouse will be in bankruptcy, too.  Rather than investing the family’s life savings to buy time and maintain the status quo, the owner should have spent a fraction of that money and put the business into Chapter 11, which would have bought 3 to 5 years to turnaround the business (with the family’s personal assets still intact).  If this situation sounds like you, or spouse, or client, then consider getting help from a professional who has experience with business bankruptcy.  Most lawyers have free initial consultations. 

Finally, there is an important deadline in March of 2021 which will freeze many businesses out from taking advantage of the Small Business Reorganization Act of 2019.  So, please be aware of this and, if you are a business owner meeting with a bankruptcy attorney, please ask your lawyer about the deadline.  

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