Lately I have received many calls from small business owners. Each tells the same story. Their family business is in trouble. They have been trying to make it through the last year by putting all their savings in the business. They are foregoing a salary to try to keep the doors open. They have been waiting for things to turn around for months and now they have pretty much run out of money. They are afraid to tell the bank or their trade creditors for fear they will lose everything. Can I help?
Sadly, the answer is often "No." Here are some things small business owners can do to get a different result.
Don't wait
Successful business turnarounds take time and money. Lawyers (yes, you need good lawyers) charge from ten thousand to hundreds of thousands of dollars. Generally, the costs will amount to at least 10 per cent of the total debts the company owes. Depending on the assets of your company you may need to pay all or a substantial amount of this cost in cash up front as a "retainer." Lawyers for troubled companies do not work on credit.
Troubled companies also need time to find and hire good professionals and get them up to speed; to design a business plan; to negotiate with secured creditors regarding financial concessions; to raise money or look for potential purchasers; to work on cost-cutting measures, agreements with suppliers and customers and to cope with emergencies.
Start planning for failure as soon as trouble appears or even before it appears if you know there is a risk of trouble. If the company has run out of time and money it can only be saved by a miracle.
Talk to creditors
Creditors are the key to a company's survival. If creditors see value in the company and if they have confidence in management they usually want to help the company survive. This is especially true in troubled times when many sources of business and lending have failed. Suppliers have to sell their product to someone or they, too, will fail. That someone should be you.
To convince creditors, you need a business plan that recognizes reality. If possible, have a financial professional independently assess the business and prepare and present the plan to creditors.
Talking honestly to creditors also builds their confidence in you.
Everyone knows that customer orders, sales, prices for fuel and utilities are volatile and can't be easily predicted. Pie-in-the-sky projections and unsubstantiated assumptions are worthless. Honest communications and predictions generate confidence and result in a realistic plan for everyone's benefit.
If creditors don't see the value in continuing your business, neither should you. If you have not invested your life in the company you can walk away. Once you have invested your life in the company you have no exit strategy. Worse, you have no bargaining leverage with creditors who can "smell blood" and use it to their advantage to try to extract unreasonable terms to continue the business. So. . .
Don't invest your life in your business
Smart business owners keep something back. They do business in a corporate structure that will protect their personal assets. They don't start the business by giving it all their valuable assets. They lease or license real estate, patents, equipment, vehicles to the company. That way they will have personal assets if the company fails.
You can't take assets back from a troubled company. Removing assets from a troubled company is a form of fraud that can have serious consequences for the persons who receive the transfers as well as for the directors of the company.
In contrast, if you keep the assets in your own name you will have a bargaining chip when you need to negotiate with creditors or assets to start your new life when the company fails. You also have something to contribute to the company in exchange for the concessions you are
asking the creditors to make.
If you give your life to your business, your business will take your
life.
Kaaran Thomas is a partner at McDonald Carano Wilson LLP and is one of two practicing attorneys in Nevada who are fellows of the American College of Bankruptcy, the national honorary society for specialists in bankruptcy and business reorganizations.
