By: Donald L Swanson
There are lots of well-run businesses. But even the best of them face risks, from time to time, that threaten their existence. Such risks often arise from events that can’t be foreseen, let alone controlled.
When such risks become reality for a business, what are the owners to do?
Hypothetical
Several years ago, a family business is in financial stress. Things are going fine . . . until the pandemic hits. Government programs (like PPP) help. But receipts are declining, and debt loads are increasing.
Question
What should the business owners do, to guard against and prepare for the possibility that their financial bad-case-scenario gets worse?
Two Answers
The owners should:
- educate themselves on potential strategies for dealing with financial stress; and
- develop a plan of action for dealing with a bad-case-scenario getting worse.
Common Error
What usually happens, when facing financial stress and an uncertain future, is that owners simply press forward and hope for the best. The error is that they, (i) fail to plan for the financial bad-case-scenario getting worse, and (ii) are scrambling when the worse scenario arrives. The error often results in a hastily-filed bankruptcy in a fire-ready-aim mode: this rarely works out well and is something to be avoided.
Getting Educated
Reading and self-study are always advisable, but we are talking here about getting professional advice and assistance. What’s needed is legal advice from attorneys with extensive experience in, (i) helping businesses walk through financial stress, without filing bankruptcy, and (ii) filing and successfully prosecuting a bankruptcy reorganization, when no other alternative is available.
Developing A Plan of Action
Every business facing financial stress needs a plan of action.
The first part of the plan is to develop a strategy for dealing with the stress outside of bankruptcy, with a goal of avoiding the necessity of filing bankruptcy.
The second part of the plan is to develop a bankruptcy strategy and the elements of a plan of reorganization. There are three purposes for doing so:
- What might happen in bankruptcy to the claims of major creditors can be a powerful tool for negotiating with those creditors outside of bankruptcy;
- If and when a bankruptcy filing becomes necessary, the terms and provisions of a plan of reorganization need to already be thoroughly thought-out and ready to go; and
- Since transfer avoidance risks for owners (e.g., insider preferences and fraudulent transfers) are a common problem in bankruptcy, identifying and addressing those risks, well in advance of a bankruptcy filing, can be crucial in minimizing their significance.
Conclusion
One part of successful business management is to deal proactively with risks before they become reality. Preparing and planning for a bad-case-scenario getting worse is essential in the midst of financial stress.
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