What Should A Business Do When Facing Financial Stress?
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 risks become reality for a business, what are the owners to do?
Hypothetical. A family business is in financial stress. Things were going fine . . . until the pandemic hit. Government programs (like PPP) have helped. But receipts are declining, debt loads are increasing, and cash is running short.
Question. What should the business owners be doing, to guard against and prepare for the possibility of a financial bad-case-scenario?
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.
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 a financial bad-case-scenario, and (ii) are scrambling when it it 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 step in planning is to evaluate your situation and compare your options against bankruptcy. You also need to understand your personal exposure.
The second step is determining if the situation is best handled inside or outside of bankruptcy. Most often it is best handled outside of bankruptcy and you develop a strategy with a goal of avoiding the necessity of filing bankruptcy.
The third step 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 a major creditor can be a powerful tool for negotiating with that creditor 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 (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.
One part of successful business management is to deal proactively with risks before they become reality. Preparing and planning for a bad-case-scenario is essential in the midst of financial stress.