Case Study 1:
- Business people are people: they come with their own complexities that must be examined.
- Our job is not always to salvage companies at all costs.
- Our real task is to find out what the head of the company wants to do, and then to help make that thing happen.
This is a case that involves an automotive manufacturing company. The company was a closely owned business that the founder left to his son, who became the inheritor and new owner of the business.
The son got married and had two children, both of whom were autistic and required very involved care. He therefore experienced a bit of strain around simultaneously managing the care of his children while also running the business he inherited from his father.
What ended up happening was this: the son was essentially the “smartest person in the room”, having been accustomed to success with the same business model that had worked so far. He didn’t seem interested in keeping his finger on the pulse for potential adaptations to ongoing changes in the market. Therefore, there wasn’t a clear handle on where the finances were trending in the company’s industry. This company was an automotive supplier that sold its goods on a “cost plus” basis, regardless of the increase in costs that they were incurring.
Unfortunately, several of the company’s largest customers went bankrupt followed by the closure of the customers bank during the last recession. As a result, the business failed to deliver on the bonuses that were promised to employees, and other costs that were slated to be paid based on the expectation that they would receive funds from their now-bankrupt customers and others that were to be funded by the lending institution that was now no longer able to lend the cash needed for the company to remain operational.
This essentially led to a situation where the son, the head of the company and my client, said to me, “I think I am running out of cash.”
This scenario is actually rather common, despite the individual details. Often, when people have been successful in a given business for many years, they stop looking as closely at their cash position as they should. By the time they look, they find that they are running out of cash.
The way that we handle cases like this is to look at the cash problem as a part of the larger challenge. First, we endeavor to understand what led the company to the cash problem, and then we endeavor to understand where the company want to go from there.
Notably, when I refer to “where the company wants to go”, I am really talking about the owner of the company, who is driving the show. This case illustrates the importance of that sort of understanding. When we delved deep into the desires and motivations of the owner, we discovered an even deeper source for some of the problems the company was having with oversight.
What we discovered was that the owner really wanted to be spending more time at home with his family and his children, even though the job with the company was paying him well and had been for years. Furthermore, he had a passion for teaching that he wanted to pursue.
Between those two factors, the owner decided that he no longer wanted to run the business. However, he did want to keep the real estate which he and his wife owned, in which the business was housed.
In this case, we decided that it would not make sense to endeavor to “salvage the business”. Instead, we were able to sell the business in such a way that enabled the owner and his wife to keep the real estate. We negotiated a very favorable lease from the new buyer of the business. This allowed the now-former owner and his wife to obtain some profit from the real estate, and also allowed the now-former owner to free himself of the company and go get his teaching certificate. He is now teaching children with special needs and spending lots of time with his own children.
This was a huge win for everyone involved, and it required innovative thinking and considering non-conventional possibilities. We are trained to always want to save the business in cases like this. However, in the end, the more central question for us as attorneys is to find out what the people running the business actually want, and then find a way to make that happen.
Case Study 2:
- Newer small business owners, especially those who have limited experience in business before starting their company, often require something of a “crash course” in business financing. As an attorney, part of your job is to provide that education to them.
- It is very common for newer small business owners to fall into the trap of predatory lending, like that offered by merchant cash advance creditors. If it is at all possible, this should be avoided. If it has already occurred, there are tools that can be utilized (i.e., restructuring of debt, Sub-Chapter V bankruptcy) that can help get the client out of their jam.
This is a case that involves a home healthcare company. The founder of the company was inspired by her experience being a caretaker for her grandmother, which is a process that she loved from start to finish.
After her grandmother passed away, the founder continued to feel very passionately about home healthcare. This inspired her to start her business, which was specifically focused on caring for people in their homes. Her business offered things like personal grooming, reading, and many of the other things that a homebound person doesn’t necessarily get to do or share with busy family members.
Over the first couple of years, the business grew very quickly. However, even though the company’s growth was great, and even though the company’s revenues were increasing, the founder realized that from a cashflow perspective, she was not able to keep up with the rapid rate of growth. The lack of cash flow made it difficult to do important things like hiring and training employees, all of which is necessary with the growth of a company.
This was a situation in which the company grew faster than the founder planned for, and faster in fact than the founder had the capacity to facilitate. As a result, the founder ended up not being able to pay for things in a timely manner. The lack of timely payment allowed interest to accrue.
When faced with the problem of interest, she decided that she had sufficient revenue to borrow some money. Her business was very young at this point—perhaps two years old—and was not bankable. Therefore, she started borrowing money from merchant cash advance creditors, at rates that she didn’t fully understand.
The founder quickly learned this was a mistake. These cash advances had rates far higher than 25%. The founder did not realize the trap these lenders set, which is collecting daily rates in exchange for advancing some money, and in doing so actually buying their receivables.
This decision put her even further in the hole in terms of cash availability. At a certain point, she was literally unable to make payroll. She came to us in a panic at this point. Remember, she was only a few years into her business, and she was excited about the growth she was experiencing but did not really have a thorough understanding of the basics of financial management.
So, in addition to advising her that we had to restructure the company in order to fix the problem she was facing, we also had to provide a sort of “crash course” in financial management and cashflow in small businesses. This is actually not uncommon with a lot of small business owners, especially new small business owners.
In this case, we were able to stop the bleeding of all the daily cash withdrawals that were literally bankrupting her. We were instead able to restructure all that debt into a single reasonable payment that didn’t exceed a certain threshold as far as the percentage of her revenue.
We were able to do that quickly enough that she was able to get in and out of a Sub-Chapter V bankruptcy case within a matter of months (as opposed to the typical year). She has since gone on to continue to grow her business and has successfully obtained more contracts. We are proud of the success we were able to help this business owner achieve in this case.
Case Study 3:
- Often, small business owners put everything they have into their businesses. This often means tying their personal finances to their business finances, doing things like guaranteeing their business debts with their home.
- When things change (for example, if the business scales down), it often calls for the reorganization of the business owner’s personal AND business debt obligations, as the two are so closely connected.
- Though a Chapter 11 Bankruptcy may not look like a successful outcome, this sort of debt reorganization is often the perfect solution to problems that arise from comingling personal and business finances.
This is a case about a physician who had his own private practice, and illustrates reorganization not as much of the business as of the guarantees that the physician had taken on.
This physician was older, probably in his 70s, and was still practicing. He had been working with the same business manager for many years.
As he grew older, his patients grew old with him, so his patient population started to decline. As a result, he was servicing debt that was just a bit too much for his business to bear, and the personal guarantees were close to being called. This was a major problem, as he had guaranteed all of his business debts with his home, his vacation property, and parcels of real estate that he and his wife owned free and clear.
It is not uncommon to do this sort of personal and business comingling in small businesses. Still, the interconnected nature of the extension of his personal credit to his business debt did present a unique challenge.
So, in this case, instead of restructuring the business, we restructured his personal finances in conjunction with the business, by filing a Chapter 11 bankruptcy for him.
In doing so, we were able to essentially take all those debts and guarantees and restructure those obligations, spreading them out over a longer term. This way, he could continue to support that debt with his scaled-down practice and still yield a reasonable profit margin. This ensured that the physician and his staff could take away a reasonable salary to support their lifestyles.
This case had a very successful outcome, though most people don’t typically consider Chapter 11 bankruptcy when they think of success. However, because entrepreneurs and small business owners are typically very passionate about the work that they are doing, they put everything that they have into their businesses. As such, solutions like bankruptcy make sense when things need to be reorganized within the business.
When a small business’s finances are so closely tied to the owner’s personal finances, we can use personal restructuring to restructure both their personal debt service as well as that of their business.
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