Workout and Turnaround Case Studies
Our typical client is a small businessman who perceives that his business is failing, and who has been advised by other professionals to seek bankruptcy advice.
We have learned over the years that bankruptcy protection is seldom the first choice of remedy. There are many reasons for this.
First, the only reorganization protection for businesses is under chapter 11 of the Bankruptcy Code. This statute is designed for large businesses. Smaller companies simply cannot afford the special legal, accounting, and management costs (typically $50 - $150,000) that formal bankruptcy reorganization entails. Moreover, a company that is losing money prior to bankruptcy will, if not "repaired," continue to lose money while under court protection.
The Bankruptcy Court will not allow itself to be used as a shield to allow a company to run up more debt, and such a company will be (at least in this district) converted to chapter 7 liquidation, which is the worst possible result for the business, its creditors, its customers, and its owners. Conversely, if a business CAN be made profitable, we can almost always negotiate forbearances and payment arrangements with the creditors, which makes bankruptcy protection unnecessary.
A Customer's Bankruptcy Causes Chaos
A long established, family-run manufacturing service company landed a new major customer. The customer promised to double the firm's sales, and in anticipation of that, the firm opened and equipped a new stand-alone facility to handle the customer's demands. Unfortunately, the customer's business plan was faulty, and the customer ended up bankrupt and out of business. The firm's remaining operations could not sustain the debt load and cash flow demands of the now-vacant expansion facility. Its debts mounted and creditor actions started. The firm came to us seeking chapter 11 representation.
Rather than file the firm in its own bankruptcy, we undertook a two-year transition plan under which the firm, now our client, raised cash for creditor settlements by divestiture of some of its remaining operations. It remains in business in a profitable, if smaller, form, ready to grow anew and without the cost, risk, and stigma that a formal bankruptcy would have entailed.
Going Private via Chapter 11
Our client was a technology company with publicly traded common stock. The cost of maintaining its SEC requirements, including annual audits, had become prohibitive. It also needed creditor relief and recapitalization of future operations with an influx of new capital. The new investors were reluctant to invest new equity while the problem of the historical debt and the public registration costs were unresolved.
We represented the company in a successful chapter 11 reorganization, which resulted in cancellation of the publicly held stock, restructuring of debt, and issuance of new equity in part via conversion of insider debt.
The Case of the Deceased Entrepreneur
The founder of a family-owned manufacturing business died suddenly and unexpectedly in early middle age. Neither of his two sons, who were being groomed for management, were ready for the responsibility of running the company. The distraught widow consulted their business attorney, who in turn referred the family to our office for crisis counseling and management.
We put together a team of consultants, including ourselves, to constitute a shadow board of directors and a management team that ran the company for the next year. We dealt with the creditor issues that arose by constant negotiation and demonstrations of goodwill and successful operations, thus avoiding bankruptcy. During that year, sales doubled to almost $10 million, and the year after our engagement terminated, the company posted $1 million in net profit.
More...