Although bankruptcy is a crucial tool for righting a struggling venture, experts caution against filing if you can avoid it. You should always play other angles first.
"Chapter 11 should be a last option," says Len Shulman, who advises small businesses at the Irvine, California, law firm Marshack, Shulman, Hodges, and Bastian LLP.
Once you recognize something is wrong, you need to look into an out-of-court workout. David Dykhouse, a partner with New York City law firm Patterson Belknap Webb & Tyler LLP, says you have two options: selectively dealing with creditors (say, renegotiating a loan with your bank or your lease with your landlord) or dealing with everybody at once. "The [latter] process can get a little chaotic," he says, "but it is possible to get people to accept less than full payment."
To negotiate, you first have to open communications with your creditors. Tell your vendors why you haven't been able to pay them. Call your banker. "Creditors are very willing to deal with businesses," says Shulman. "They just want to be treated honestly."
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If you haven't been truthful or if your creditors perceive that your business is on the brink of breaking up, the shouting can get pretty bad. Those communication breakdowns can be overcome by bringing in a workout expert like Van Conway, president of Conway MacKenzie & Dunleavy PC in Birmingham, Michigan. Workout specialists, who are most easily found on the Internet, identify cost savings in your processes and raise cash by financing assets in ways you might not have considered. When they present their plan to your creditors, they can sound like the voice of reason. "Creditors appreciate the outside voice," says Conway.
There is one other option to consider. Keeping in mind that 75 percent of Chapter 11 filings advance to dissolution under Chapter 7, maybe you should sell your business-or just auction its assets and pay your creditors-and start planning your next one.
"Sometimes a workout is having a graceful exit from a business," says John Ventura, author of The Bankruptcy Kit (Dearborn Financial Trade) and an attorney in Brownsville, Texas. "The fact that you went out of business won't prevent you from getting financing in the future. It's how messy you did it that can get you into a little trouble."