Chapter 11 may be the answer to saving a Small Business!

August 29, 2020

BY WM. RANDY MCKINLEY | President & CEO of The Company Drs

Chapter 11 may be the answer to saving a small business!

First, a little context of what small businesses mean to the economy

Most people don’t realize that small businesses are the engine that keeps the economy going and that engine needs help! America's small businesses are already beginning to fail and only a small percentage will make it past the 60 days of the coronavirus shutdown without major restructuring?

Small businesses create 2/3rds net new jobs and small firms employ about half of the private sector workforce. Since 1995, small businesses have created about two out of every three net new jobs—65 percent of total net job creation in the US.

When we look even closer - most small businesses are sole proprietorship and of America’s 28.7 million small businesses, half of all small firms are home-¬based, and 23 million are sole proprietorship. The remaining 5.7 million companies have employees and can be divided up into mom and pop businesses, small-¬and medium-¬sized suppliers to larger corporations, and high-¬growth startups.

Now Back to first sentence. “Chapter 11 may be the answer to saving small Businesses!” YES

Second, it is a myth that Chapter 11 is only available to big businesses & not available to small businesses or sole proprietorships.

Chapter 11 is a way for troubled companies to save themselves by preserving profitable parts of their business while doing away with dead weight, which can include unprofitable stores and untenable debt.

The company’s management remains in control of the business, but a bankruptcy court oversees the process as it negotiates with landlords, suppliers and other creditors.

“The goal in Chapter 11 is to carve out the productive part of the company and get rid of the parts that are losing money,” said James Angel, a professor of finance at Georgetown University’s McDonough School of Business. “They may sell off certain parts of the business, close down facilities and void contracts with the approval of the court.”

A Chapter 7 filing results in a liquidation, meaning everything is sold off and stores are shut down for good.

Third, there are two routes to a Chapter 11 filing

A company must either have more liabilities than assets (known as the “balance sheet test”)

A company is unable to pay its debt as it comes due (the “income statement test”)

Fourth, how do you handle Chapter 11 & save the good parts of your business

Before you do anything consult with a Debtor in Possession expert to determine if this is the best option

You need a game plan to manage cash flow during the Chapter 11 process & D.I.P. makes that possible

The court will typically give you 6 month or a little more to get your plan into place to pay your creditors

In Chapter 11 your company can void contracts with the approval of the court i.e. leases, etc

Example: Retailers us Chapter 11 as an opportunity to drop unprofitable stores or pare down locations that are too close together i.e

i.e. GNC Holdings - 1,000 stores, Pier 1 imports – 540 stores and Brooks Brothers - 50 stores

Fifth, it isn't true if I file Chapter 11, I will lose control of my company

It might be difficult for business owners to consider filing for bankruptcy simply because they do not want to lose control of their companies.

Even in situations where a Chapter 11 case could help alleviate financial struggles and allow operations to continue, business owners will be relieved to know that law allows them to retain control of their bankruptcy case through the role of “Debtor In Possession.”

Sixth, What are the duties of a Trustee / Debtor in Possession in small business cases?

In a small business case, a trustee or the debtor in possession, in addition to the duties provided in this title and as otherwise required by law, shall-append to the voluntary petition or, involuntary case, file not later than 7 days after the date of the order for relief-its most recent balance sheet, statement of operations, cash-flow statement, and Federal income tax return; or a statement made under penalty of perjury that no balance sheet, statement of operations, or cash-flow statement has been prepared and no Federal tax return has been filed

Attend, through its senior management personnel and counsel, meetings scheduled by the court or the United States trustee, including initial debtor interviews, scheduling conferences, and meetings of creditors convened under section 341 unless the court, after notice and a hearing, waives that requirement upon a finding of extraordinary and compelling circumstances;

Timely file all schedules and statements of financial affairs, unless the court, after notice and a hearing, grants an extension, which shall not extend such time period to a date later than 30 days after the date of the order for relief, absent extraordinary and compelling circumstances;

File all post-petition financial and other reports required by the Federal Rules of Bankruptcy Procedure or by local rule of the district court; subject to section 363(c)(2), maintain insurance customary and appropriate to the industry;

Timely file tax returns and other required government filings; and timely pay all taxes entitled to administrative expense priority except those being contested by appropriate proceedings being diligently prosecuted; and allow the United States trustee, or a designated representative of the United States trustee, to inspect the debtor's business premises, books, and records at reasonable times, after reasonable prior written notice, unless notice is waived by the debtor.

Summary:

A Debtor in Possession is a debtor that acts in the role of the trustee in his or her bankruptcy case

This allows business owners to manage their cases on their own provided they meet the requirements set by the bankruptcy court

A debtor in possession has many of the same rights and powers as a traditional bankruptcy trustee

Yes, you have a good chance to save your small business by using Chapter 11 & D.I.P.

The Company Doctors & Strategic partners understand how to save businesses and how to use D.I.P.

WE ARE HERE TO HELP!

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