Businesses in desperate shape can often be saved. Frankly, not all should. Maybe the market is not there, or management isn’t up to the task. But if the business shows resilience and the potential to thrive, disputes can generally be satisfied to meet the needs of the company and its creditors’ alike. This takes effective communication. The exception is where conflicts are based on personal issues, such as rancor, distrust and even hatred, rather than on rational, financial considerations.
A business in trouble can become beset by those who understandably feel justified in getting as much as they can, in short order, while paying little heed to its potential to give them lifetime customer value. These complex debt issues can involve banks, equipment lessors, landlords and trade suppliers. As well, business partners may be fighting with each other. To those involved it can seem like an irreconcileable mess. Everyone wants their bite out of the company and are prepared to pay for good legal help to get it.
It’s easy in this situation for accounting or legal professionals to view the situation as hopeless and recommend bankruptcy. But Chapter 11 will cost tens of thousands of dollars, padding the pockets of the professionals involved, rather than being used to make proportionate reduced-cost settlement payments to creditors. This loss of cash to the company and its suppliers is one of the reasons why most Chapter 11 filings are quickly converted to Chapter 7 liquidations.
When a company’s creditors look out for their immediate self interest, it can kill the business, together with the unsecured suppliers’ hopes for getting paid. It’s akin to the well known “Tragedy of the Commons” scenario, which describes the dilemma where individual livestock-owners see it in their best interest to add more and more cattle to the commons. It makes sense in the short term, but it results in the eventual destruction of the commons’ ability to function as a productive grass-producing system. And if the grazing disappears, everyone loses out.
To head this off, all the livestock owners would need to understand that it’s in their best interests to control their desire to get everything they imediately want. They would need to come to realize that they are playing a part in killing the productive asset that they need, unless they hold off. Someone would likely have to get them together and let them know the situation. It’s a similar scenario in complex business debt workout situations, when you communicate with creditors and ask for their patience and understanding.
The key in resolving complex debt predicaments is to get everyone (whether or not suits have been filed) to step back and take a holistic view of the problem. In the short term, they can minimize their losses. In the longer term, they can maximize their benefit with a strengthened business relationship and loyal customer.
This process akes place by thoroughly analyzing the situation and assessing the claims of each and every one of the creditors. It is effective to start by putting together a simple report, for distribution to them, outlining the issues and alluding to solutions that would move everyone forward.
Time is of the essence. If a suit has filed and served, it has to be answered. The plaintiff has to be tied up in court by competent legal counsel for long enough to get the overall situation resolved.
If your business faces multiple creditor issues, tackle the situation in a holistic way. If you handle each issue in piecemeal fashion, you will be less likely to succeed.