Chapter 11 bankruptcy for privately held businesses is an alternative for businesses too small to be subject to the middle market pressures of a fast sale environment. In the small-business environment, the traditional role of Chapter 11 bankruptcy as a way to protect and nurture a going concern has real application.
Many small-business owners know where they went wrong. They know that they grew too fast, hired too freely, bought assets beyond the needs of the business, leased too much space, failed to act quickly when receivables began to age, borrowed money from the IRS without permission to do so, or incurred a contract that is unprofitable and inefficient to perform.
Other business owners feel themselves at the mercy of their senior secured lender. They engage in sell downs and inventory liquidation programs that limit the loss exposure of the senior secured lender at the ultimate expense of trade creditors who make up for the liquidity crunch of their customer in a desperate attempt to keep product flowing without an interruption in the distribution and sales chain.
Some business owners don’t know why their companies are in trouble. Some confuse a lack of cash flow with a loss of profitability. Some fail to track and control discounts and trade incentives. Some allow an aging work force and personal relationships to dictate salary levels beyond the ability of the company to sustain the payroll expense.
In all of these situations, and many more, Chapter 11 bankruptcy can provide a protective environment in which to take corrective action and return a business to health and stability. Chapter 11 is not a way for business owners to dump debt, keep the company, and keep running along. Rather, Chapter 11 is a way to restructure debt and assets to produce a viable operation and a healthy balance sheet.
The key to successful use of Chapter 11 is to act early. Once a company is fully leveraged, no equity left, and no tools or cash to use to restructure, it is probably too late to use the rehabilitative powers of Chapter 11 to your advantage. It is before you hit bottom and are out of alternatives that Chapter 11 has its best effect. If your business is insolvent, or approaching insolvency, you should seek out a Chapter 11 practitioner as soon as possible.
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