If your business is sliding toward insolvency, you are probably asking yourself a very practical question: What are my options, and how will those options affect me and my employees? For many owners the answer is a negotiated restructuring outside of bankruptcy court, and the next question is how long that takes. This question is not easy to answer, especially if you want a general answer. It depends upon so many things, and those things are often unique to the business. Still, there is a useful benchmark. An out-of-court restructuring can often be completed in six to nine months, or less. A Chapter 11 case, by comparison, may take nine months to a year. But that’s the problem with generalizations: they ignore the unique features of individual cases.
Think of the out-of-court process as an alternative to going into bankruptcy. Under either scenario, you propose to your creditors that your existing debts be renegotiated. But in the case of a bankruptcy, that proposal is made to a judge. In an “out-of-court” restructuring process, you aren’t asking a judge to grant you relief. Instead, you propose to your creditors that they collectively agree to help you out, with their consent. A lender might forgive part of the balance. Repayment schedules may also be stretched out, or interest rates reduced, or a variety of other modifications agreed. Ultimately, all of these will reduce your obligations and help you preserve your cash flow. A successful workout, by definition, means that the creditors agree to give up something for something else, with the idea that it will better help them collect on their claims. That is usually a fair bet for them, because if the company is liquidated or forced into bankruptcy, the lender will likely receive significantly less repayment than what the company has agreed to pay through the restructuring process.
An out-of-court workout has two steps. In the first step, the company proposes changes to the terms of the debt, and discusses them with the people owed. In the second step, the company and the creditors reach agreement, and the terms are formalized in new agreements. Then the company moves forward with the new debt service terms. Each conversation takes time, of course, and so does “repackaging” the deal and drafting agreements for signatures. Ideally, your business can stay operational while the negotiations are going on. How quickly you get through those steps comes down to three things: cash, the shape of your debt, and your relationships with the people you owe.
Start by understanding what is happening with the business. When and how will liquidity dry up? How long do you think you have? Liquidity decides whether an out-of-court deal is even feasible, because you need enough of it to carry the business through proposing, negotiating and preparing a plan. During an out-of-court restructuring, the business must continue to operate and generate revenue. If the cash runs out first, it doesn’t really matter what happened during the negotiations, because the operation will most likely fail before all the negotiating is over. In other words, don’t start a deal and then run out of cash.
You also have to be clear about how complex a situation you have. For instance, if the company has several different types of debt, restructuring will take longer. Each time you add more people and promises at the table, it adds time to your deal. Each layer of debt adds in a new decision-maker. That matters because an out-of-court restructuring typically needs the approval of every lender, supplier and vendor, and the more of them there are, the more likely one says no. The hard part will be getting each of these decision-makers to agree. The shorter your list of creditors and the simpler your budget, the sooner it will all be done.
People who give advice will tell you that an out-of-court restructuring is quickest if you already have a relationship with a lender or creditor. But there is more to it than that. You need an agreement with every significant creditor, and goodwill makes that easier to get. If the business owner has tried to avoid paying the creditors, the path to a successful workout will not be quick. There will have to be the hard work of gathering support and convincing lenders to accept the terms of restructuring. Even when the initial relations between business owner and creditors are good, a successful restructuring takes a lot of work. There’s no magic formula, but the more your creditors believe you have a viable business that is important to them, the faster your restructuring will likely go.
What you ask for shapes the timeline too. The two most common requests are a haircut and a moratorium. A haircut means the lender agrees to forgive a portion of the total principal or interest amount owing. A moratorium is when you ask creditors to delay payments for a while, usually because of a temporary hardship. The reason you want to do this in the first place is to give the business a chance to recover. There should be a plan in place for how and when the business will recover and repay its creditors. Bigger asks take longer. A debt-for-equity swap involves the business and the lender agreeing on shares the lender wants, how many are needed to cover the forgiven amount. It tends to make sense when a company carries heavy debt alongside significant assets, since shutting the business down would help no one. But, while a debt-for-equity swap can wipe out a large chunk of what the company owes, there is a catch. The creditors who take the shares in exchange could end up having a big say over what the company does.
Keep in mind that Chapter 11 shields a business from creditor demands and lawsuits. In an out-of-court restructuring, there is no protection. Until every creditor signs, any one of them can still commence collection proceedings. Depending on the length of the negotiation, the business can be damaged. And your own attitude toward the restructuring process could make it take longer. While all of these processes are time sensitive by their nature, you can cost yourself time if you drag your feet.
Relative Speed and Low Costs
The major advantage of out-of-court restructuring compared to an in-court restructuring (such as Chapter 11) is its relative speed and low costs. Another benefit of out-of-court restructuring is that you have more flexibility, since you can propose different strategies to your creditors until one works. It is also private. In a Chapter 11 case, the company’s financial records become part of the public record. A public filing creates its own set of problems that didn’t exist before. A workout lets you negotiate with lenders and vendors all while keeping the issues you need to work out confidential. And when creditors agree to settle things this way, they are showing trust in your business and your management. Instead of declaring “You’re bankrupt,” creditors are saying, “Actually, we think you’re fine and we want to do business with you.”
So, how long will yours take? Out-of-court restructuring is a highly individualized process. Still, six to nine months, or less, is a realistic target if you have the cash to last through the talks, a manageable list of creditors and relationships worth something. The length of time it takes for an out-of-court restructuring will depend in large part on what you decide to offer and how well you negotiate. There’s no one size fits all answer. Because out-of-court restructurings are often an all-or-nothing bet, it’s better to do them sooner rather than later.
