When a business is backed up against the wall and out of cash, the easiest thing to do is pay the vendors later. We see a lot of companies out there running on fumes. By the time an owner calls us, they have usually been struggling to pay their bills for a while. That means the terms they’ve been granted from each vendor are usually out the window. It isn’t unusual for a company in this spot to be more than 60 days behind on its payables overall, and sometimes the vendors who have been hurt the most haven’t been paid in three months or more.
But bankruptcy isn’t the only way out. More and more troubled companies are fixing their balance sheets outside of bankruptcy court. Partly this is because there’s new capital available to help distressed companies. Beyond that, creditors are pushing to keep costs down, and owners who file lose a lot of control of their own companies. Out of court, negotiating can often let you arrange favorable terms with creditors who already know they are badly impaired. That means getting good at negotiating is more important than knowing your legal rights. This post walks you through six ways you might be able to restructure your debts to vendors out of court.
Look at It from Their Chair
The first way is a change of mindset. People in trouble usually think of stretching vendors as a necessary evil. They don’t like it, but it’s a part of the situation they are in. That’s the wrong attitude. Telling yourself you “have to” push out your vendors will just make the whole process harder. Try to look at it from their chair. Put simply, if you do not understand where your suppliers are coming from, you will never work effectively with them. The numbers grow faster than most owners expect. Take a company, for example, which sells $100 million a year at 40% gross margin, with days payable of 30. That would be $5.0 million in accounts payable. If days payable stretches to 75, accounts payable jumps to $12.5 million. Left unchecked, your suppliers will start asking for money upfront for new shipments, then they sue; then they just stop shipping and providing services.
Comprehensive Restructuring Plan
The second way is a comprehensive restructuring plan. Even if you know you need to deal with unpaid vendor debts and overdue payments, do not try to work this out before you have your plan. If you start by piecemealing everything you will go crazy and burn through all your goodwill. You cannot restructure your vendor debt one business at a time, because without an overall plan you have no way of knowing what anyone else is really going to accept, and you can’t know when the numbers are so bad that going into bankruptcy is a better option than staying out. With the plan in hand, you can work out how much your vendors will need to concede.
Third, sort your vendors into groups. Not all debts are created equal, so the same recovery rate won’t make sense across the board. Your mission-critical suppliers go in one group, the vendors of stuff you could get somewhere else if needed go in another, and so on. Then set a recovery rate target for each. Mission-critical suppliers need to get paid more than vendors of easily-replaced items. Then add it up from the bottom. That gives you a realistic number for how much forgiveness to aim for. Now you’ve got something to bargain with.
The fourth way is to settle on paper you have already prepared. You’ll save yourself time and money if you prepare a standard template with blanks to fill in for the specifics of each deal. That way you won’t have to drag your lawyer into every minor dispute. You’ll have a lawyer draft the template, and it should be flexible enough to serve most of your vendor negotiations. Expect to go off the script a bit with some vendors, but most claims should settle on the template itself.
Fifth, open discussions with all your vendors. This is best done with a simple form letter, sent to every vendor, laying out the current situation, the goal of the out-of-court restructuring and how the settlement process will work. It often helps to include a financial package explaining the reasons for the restructuring. Include a contact to follow up with, and be sure everyone hears the same story.
The sixth way is to keep track of everything, with bankruptcy in view the whole time. When you have a lot of partners in settlement talks, you can expect that those negotiations will take up a good chunk of management’s time. Set up a proper way to track what you’re offering and what you’re hearing, so you and your team aren’t trying to wing it when you need to answer a question. That will give management and advisors a way to stay on top of things. Bankruptcy should always be one of your reference points during a negotiation. It doesn’t mean you’ll have to do it, but knowing what the worst-case looks like tells you how much you have to gain (or lose) by working a deal. If the company files for bankruptcy, there are some kinds of claims that get higher priority than others, so keep a close eye on potential 503(b)(9) claims and allowable landlord claims.
A substantial restructuring of vendor debt can be done without a bankruptcy filing. The catch is that the company needs to commit to a robust process, and have a sound team of advisors ready to help. Problems with vendors don’t happen overnight, and fixing them isn’t fast or easy either, in or out of court. Consistent success comes from making good decisions about what the future should look like, and then carefully managing each step that gets you there.
Business Debt Settlement Company
Delancey Street is a business debt settlement company, not a law firm. Here’s what we do: if you’ve got a debt you can’t pay, you call us, and we look at it free and confidentially. We negotiate with funders, lenders and other business creditors for less than the full balance owed. If it looks like bankruptcy is your best shot, we’ll let you know and send you to the right place.
