Chapter 11 lets a company that can’t pay its bills keep doing business. It can also leave the business with far less debt. It’s a complicated process that can be very expensive, involving interim management, reorganization plans, recovery alternatives and exit strategies, all under the scrutiny of many stakeholders with many demands. At Delancey Street, we negotiate with merchant cash advance funders and lenders on behalf of business owners, and owners who are considering bankruptcy often ask us what life looks like once a plan is approved. Getting a plan confirmed is a significant milestone in the process and an important accomplishment. The work, however, is not finished. Here are six things that tend to happen next.
Big Hurdles to Overcome
First, the hurdles keep coming. Companies that make it out of bankruptcy still have big hurdles to overcome. Addressing issues like fresh-start reporting and the broader need to manage expectations in concert with existing stakeholders are among the biggest obstacles. The capacity to navigate these hurdles is essential not only to maintain the company in the near to medium term but also to provide a sound basis for longer-term growth prospects. Often, even the best strategy for the problems you’re facing can be hard to find. In the short run, it can be hard to tell what will even help you recover. It doesn’t help that the case itself takes a toll. Going bankrupt is a stressful, depressing, expensive proposition. The important thing is that you emerge with a plan that makes sense for you and your business. Don’t let the bankruptcy beat you up too much. Keep your energy and enthusiasm for your business.
Second, how your business does after it exits depends a lot on what kind of case it went through. Here’s the twist. A faster bankruptcy process (like a pre-packaged or prearranged plan) often leads to more problems after the bankruptcy than a freefall bankruptcy followed by operational changes. A quick pre-packaged or prearranged bankruptcy only does things like write down debt or convert debt to equity, and rarely makes any operational improvements. Meanwhile, a freefall bankruptcy is a bigger hassle, but it can lead to changes that make the business more profitable.
Third, the debt may still be too heavy, and the old problems may still be there. Often, companies emerge from restructuring with the same underlying problems, and are overleveraged. It’s not just a bad balance sheet that’s a problem. It’s what has eroded the business that makes that capital structure unsustainable. Rightsizing the balance sheet is really important in bankruptcy, but it’s not really the fix. Firms leaving Chapter 11 frequently have not reduced their debt levels enough. They are left with highly leveraged capital structures.
Fourth, the cutting has to give way to building. You can’t cut your way to growth, mid or long term. Cutting can save your life, though, much like an amputation can save the rest of your body. You need investment, capital expenditures, and more and better human capital to grow. Bankruptcy can help a lot, because in Chapter 11 you can get out of crushing contracts and leases more cheaply than you could without bankruptcy, but usually more than one thing kills a company.
Big Black Mark on a Company
Fifth, your credibility takes a hit, and how hard depends on your industry. Bankruptcy is still a big black mark on a company, even though it’s much less harmful than it used to be. It affects different sectors differently. Retailers usually recover well, as long as they honor gift cards, returns and refunds after the company comes out of bankruptcy; customers are unlikely to hold a grudge. Manufacturers have long lead times on orders, so trust is super-important. Distributors really suffer because it’s so easy for skeptical customers to switch. Companies should let customers and suppliers know that a bankruptcy filing usually doesn’t mean a company is going under. It’s just about figuring out who gets to own it once it’s all done. They should assure them that all of their obligations to customers (and possibly suppliers) will be maintained. Trust is important during the whole process, from start to finish. Many first day motions are intended to maintain trust with suppliers and customers. A company should recognize how much faith it will lose and start preparing for life after emergence before it ever files.
Rebuild a Company
Sixth, you get a clean slate, and what you do with it matters. Coming out of bankruptcy gives you a clean slate and the chance to reconnect with your suppliers and customers. Management has a chance to set a new strategic plan that will establish new financial metrics for measuring the business’s performance and reset the brand in the marketplace. A company coming out of Chapter 11 should take out as much cash as it can. More than you think you need, if at all possible. That’s to reassure your suppliers and other important creditors that you’re back in business. It’s also to buy yourself some breathing room if things go south. Be sure you’ve fixed what’s wrong with your business, and think about whether to bring in some new people in critical positions (management and board) so outsiders see a change. Then make sure you can tell outsiders (and employees) about your turnaround story. You should have a post-bankruptcy story ready before you exit bankruptcy. You have to explain why the new capital structure is easier to handle than it was before you filed. You have to communicate with everyone, including your employees.
Can a company get over the “taint” of bankruptcy? That depends largely on whether it fixed the problems that caused the bankruptcy. Often, though, it doesn’t and it sticks around for a while, unnecessarily. Suppliers want to work with you again, employees want to work for you again, and customers want your products. It takes time to rebuild a company and get past the defeat of Chapter 11. Be patient.
If you are considering filing Chapter 11, keep in mind that getting out does not mean the challenges are over. The period after emergence is just as important as the plan’s confirmation, so consider what your business will be like and what you will say to customers, suppliers and employees on the other side before you ever file. Delancey Street is a business debt settlement company - not a law firm. Our advisors negotiate with MCA funders and lenders for less than you owe. When bankruptcy, like Subchapter V, is the better option for an owner, we refer the owner to a qualified independent bankruptcy attorney. Our first consult is free and confidential. If there’s an option that’s cheaper, we’ll tell you on that first call.
