Managing Business Insolvency and Bankruptcy

4. Try Selling Outright

A troubled business (or division) will often thrive in someone else's hands. And a whole business is generally worth more than the sum of its parts. There may even be a job with the new owner.

Works best when…the organization has an asset of particular value, one or more distinctly profitable divisions, or a strategic fit with a particular suitor. Still, buyer financing is hard to come by, and buyers know time is on their side. Good suggests creative dealmaking, such as seller financing or agreeing to a low upfront payment.

In court or out? A sale can occur under Chapter 11, but a debtor who wants a structured proceeding without the high costs of bankruptcy can arrange what's known as assignment for the benefit of creditors. Here, an independent third party (the assignee) disposes of the assets under state law.

5. Liquidate

Selling a business in pieces usually brings the lowest price and puts everyone out of work. Liquidation can be self-managed or conducted by a appointed trustee under Chapter 7.

In court or out? Most turnaround consultants say your own efforts will raise more money than a court-sanctioned process -- a trustee is not likely to go the extra mile -- and thus earn more goodwill among creditors.

On the other hand…running your own liquidation sale can be emotionally draining and -- because you may need professional help to sell specialized equipment or other assets -- expensive. Chapter 7, says Caplan, has the virtue of extracting you from "a really negative environment that makes restarting your own life very difficult."

The Psychology of Insolvency

Get objective advice. Because entrepreneurs invest so much of their lives in their ventures, it's understandable they are often the last to recognize a dismal situation. So if you see warning signs, seek an independent adviser who can tell you to stick to your guns or help you decide how to tackle insolvency. You'll almost certainly need an adviser if you hope to reorganize, because your lender is unlikely to take you at your word that you can turn things around. Lenders are increasingly requiring businesses to hire turnaround consultants.

Communicate regularly with stakeholders. Difficult as it may be, answer the phone when creditors call, and keep them informed, even if you have nothing good to report. It builds trust and may help persuade a creditor to participate in a reorganization. Similarly, you will depend on your employees to see you through to the end, and they, too, will share in the consequences. You owe it to them, says Kristin Johnson, the director of the Northern California SBDC Network, to give them as much information in advance as possible and support them as they seek new work.

Keep your emotions in check. You may believe that your creditors are trying to bury you, and you may even be right. But poise will serve you well in the long run, especially if you seek work in your industry or hope to plan a new venture. "You're going to be living in that community for a long time," says Maggie Good, "so you want people to think that even though your company failed, you did whatever you could to get what you could for them."

The Vanishing Chapter 11

Chapter 11 bankruptcy is not so widely used as it once was. Companies with less than $2.2 million in debt, in particular, face a truncated process that leaves them at a potential disadvantage, says Dallas bankruptcy attorney Paul Keiffer. Moreover, attorneys say that changes to the law in 2005 made it harder for debtors to conserve cash or obtain financing during a Chapter 11 proceeding. Partly as a result, the rate of Chapter 11 filings dropped by more than a third. And now, lawyers say, less than 25 percent of companies that file for Chapter 11 emerge successfully reorganized.

That said, turnaround consultants and lawyers insist that a company's odds of succeeding improve dramatically if it has a plan going in. Most businesses, they say, don't. "If you have two weeks to a month to prepare, that's a real luxury," Keiffer says.

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