By: Donald L Swanson
When large businesses are in financial trouble, their banks commonly require them to hire a CRO (a Chief Restructuring Officer) as a condition for extending loans. The CRO can do a variety of things. But one of the essentials is an advisory role:
–Evaluate the financial troubles and recommend a course of action.
And the CRO’s budgeted fees are funded by the extended loans.
It Rarely Happens for Family Businesses
In smaller businesses, however, this CRO advisory role almost never happens. Instead, when a bank starts making demands and applying pressure, the business is left to fend for itself. This often ends badly, with the business taking little remedial action and then filing an emergency bankruptcy to stop a replevin action or deed of trust sale. The bankruptcy is then in a “Fire, ready aim!” mode.
This is a shame!
Why Not Consider a CRO Advisory Role?
I’ve always wondered why banks for smaller businesses don’t require a CRO-type professional to evaluate and advise a struggling debtor. When a family business is in financial trouble, why doesn’t its bank do what banks for larger businesses require?
- Why not, as a condition for extending a loan, require the hiring of a seasoned bankruptcy professional to evaluate the business’s financial troubles and recommend a course of action?
- And why not fund the professional’s budgeted fees with proceeds from the extended loan?
A bank should want to do such a thing to prevent what commonly happens. What financially-strapped family businesses commonly do is this:
- Management thrashes about in a buying-time mode, hoping for something positive to happen, while the bank sees nothing but delays and broken promises;
- The relationship between bank and management deteriorates significantly, distrust abounds, and the bank moves toward a collection mode;
- Then, collection efforts begin with a replevin filing;
- Whereupon, management starts looking for a bankruptcy attorney to stop the replevin;
- With little-to-no planning, and without even a basic understanding of Chapter 11 rights and obligations, the business files bankruptcy; and
- The business scrambles to prepare schedules and seeks authority to use cash collateral on an emergency basis—it’s a “Fire, ready, aim!” bankruptcy.
Banks Aren’t on Board With a CRO-Type Advisory Role—But Should Be
My impression is that banks lending to family businesses, (i) haven’t given the CRO-type advisory role much thought, but (ii) to the extent they have, they view it with disfavor. I’m not sure why, exactly, but here’s my guess:
- They see the cost as probably prohibitive; and
- They are concerned that a CRO-type professional might find something wrong with their loan and lien documents—and alert management to the problem; or
- They are afraid the bankruptcy professional will find other ways to damage the bank’s interests.
Regarding such concerns, (i) the bank and borrower can set a budget and hold the professional to it, (ii) the bank needs a documents review by its own attorney anyway—and in all events—before litigation ensues, and (iii) the bank has no control over any professional the business might retain—so, why not assure that the business starts with a good one.
Common Goals for Bank and the Business
But here’s the deal for many struggling family businesses: a bank and its financially-strapped customer are often on the same side. They frequently have common interests and goals in the situation:
- Maybe the immediate culprit is a bunch of MCL loans sucking cash out of the business at an alarming rate;
- Maybe the business needs to liquidate some non-performing assets and is prevented from doing so by out-of-the-money lienholders;
- Maybe the business needs to jettison some unsecured debt that’s dragging it down;
- Maybe the business is in a sub-chapter S corporation and can’t liquidate without creating huge tax liabilities for shareholders.
In any of the foregoing circumstances, a strategy might be found that both the bank and the business can support and pursue. Maybe the strategy will involve a bankruptcy filing, maybe not. But the only way to know is to have an independent professional evaluate the situation and recommend a course of action, before relationships deteriorate beyond repair.
Here’s hoping, and recommending, that banks with family business customers consider utilizing a CRO-type advisory role for dealing with financial stress!
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