Triage and Prescriptions for Ailing Businesses

By: Donald L Swanson

Business activity rarely stands down.  Yet, it can happen from localized and short-term disasters like a tornado or a blizzard; from regional events with extended effects, like Hurricane Katrina; or from a national event like 9/11.

But the corona stand-down of today is different.  We are in a worldwide pandemic, with no end in sight.  The result is that many, many businesses will struggle—and some will fail.

What follows is a triage for ailing businesses: a sorting into three broad categories, with general prescriptions for each.

The Dead and Dying

Imagine a Mom & Pop operation of several sports bars.  In the best of economic times, Mom & Pop struggle and barely get by. They and their lenders and landlords and suppliers had been looking toward a combination of March Madness and St. Patty’s Day to get their delinquencies cured and their finances back in line.  But those events did not happen.

Today, unfortunately, their sports bars are in the business equivalent of hospice care.

—Prescription for the Business

Today’s corona prescription for Mom & Pop is this: to develop a plan for shutting the business down and addressing their personal financial problems.

—Prescription for the Owners

The personal obligations of Mom & Pop are likely to include guaranteed bank and lease debts, liability for withholding and liquidation taxes, credit card debt, and liability on merchant cash advance loans.

Personal bankruptcy is probably necessary for Mom & Pop, where they will face strategic questions like, (i) whether Chapter 7 works for them, (ii) whether they qualify for Chapter 13 or Subchapter V relief [Fn. 1], and (iii) how they might deal with tax liabilities.

The Ailing but Hopeful

Imagine a concrete supply company that serves the commercial construction industry.  It’s owned and operated by a couple of skilled entrepreneurs. Their concrete business has been successful for most of the past decade. But an ill-advised expansion and a bidding mistake in the recent past created financial problems. By January and February of 2020, they were finally getting through the worst of those problems and looking ahead to the new construction season (in the then-booming economy), with hope and high expectations.

Today, unfortunately, the expectations are gone.  But hope remains.

—Prescription for the Business

Today’s corona prescription for the two entrepreneurs is this: to develop a plan for hunkering down, conserving cash, surviving until the stand down ends, and looking to tax credits/incentives and loan options for help.

[Note: Their ability to hunker down and survive is dependent, first and foremost, on the continuing availability of cash. Cash to a business is like blood to a body: it is essential for life. Assuring the continuing availability of cash is task # 1 for the two entrepreneurs.]

—Prescription for the Owners

Meanwhile, the two entrepreneurs need to be looking at their own financial situation, against a worst-case scenario. Now is a good time to review the exposure they might have for, (i) guaranteed business debts, (ii) pass-through taxes from a liquidation of the business, or (iii) avoidance liability (e.g., preference or fraudulent transfer) in a bankruptcy filed by the business. Then, they need to consider what they might do to protect themselves financially—but not get themselves in trouble in the process (e.g., transferring a residence to a close relative is, typically, a very-bad idea that leads to trouble).

A worst-case scenario for the business (i.e., it can’t survive until the stand down ends) is also a worst-case scenario for the two entrepreneurs. That’s because, if the entrepreneurs need a personal bankruptcy, they probably have too much debt for Chapter 13 or Subchapter V relief [see Fn. 1], they might not qualify for Chapter 7 relief because of prospects for earning money in the future, and they are subject to the absolute priority rule and a five-years plan requirement in a regular Chapter 11.

[Note: Advising these two individuals, effectively, in such circumstances is one of the more difficult tasks for bankruptcy-type professionals, requiring highest levels of expertise, experience, creativity and judgment.]

The Strong and Resilient

Imagine a professional services firm with a great set of clients, a superb and profitable business model, a low-to-no debt load, and a group of committed professionals.

Today, unfortunately, they are scrambling to maintain a semblance of business-as-usual.

—Prescription for the Business

Today’s corona prescription for the firm is this: to focus on treating its employees well and being a good corporate citizen, while assuring its own continued viability.

Even this firm must be aware and diligent. Business activity can dry up in a hurry, while expenses continue on. Cash reserves can dissipate quickly. So, as with other businesses, preserving and conserving cash and credit reserves must be a highest priority.

—Prescription for the Owners

Owners are probably fine for now.  But this would be a good time to check for any guarantees that might be out there.  Moreover, before the firm takes on new credit, the owners need to have a clear understanding of the extent to which they are incurring personal liability, if any, for that credit.

Conclusion

The corona pandemic has created a worldwide business stand down.

The stand down creates huge problems for businesses of all types. The foregoing provides a triage (sorting) of businesses into three broad categories and offers general prescriptions for each.

If you’d like to discuss the triage and prescriptions described above, please give me a call at 402-343-3726.

Footnote 1:  The debt limit for Chapter 13 eligibility is $419,275 of unsecured debt and $1,257,850  of secured debt, under 11 U.S.C. § 109(e).  The debt limit for Subchapter V eligibility is $2,725,625, under 11 U.S.C. § 101(51D)(B).