Informal Mediation for Small Businesses in Financial Stress

By: Donald L. Swanson

Pre-litigation mediation opportunities are provided in many farm states before a creditor can pursue legal action against a farmer on a delinquent obligation.  Such early mediation efforts are highly effective in resolving disputes.

Similarly, small businesses in financial stress and their creditors might engage in early efforts to forestall credit disputes.  An early neutral evaluation is one option.  I call it, “informal mediation.”

imageInformal mediation looks like this:

–small businesses experiencing financial stress and their creditors engage a third party neutral to help address financial stress, before the stress creates an adversarial relationship.

–A professional with mediation experience can help the parties understand what bankruptcy and other legal possibilities might look like and then use those possibilities as a backdrop for considering other options.

Advisory CRO Analogy

I know.  I know.  Most people are not doing informal mediation like this.  But I liken this proposal to the advisory function of a Chief Restructuring Officer (“CRO”) position in large business cases.  The CRO position developed from virtual-nonexistence in the early 1990s to standard-practice in today’s large business cases.  The advisory function of a CRO is to help a business evaluate and address its difficult financial circumstances.  An advisory CRO provides expertise in analyzing financial difficulties, educates the parties on what a bankruptcy might (or might not) accomplish, establishes credibility for decisions that are made, and avoids costs (both economic and otherwise) of an ongoing legal fight.

An early neutral evaluator can provide similar types of advisory benefits and effectiveness to a business / creditor relationship that suffers from financial stress.

imageInformal Mediation Details

Here is how an informal mediation might work.  It begins, in the midst of financial difficulties, when a small business and banker are discussing loan renewals for another year.  The parties agree to utilize informal mediation and select a professional.  They then provide a complete list of the small business’s assets, liabilities and financial condition to the professional and describe the financial history and current difficulties.  The parties then meet in one or more sessions with the professional to evaluate and address their situation.

Regarding costs, the small business and creditor work with the professional to set a budget.  My experience is that professionals like this are highly motivated to accommodate budgetary guidelines set by the parties.

Conclusion

Regrets over opportunities-lost can be avoided by taking proper action at an opportune time—i.e., when financial stress reveals the need to take action.  And informal mediation can be an effective tool for seizing the opportunity.

[Note:  An earlier version of this article is published as a Guest Article on January 6, 2016, by the Iowa State University’s Center for Agricultural Law and Taxation at this webpage.]

**  If you find this article of value, please feel free to share.  If you’d like to discuss, let me know.

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