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FACT: Many businesses fail. There are many reasons why a business fails or why a company declares bankruptcy. Most business bankruptcy happens because debt owed to secured creditors like banks and lenders or unsecured debt owed to vendors, suppliers and/or the government becomes unmanageable.
Things to Consider:
– Bankruptcy vs. Receivership?
– Receivership vs. Division 1 Proposal?
– Division 1 Proposal vs. Bankruptcy?
The decision you make for your business depends upon what options it has available to restructure, reorganize and repay its creditors. Getting help or advice is important to make sure that you have explored all of your options.
Bankruptcy, Receivership and Division 1 Proposals – What you need to know if your business is in trouble
Today I am covering a topic that many entrepreneurs wish they knew more about. If you think that your businesses may be in trouble and you need a little bit of direction to try and figure out what your options are hopefully this helps you. This is not meant to be an in-depth review, but it is meant to be a quick summary of the highlights of what you need to know about bankruptcy, receivership and division 1 proposals. So how does a business get to a place where the words bankruptcy, receivership, trustee, division one proposal, Notice of Intent and other fancy legal words get thrown around? Typically a business gets here because creditors both secured and unsecured as well as the obligations to banks, creditors, the government, etc. become overwhelming. An entrepreneur may find themselves in a position where they’re just not quite sure what to do. And so when debt becomes overwhelming and when cash flow isn’t working, it can lead to a couple of questions such as “what happened here?”
“How did we end up in this position?”
Most times there are a few key things that happen when sales get interrupted, fall off or slow down. Typically this means that all the future cash that your business needs is no longer available or costs are increasing silently until they cannot be paid. Because sales have dropped your business no longer has enough cash to pay the expenses of the business. Between sales falling and dropping or costs increasing, whatever is happening in those two buckets leads your business to a place where you may be asking: “Do we go bankrupt? Do we have other options?” An entrepreneur usually thinks that cash is the problem. I’m a believer that cash is never the problem – cash is just a resource that your business uses to try and get a better result. And so when you say cash is the problem, you may be fooling yourself. The problem is you don’t have enough sales or your costs are too high or your margins are unknown and uncertain. Between all of those things, cash is just simply reflecting to you what’s going on in your business or in some cases what’s not going on in your business. It’s either revenue or costs – one of those two things (or both) need to be fixed.
If your business is in trouble the first thing you have to ask yourself is: “Can we fix this, whatever this is?” Being able to answer this question will lead to three options that you’re going to want to consider as you decide what to do with your business: 1) bankruptcy, 2) receivership or 3) A division one proposal. Bankruptcy means that the fundamental problem in your business simply cannot be fixed. Receivership means that the problems in your business probably can be fixed, but a creditor like a bank is going to want to take control for a period of time until they have recovered their money. A division one proposal means that the problems of your business can certainly be fixed, but the business is going to need some time to sort it all out.
You might think your situation is unique, but businesses all fail for the same reasons. They fail because the entrepreneur might be good at the product or the service, but they don’t have any other people around them to help them understand the other things that they’re not good at and they just don’t know what they don’t know. Recognizing there are many reasons why a business is going to find itself in trouble, how do you know if the problems in your business can be fixed? The first question I always like to ask is: do you know how your business makes money? Can you point to a time in your history when your business was making money? Maybe that was last week. Maybe that was in your last fiscal year. But let’s take a look at that and figure out how your business is making money. Once you figure out how your business makes money, then you’ve got to ask yourself kind of the next set of questions:
- If we know how our business makes money, then why do we need to do?
- Do we need to increase sales?
- Do we need to offer a new product, a new service?
- Do we need new customers?
- Do we need to resell to existing customers?
- Do we need to get into some strategic relationships that would give us some new revenue opportunities or do we need to decrease costs?
As payroll is probably one of the largest costs for any business you need to ask yourself: “Does every single roll on our organizational chart contribute to our bottom line?” Desperate times call for desperate measures, and often it’s difficult to go to your staff that you’ve worked with for a long time to try and have a conversation about how their role contributes to your business.
After answering some basic questions, you have you need to ask yourself: What do we do now? Does the business claim bankruptcy? Does that mean we’re going to claim personal bankruptcy as owners? Do we need to leverage personal assets to raise more cash? How much do we need? As you think through these questions, you’re going to end up deciding on bankruptcy, receivership or a division one proposal.
What’s a receivership?
Receivership is a legal method that secured creditors can use to recover money owed to them by a business. If a business defaults on a loan obligation, then a secured creditor can appoint a receiver and their security documentation if it allows for it, or they can apply to the court to have a receiver appointed. A receiver only acts on behalf of the creditor it was appointed for. This is key because a receiver doesn’t act on behalf of all of the other creditors involved in a situation. A receiver will only act for one of the creditors. A receiver has the authority to take possession of any assets that were pledged under the legal security documentation granted and sell them to repay the outstanding debt.
What is a division one proposal?
A division one proposal is an agreement between a business and its creditors. It’s meant to help a business reorganize itself and its finances so that it can continue to operate and repay creditors in an orderly and timely fashion. When a business files a division one proposal, creditors can not begin or continue any legal action against the business.
What what is bankruptcy?
Bankruptcy is a legal procedure that provides businesses with relief from creditors when a business has become insolvent or incapable of paying its debts and obligations. A trustee is appointed after a business voluntarily makes an assignment of its property to creditors or by one or more creditors making an application to a court to have the business declared bankrupt.
Bankruptcy means that you are going to close the business down and a trustee is going to be appointed to manage that process and try to liquidate whatever can be liquidated to satisfy the creditors in order of priority of their claims. Going into receivership means the business still operates and continues to do what it needs to do, but it does so under the authority of a receiver who is acting on behalf of a creditor to try and get some money back. A division one proposal involves a trustee stepping in to make sure that the proposal that the business has made to its creditors is followed. If the proposal isn’t followed then the trustee is there to help the creditors and remedy the problems.
It’s important to remember when you’re thinking about what to do with your business that whether you get a trustee or receiver they will be acting on behalf of the creditors. They are there to do a job. They are there to follow due process to make sure that what needs to happen will happen according to law. You are going to need someone in your corner who can act on your behalf with your best interests in mind as it relates to the business on a whole. If you were to ask your creditors what you should do with your business, they’re just going to tell you to sell everything and pay them back. The truth is, sometimes you’re going to need to do more than that. You’re going to need to increase your sales. You’re going to need to correct and clean up the business and you’re going to need some time to do that. Creditors may not care and just want their money back which is where it can get a little tricky and you can create a little bit of friction. If you don’t have someone representing your interests or you aren’t sure what to do you may just end up doing whatever a receiver or a trustee tells you to do. And that may not always be the best option for you.
Many businesses fail. The statistics are high, but I believe that many businesses don’t need to. I think there’s a gap that exists in knowledge and experience. Entrepreneurs don’t know what they don’t know. It’s hard to ask for help if you don’t know what exactly you need help with. Bankruptcy becomes the default option that businesses will exercise as a result of ignorance. The truth is, bankruptcy isn’t the only option for a business that’s looking to survive. Where do you get help? Who do you talk with? It’s certainly a tricky problem to solve. But some individuals can help. Figure out if your business is worth saving. If so, why do you think that? What is it that needs to happen? Do sales need to go up? Do costs need to go down? Some mix of both? If you think your business can be fixed then you may want to avoid bankruptcy. But what does that mean? You’re going to need to talk to your accountant, to your lawyer, to other people that you trust to try and help you navigate through your decision. In some cases, the business does just need to be shut down. There’s no question about it. Not every business ends up surviving troubled times, but a lot of times there are other things that can be done. You just need someone creative, who can look at all of the pieces of your business and try to help you make the best decision possible.