June 27, 2017

Small Business Bankruptcy Basics

CPCC

My friend and fellow bankruptcy attorney Susanne Robicsek and I recently spoke to a group of local small business owners gathered at Central Piedmont Community College in Charlotte, North Carolina. In this tough economy business owners are wise to acquaint themselves with the legal options they may need to employ if their companies hit the shoals.  It was a pleasure spending an afternoon trying to keep people OUT of my law office.

Separate the business from its owners

One of the most important things we discussed at CPCC is the distinction between the liabilities and assets of the business, on the one hand, and the liabilities and assets of the business owners, on the other. The very first thing a client must do when sitting down with me or any attorney is list business liabilities that the owner has personally guaranteed. Small business owners frequently make the mistake of putting everything in the business name but backing everything with a personal guarantee, making it very difficult to split the client from the business.

This fusion of business and personal entities shows up in the language clients use. They say “I did this” instead of “the company did that.” I call this the “I factor.” People with a high I factor have a difficult time making the right business decisions. A business is a business. It exists to pay its owners, not the other way around.

Restructuring a business

Susanne and I also presented information on factors to consider in determining whether a financially troubled business is worth trying to save.  For example, a good attorney will determine what level of debt the business can afford carry given its revenues, then see if there is a way to restructure the debt and save the company.

I often see a business owner in trouble about two or three years after startup when the SBA loans can’t be serviced. When I start talking to these business owners it amazes me that most don’t know their break-even point.

Another warning signal that a business needs to be restructured is an owner that isn’t funding a reasonable compensation to themselves. I have to ask,”Why are you in business?  To live the nightmare?”

It’s strange to me that people go to the bank with an elaborate business plan so they can get a loan, then they stop paying attention. You must compare your actuals to your plans. If you don’t you ‘ll be completely overwhelmed.

I tell people in financial trouble to send me a business plan week by week, then month by month not because I need to see it for my sake, but because they need to instill discipline in themselves and get my objective feedback. If you’re going to get out of financial difficulty, you’ve got to be realistic. A business plan helps instill discipline. A business plan also gets business owners out in their businesses taking action instead of sitting behind their desks fretting.

People are able to talk about sex and STDs all day long, but not money

If the attendees take half my advice I’ll never have to see them in my office. If any of them do I’ll acknowledge their bravery. Bravery? Yes, walking through my door means you’ve admitted you need help.

When you walk through my door you know you’ve got an honest and objective person, not a yes-man. Will my advice always be right? Heck no — just ask my ex-wives.  But I will tell you what I see about your situation and what my experience has shown to be effective for others in your shoes.