One of the gratifying aspects of hosting a podcast is that it links me up with other podcasters who are covering the business world. Sometimes we even appear on each other’s shows to share stories from the trenches. When that happens, it evokes lessons that I’ve learned along the way in my own entrepreneurial journey.
That’s what happened last month when I appeared as a guest on The Business Transition Sherpa podcast with host Laurie Barkman. We talked about what it was like to go through a business bankruptcy 13 years ago. The time I spent with Laurie discussing this challenging but educational era in my life inspired me to write this post.
Although entrepreneurs tend to view the legal process of reorganizing a company’s financial obligations as a sign of failure, I learned that it doesn’t have to be a decision based on defeat. Bankruptcy can – and should be – deployed as an effective tool of recovery. It doesn’t have to cause feelings of shame and the erosion of identity, confidence and self-worth.
This realization was so profound that I wrote a book about my experience called The Turnaround. I felt driven to tell the story from the perspective of being inside the fishbowl of a Chapter 11 bankruptcy process. As an insider, my perceptions completely changed. I wanted to share the message that it’s not a taboo topic that needs to be perceived negatively.
Multiple Divisions
My bankruptcy story began when I joined a business in 2006 as the chief financial officer. We were a slightly profitable $10 million company. There were three divisions. The first was a publishing service that tackled outsourced work. The second was a staffing division where we dispatched editors and content development people to government agencies and associations. The third hosted in-person live training.
The business was doing reasonably well and growing little by little, so we brought in a new management team and began investing heavily in sales and marketing. But then market circumstances dealt us a heavy blow – the 2008-2009 economic crisis demolished our training business. Clients’ marketing spend vanished and revenue quickly dropped in the training business. It went from a healthy and sustainable level of millions of dollars down to almost zero. We were officially in a death spiral.
Whack-A-Mole
Our executive team started managing cash as best we could. We survived until 2011 by juggling our accounts payable and renegotiating with the bank. But the pressure just kept building. The measures we took were only leading to marginal improvements and postponing the inevitable. It was like playing Whack-A-Mole – we would negotiate a payment plan for one vendor, and another would pop up. We didn’t step back and ask ourselves what significant measures we needed to take.
Eventually we talked to an attorney. After reviewing our situation, he recommended that we consider Chapter 11 or Chapter 7 bankruptcy.
A Chapter 7 bankruptcy would mean we’d stop our business and hand it over to a court-appointed trustee. That trustee would collect and liquidate any assets they could, then make payments to creditors according to seniority. This type of bankruptcy is used for businesses that are beyond the point of recovery.
The Chapter 11 process is similar, although the big difference is that the company is allowed to continue operating under court supervision. The business is reorganized with a goal of emerging from bankruptcy as a viable business.
Pressing Pause On Debts
The day you file for Chapter 11 bankruptcy, all your creditors get notified that they are officially in a holding pattern. It’s like pressing pause on your debts. The essence of the message is that we’re going to work this out over the next 12 to 24 months, so please stand by. Creditors are asked to verify their claims by a date set by the courts. Eventually, those creditors will receive payments according to the court-approved bankruptcy plan.
In our case, one of the reasons we decided the Chapter 11 process was right for us was that we needed relief from the long-term commitments of the training business. There were 70 computers on lease plus thousands of square feet of real estate we used to run our in-person training sessions. These long-term contracts were weighing us down. On the other sides of the business, we had had very happy and loyal customers. The bottom line: one-third of our business was dragging the whole operation down.
Shedding Fixed Burdens
The Chapter 11 bankruptcy process allowed us to reorganize. The fixed cost associated with the training business could be alleviated through bankruptcy. We were permitted to terminate our leases, return the hardware back to the vendors, and break free of our real estate commitments.
Some of our concerns were that the employees were going to quit, the vendors wouldn’t work with us, and our customers wouldn’t do business with us ever again. Those fears turned out to be unfounded. The employees appreciated that we were going through a formal process to get the company out of trouble, so they stuck around and rallied around the opportunity to reorganize and rebuild the business. The vendors knew they would be taken care of in a manner that was fair to all the creditors. And we weren’t abandoned by our customers.
Our bankruptcy case was small and took 18 months, which is on the shorter side. I vowed to lean in and learn as much as possible about the process, and to that end, I studied to become a certified insolvency and restructuring advisor. When combined with my finance background, it helped keep the cost of the overall process lower than normal.
Hope Isn’t A Plan
As entrepreneurs, we have so much of our emotions tied up in our businesses that we tend to hang onto them for dear life. That can drive us to do silly things such as skipping paychecks and running up credit card balances. You can set a six-month goal to improve revenue flow so that your profitability improves. But if you haven’t moved the needle enough when that time comes, it’s probably time to look yourself in the mirror and stop tying your outcomes to hope.
I encourage entrepreneurs who are going through hardship to seriously consider Chapter 11. Take a step back and have a conversation with a bankruptcy attorney. This proven tool is there for you to use. It’s a legal procedure designed to help businesses recover. It is not criminal or corrupt. It simply indicates that you got caught in tough times – that the economic factors affecting your bottom line shifted on you quickly. That’s nothing to be ashamed of. And you can come out other end of it with a much stronger business. That’s worth putting aside preconceived notions in pursuit of a pragmatic solution.
