The process of turning a company around after going through a bankruptcy can be daunting, even when the necessary changes are not complicated in themselves. It’s important to remember that bankruptcy laws favor the debtor. Bankruptcy offers a chance to wipe the slate clean and start over by providing protection from creditors and opportunities for reorganization.
Personal integrity is crucial. In smaller companies, where startup money may have come from family or friends, business owners must communicate honestly and often with those who provided funding. Not only do investors deserve to know what’s up, but they may have some good ideas for reorganization.
Timing is also important: you should try to file for bankruptcy before creditors take your business to court. Once you file for Chapter 11, your business will have court protection and creditors will be kept at bay, allowing you time (typically 120 days by court order) to come up with a reorganization plan. The plan will need to be agreed upon by all creditors. If you fail to present a reorganization plan within the permissible time period, creditors can propose their own plan.
The first thing you must do in a turnaround situation is identify the two or three things your company does well and build around them. Anything else should be discontinued, sold, or outsourced. Immediate action is crucial. Executives at a company in trouble have to work quickly because they’re not only losing money, but may also be losing employees. It’s tempting to buy into the notion that your company will weather the storm, rather than aggressively making essential changes, but this kind of thinking can be harmful and self-destructive.
Focus on financial measures within your control, such as cash flow and debt reduction. Overhead should be slashed, accounts receivable aggressively pursued, and terms renegotiated on accounts payable. Companies planning to reorganize may need an infusion of fresh blood at the top, because the executives in charge when the company got into trouble may well be partly to blame.
If you’re a smaller business owner who relied on family support when starting out, you may find that your family may no longer be willing — or able — to help after failure. With relatives tapped out, you’ll want to go to the bank for funding. However, conventional financial institutions may not be impressed by a history of failure. At this point, private investors or venture capitalists may be a better choice. These more sophisticated investors are often willing to take a risk on business people who have failed and learned from their mistakes. This is especially true in fast-growth companies such as restaurants, franchises, or high-tech, universally understood to be inherently high-risk. Finding capital will not necessarily be easy or instantaneous. You’ll need to toughen up and learn to move on after rejection.
It’s also crucial for the business owner or CEO in a turnaround situation to figure out what’s really going on at the company and how improvements can be made. When it comes to redesigning the management team, a new CEO can often find excellent people at the level below the top decision makers. These employees, whose voices weren’t heard in the past, have good working knowledge of the company and a lot to contribute. The CEO should find ways to get unfiltered information about what is really going on. Avoid rigid use of the chain of command, and be receptive to complaints and comments from all employees.
Most of all, make continued and concerted efforts to communicate with customers, suppliers, and employees. Do your best to avoid leaving a trail of unpaid suppliers and angry customers. Most experts agree that an honest, forthright, and trustworthy business owner is likely to get a second chance.