Dissolution. Clients like me because I’m clear, blunt, and straight to the point. So here it is: a lot of businesses won’t survive the current virus crisis. I know it’s only been a week, but there’s a reality you may have to face, and that is the crisis won’t be lifted any time soon. Even a few more weeks before businesses are allowed to reopen will be catastrophic for many, depending on the industry. The longer the business prolongs closing, in my opinion, the worse the process will be, whether bankruptcy or dissolution. Protect the owners’ assets and minimize any loss by starting now, as soon as your gut tells you it’s time to wrap it up. It’s not going to be pleasant for many.
WHAT TO DO IF YOUR BUSINESS FACES DISSOLUTION
There’s many steps that small and mid-sized businesses can start taking now to prepare for a possible closing event. The first is to recognize the signs that the business is headed towards closing. Obvious signs for many are the mandatory closing by government order. If your business can wait it out for a few weeks then reopen better than ever, great. Or, maybe it can wait for government largesse to weather the coming slow times even after reopening. It’s your business, you’ll know which applies.
But if you project out the potential success of your business after the quarantine is reduced, and that outlook is not hopeful, it might be time to shutter the windows, liquidate, and return another day.
KEEP COMMUNICATING
That’s one thing my clients know me for – it’s that I advocate talking with all interested parties. Looking for solutions. Working out disputes before they head to court. Your business might need to cancel or reduce regular deliveries; or ask for new financing terms on debt. On the other side, you may have to reduce your invoices to get paid. Offer discounts for quicker payment or any payment. Yes, there are many that will routinely abuse vendors in order to get discounts on deliberately late payments. But you likely already know which businesses those are, and have hopefully weeded them out of your customer list. These simple steps can reduce your debt service, and bring in some needed cash.
REDUCE EVERYTHING
This is a societal problem we’re facing. It’s not just that you picked a slow retail location, or there’s been a two day snowstorm, or it’s the seasonal slow period. Everyone needs to hunker down. That means reduce staff. You might have to return under-used equipment to the vendors if you’re leasing. Maybe cancel routine service contracts for items that can either wait, or the work can be done by the owners, at least temporarily. Yes, owners, you’ll be doing extra shifts. You can sell under-used equipment too. It’ll be a fire sale, but cash in hand is better than nothing right now.
CLOSING IT DOWN: THE FINAL DISSOLUTION
Most failing corporations or limited liability companies actually don’t need to file bankruptcy. The same statutes that created your business also have dissolution, or winding down procedures that, if properly followed, will serve to reduce the risk of individual owner liability for business debts. This is where having an experienced attorney like myself can be a great way to efficiently handle the closing of the business.
The process is similar to bankruptcy, but you do it yourself. It’s often quicker, cheaper and easier than filing for bankruptcy, plus it doesn’t have the BK stigma attached.
Like bankruptcy, the business marshals its assets; determines liabilities; and presents the creditors with a plan to pay them at least something. This process, when done as soon as the owners realize the business needs to be closed, usually preserves more assets to be distributed then when owners wait until the situation is dire. Depending on the nature of the business, there may even be assets to be distributed back to the shareholders.
BENEFITS OF VOLUNTARY DISSOLUTION
This benefits the owners and creditors because their knowledge of the industry, and industry contacts, will help maximize the value of assets sold. A bankruptcy trustee, on the other hand, just lists them for sale and sells them to whomever is willing to paym, without shopping for the best price.
Conversely, in a court ordered business liquidation event – Chapter 7 Bankruptcy – there’s usually not enough assets to pay creditors because the owners waited too long to decide to close down. They ran up the debt on a hope of a turnaround. This also means there may not be any assets left to distribute to owners. Chapter 7 does have some advantages though, like being able to cancel long-term leases for equipment (e.g. fleet car lease) or property leases, should the interested parties not be amenable to the dissolution procedure. But a landlord would rather have a vacant facility that it can put on the market for a paying customer, than have a non-paying customer running up more unpaid monthly lease payments which it will never collect in full anyway.
FINAL WORD
With the current situation, I think a lot of business owners are already thinking about a closing down scenario. It’s time to do a gut-check on your business – will it weather this storm? Can it survive? Or would it be best to close down now, bunker it out, and hopefully re-open in the future?
Contact me if you have any questions on commercial leases or any other business transaction. In western North Carolina, Asheville, Waynesville, Hendersonville at (312) 671-6453.
Email me at: palermo@palermolaw.com.
Be sure to check out my other blog posts HERE. Be sure to listen to my podcasts with Matt Mittan at BizRadio.US