The best way to get out of a hole? Stop digging one.
Business owners should be aware of the pitfalls they may be digging for themselves. The very traits that make a valuable and intelligent entrepreneur, including a strong self-reliance, can often lead to a much deeper hole than it needs to be. One of the most common sentiments I’ve heard in my years of working with troubled companies is that they waited too long to seek professional assistance. Self-reliance and an intrinsic drive to succeed is part of the reason they’ve succeeded for so long; however, this expectation that simply working harder will turn the boat around does not accurately take into account the external forces that are the root cause of the problem. To turn a boat around, sometimes you need to stop rowing.
As a bankruptcy trustee for 18 years, I’ve dealt with literally hundreds of failed business owners. Unfortunately, a business owner will only seek bankruptcy counsel when they face the brutal facts…often long after the problems have begun to snowball. These compounding problems can lead not only to a bankrupt business, but the filing of personal Chapter 7 bankruptcy to offset the shortfall realized in business liquidation. With a personal guarantee (often matched by that of a spouse), secondary creditors will continue to pursue a bankrupt business for lost investment, even after a secured creditor is dealt with through the liquidation of business assets; with no money left, this shortfall can only be answered with personal bankruptcy.
So if every hole has a rock bottom, how does it get dug in the first place? As a group of active Trustees in the state of Maine, we had a term when dealing with former business owners – the ‘Trifector’: the three shortcuts business owners would take to save their companies, all contributing to the long-term failure of the business.
First, the use of personal credit cards to obtain cash advances and cover payroll, or other Accounts Payable. It’s easy, it’s readily accessible, and it’s a quick fix – often with the intent to pay it off next week or next month, when that Accounts Receivable comes in.
Soon, however, those credit cards are maxed out – compiling interest rates and the stress of juggling past-due bills taking their toll. So, retirement programs get tapped – 401K’s and Roth IRA’s supplying a much-needed inflow of cash. These are short-term solutions, with the full intent of paying them back once business ‘returns to normal.’
The third, and most dangerous source of money struggling businesses turn to, is simply not paying IRS payroll taxes on paychecks to the owner or the employees. This is the last straw – the IRS has the power to lock the doors of any business and force liquidation. The final nail in the coffin? Back taxes owed to the IRS cannot be discharged in bankruptcy – it is an obligation that stays with the debtor until paid, including principal and an interest that accrues at an alarming rate.
Any business owner turning to one or more of these sources of cash should immediately seek professional help. Getting a business back on track, or ‘returned to normal’, should never rely on dangerous sources of cash – instead, business owners must understand the best way to deal with the root problems, balance secured lenders, and to address employee and supplier issues. Knowing options is critical to making good decisions, surviving a cash crisis, and protecting personal assets. Waiting and hoping next month is better on the bottom line rescinds control; worse than walking away, the owner closes their eyes and keeps digging.
So, what options are there? Rather than self-reliance, it’s better to address the issues head-on, proactively dealing with the lenders to find an equable solution. Remember, lenders are investors, and their best interests are the success of the business.
- Plan an orderly liquidation of assets, streamlining processes and eliminating excess.
- Determine if a “deed in lieu of foreclosure” is viable.
- If a potential buyer is interested in the company’s assets, ask the company’s secured creditor (often the bank) to do a secured lender sale in an effort to raise as much money as possible.
Keeping eyes on the ground and hoping you won’t end up with the workout side of the bank is not a good place to be. Instead, deal with the issues as soon as you recognize the company has a problem, or is even trending that way. In business, there is no ‘normal’ – every quarter has new challenges and problems to be addressed. If you are faced with financial problems that get in the way of your work, do not wait – seek professional help immediately to either create a plan to deal with the issues, or take the necessary steps to minimize the problems the owner needs to face. A professional financial analyst can help you do, and keep, your job. Bankruptcy is not a good option, but it is one. When Chapter 7 is the only option left, no one wins but the attorneys; and when the attorneys win, everyone – banks, suppliers, employees, etc. – loses.∞