3 Tips to Help Ensure Your Company Recovers from Bankruptcy

“Capitalism without bankruptcy is like Christianity without hell,” said US astronaut Frank Borman and former Chairman and CEO of Eastern Airlines.

While I understand where he is going with that, I wouldn’t explain bankruptcy quite that harshly. True, like hell, no one wants to go there. But there is an escape and it doesn’t have to feel like you are stuck in eternal flames. Or whatever your version of hell may be.

Sometimes the best option to preserve your company is to file bankruptcy. Your business can emerge strong, with happy employees and your reputation intact. Here are three tips on how to accomplish that.

  1. Keep a positive attitude 

I learned this from one of my first turnarounds, a story I tell in my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes.”  Cheerleader Supply, a $65 million a year company with 750 employees, made cheerleading uniforms and supplies and directed camps nationwide. It fell on hard times and I was called in to see it through a Chapter 11 restructuring.

That CEO taught me the value of being a cheerleader in your company as he keeps a positive attitude throughout. When the home team is down, the cheerleaders get up and motivate the crowd, right? They don’t head to the nearest Starbucks and call it a night.

When a company is going through bankruptcy, employees are scared and nervous, which leads to lower productivity. You need your team to be on top of their game. And that requires pep talks. You need to keep your team inspired and motivated so they will keep working hard for you.

I’m happy to report that Cheerleader Supply successfully emerged from Chapter 11 bankruptcy, and I learned that a positive attitude from the leader is crucial.

  1. Be transparent with your employees about what is going on

Another way to keep your employees motivated is to be transparent with them about what is happening. If you and your senior management are meeting behind closed doors and not communicating with your employees, you are fueling the panic and the rumor machine.

People can handle a lot if you are honest with them. What they can’t handle is lack of information. If you don’t let them know what is happening, they will spend a lot of time filling in the blanks themselves, time they could have been working to help your company.

  1. Keep your reputation by communicating with your investors, vendors and customers

To follow up on #2, you also need to communicate with your other constituents, including your investors, vendors and customers.

United Airlines filed for bankruptcy in 2002, then the largest bankruptcy filing by any airline. Prior to filing, the CEO flew to Chicago to meet with employees, while top executives flew to other hub cities. Then after they filed for bankruptcy, the company took out full-page ads in major newspapers around the country explaining the situation and what they were doing about it.

By being open and communicating with all its constituents, United Airlines came out of bankruptcy with its reputation intact a little more than three years later. Its reported net income last year was $4.5 billion.

Back to that quote about hell. Maybe filing for bankruptcy does feel like that. But remember what Winston Churchill said. “If you are going through hell, keep going.”

Funny, But True Stories: Of All the Gin Joints

This story falls under the What Are the Odds? category. In this case, they were not in my favor. And I got busted.

My intentions were good. I had taken over a manufacturing company and was trying to save it from $1 million loss on one order. This company had one large client, responsible for 60 percent of its revenue. A discount mart, it provided the company with steady work and allowed it to grow significantly.

The discount mart even asked this company to change manufacturing capabilities to suit its needs, and because it was such a large customer, the company invested millions in upgrades so it could print T-shirts in several different ways for the discount mart. The investment seemed to be paying off. However, there was no written contract between the parties.

Until one day. The company had produced $1 million worth of branded/licensed T-shirts, just for this discount mart. Just prior to shipping the large order, the discount mart said, “No thanks.” That’s when the CEO knew he had a crisis, was reviewing his bankruptcy option and sought my help.

I told him it was a good thing he still had the merchandise and could do something with the T-shirts to cut his losses as there was no written contract he would be violating. But the discount mart wouldn’t have it. It was like an old lover. They don’t want you anymore, but they don’t want anyone else to have you either. If we did anything with those T-shirts, they’d say adios forever.

I figured we could still sell them in markets where this discount mart doesn’t compete, so we’d at least get 50 cents on the dollar. The strategy worked and we found a market in South America willing to buy the shirts for enough money to cover our costs and avoid a bankruptcy filing.

Everything would have been fine, except for one thing. The son of one of the discount mart executives vacationed in South America and bought dear old dad a souvenir T-shirt. You guessed it – one of those T-shirts. The discount mart made good on its threat and severed the relationship. I was able to keep the company out of a bankruptcy and the company sold six months later at a significantly reduced price.

The lesson here is about more than T-shirts, however. It’s about never becoming too reliant on a single customer, vendor or product – what I call the Big Gorilla. My rule is if a customer, vendor or product involves 25 percent or more of some part of your business, you’re dealing with the risks of a Big Gorilla…. sooner or later.

When Bankruptcy is Not the Answer

When a well-known media company previously worth roughly $250 to $300 million files bankruptcy, it makes news. Add in an outed revenge-seeking billionaire financing a lawsuit against the company brought by a pro wrestler/reality TV star over a published tape c of him enjoying some hanky-panky with his friend’s wife, well, now you’ve really got a thriller.

Gawker Media, an online media company and blog network owned by Nick Denton, filed for bankruptcy last Friday. The filing came after the company lost a $140 million lawsuit brought by the flamboyant former pro wrestler Hulk Hogan over excerpts of a tape of him and his friend’s wife Gawker posted on its site.

Peter Thiel, who made his fortune with PayPal and Facebook, funded the lawsuit, calling it one of his most philanthropic efforts, as well as many others in what is seen as an act of revenge over many Gawker posts about him, including one in 2007 with the headline “Peter Thiel is totally gay, people.”

In this instance, filing bankruptcy may have been the only option for Gawker, as insurance doesn’t cover the $140 million judgment, and the company wanted to protect its assets from seizure.

Odds are really good you won’t find yourself in this situation. But you may be considering filing bankruptcy. That is one option I discuss with clients when their companies are in dire straits.

However, there are several other avenues to explore first and many reasons not to take this step, as outlined in my post The Downsides of Bankruptcy. These include the expense, the damage to your company’s reputation and the loss of control.

While bankruptcy is one tool used to protect assets, it’s not the only one and requires careful consideration of the alternatives. At GlassRatner, we look beyond the obvious choices and consider the optimum strategies to help you and your business.

 

 

 

The Downsides of Bankruptcy

The parent company of Reader’s Digest magazine recently filed for Chapter 11 bankruptcy the second time in less than four years. The U.S. arm of Atari, the video game maker that brought the world the classic game “Pong,” also recently filed for Chapter 11.

Even though it won an Academy Award this year for best visual effects for “Life of Pi,” the visual effects company Rhythm & Hues filed for bankruptcy.

Despite these high profile filings, the American Bankruptcy Institute recently reported that commercial Chapter 11 bankruptcies actually fell a whopping 36 percent from January 2012 to January 2013, from 749 to 479.

Although the decrease in bankruptcy filings may be partly a result of the slowly improving economy, it’s also due to the fact that companies are increasingly looking to alternatives to filing bankruptcy. It’s no longer assumed to be the leading default option for companies in financial distress.

In my work as the Turnaround Authority, I generally discourage my clients from declaring bankruptcy. While bankruptcy does offer several tools that may not otherwise be available, such as the ability to sell assets free and clear of liens and claims, and the ability to accept and reject contracts, I want companies to carefully consider the downsides to bankruptcy before making that move. Here are just a few I want them to consider.

It results in loss of control. While the client may still be running the daily operations, he is no longer in control of the major decisions. The judge approves all major decisions.

It’s expensive. High attorney fees can actually result in businesses being forced to liquidate to pay all the fees. Fees in excess of $1 million dollars are not uncommon. Companies have paid in excess of $1,000 an hour during a bankruptcy reorganization.

In addition to paying for its own lawyers and financial advisors, the company has to pay those of the creditors’ committee and the secured lenders.

The law firm Weil, Gotshal & Manges was lead counsel for the Lehman Brothers bankruptcy, raking in $389 million in fees and expenses in 3 ½ years. But that wasn’t all of it. The total paid out to all of the firms on Lehman’s tab? More than $1.4 billion.

An interim CEO or Chief Restructuring Officer, like me, may be brought in to handle the process, which adds another layer of costs.

It harms the company’s reputation and may discourage future investments. Just a rumor about the impending filing of Chapter 11 bankruptcy by American Airlines parent company AMR caused the shares of stock to plummet by a third and 67 million frequent flyer members fretted over what would happen to their miles.

Owners and stockholders may lose a great deal of money. The bankruptcy court determines the order in which creditors are paid back, with secured creditors first in line. Stockholders are always at the back of the line and generally need to invest additional funds into the restructured entity in order to maintain equity in the new company.

The actions of the firm’s leadership are closely examined and may lead to criminal charges. After Enron filed for bankruptcy, dozens of its executives were subsequently charged with criminal acts that included insider trading, money laundering and fraud.

I tell this story in my new book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOS’ Mistakes.” I was brought in as an interim CEO for a company that had filed for Chapter 11. On its books was $50 million of inventory at a plant in Ireland. I decided to go take a look. Turns out the plant was actually a vacant lot, but had been claimed as inventory to inflate the value of the company so it could qualify for a larger loan than it would have.

Few companies emerge intact. Less than 10 percent of companies filing for bankruptcy protection emerge as they were when they filed. Generally, assets, divisions, or the entire company are sold to provide the funds to work out a Plan of Reorganization.

Bankruptcy is a viable and helpful alternative for some companies. I’ve worked with many over the years and was successful in bringing them out of bankruptcy.  But it’s difficult and takes time and money. It’s not the best tool for every company and alternatives should be carefully considered.