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Three alternatives to business bankruptcy

| Apr 28, 2021 | Corporate Bankruptcy & Restructuring

Business owners struggling with insolvency may wish to avoid bankruptcy. Although bankruptcy can provide a fresh financial start by either liquidation or restructuring, it is not the right option for every business. In other cases, one of these restructuring options may work best.

Option #1: Changes to the operational structure of the business

Arguably the easiest and first step, this option involves an internal audit to determine what is going wrong within the business. In some cases, the audit may result in the finding of expenses that can be cut to help the business save funds. In others, the business may need to reach out for additional funding. Although investors can help provide funds to cover short-term cash flow issue, problems that extend longer into the future may require a more aggressive approach.

Option #2: Workout

A workout involves business owners attempting to navigate the financial issues with the creditor or creditors without the help of the court. This option generally uses repayment sources to convince creditors to extend their deadlines. The creditor may agree to back off on repayment demands if the business can provide a promise of payment from future cash flows, an infusion of equity or refinancing.

If neither of these are an option, the business may be able to move forward with a workout through creative negotiations. Coming up with a non-traditional solution could work. However, it is important to come up with a viable plan to present creditors to better ensure agreement. It is also important to note that the most successful workouts require the agreement of all creditors. A failure to agree can leave the business open to future financial woes.

A workout is a viable option if the business is likely to start making a profit in the near future. If not, it may be best to consider other options, like liquidation. This could include assignment for the benefit of creditors or bankruptcy.

Option #3: Assignment for Benefit of Creditors

An assignment has a lot in common with bankruptcy, with a couple of key differences. Instead of using the federal court system, an assignment generally uses a trust. Upon agreement by the board of directors and shareholders, the business essentially transfers into a trust. The exact process is governed by state and, as such, can vary depending on which state the business is located. However, it generally moves forward in a process similar to a Chapter 7 liquidation bankruptcy case.

In addition to saving time, this option can also save face — so to speak. A business that goes through bankruptcy may receive publicity stating it closed up or is bankrupt. Those that choose an assignment for the benefit of creditors may get a different type of publicity. If the assignment is part of a sale, the publicity would likely focus on the acquisition.

These are just a few of the options that can serve as an alternative to bankruptcy. Businesses looking to restructure and set themselves up for future success are wise to consider these and other options to help better ensure their business can move forward after dealing with financial difficulties.