WHAT SMALL BUSINESSES CAN LEARN FROM LARGE BUSINESSES

Since the nationwide shutdown, many people have been waiting for an avalanche of bankruptcy filings under Chapter 11. As of the writing of this article, there have only been a few notable filings, such as the XFL, Frontier Communications and True Religion. While there has been a lot of anticipation about filings by large retailers, such as Neiman Marcus, Lord & Taylor and JC Penny, none have filed. Some have suggested that the delay is the recognition that there is no advantage to filing at this time, because lenders and other creditors have limited options. For example, many state courts are closed, so while lenders could declare a default under loan documents, they cannot start a lawsuit. However, while these companies are not yet filing, that doesn’t mean they are doing nothing. Rather, they are taking steps that will either keep them from having to file or aid them if they do file. Small businesses should be doing the same thing.

Since the scope and duration of the shutdown is still unknown, it would be difficult for any company to be able to come up with its exit strategy. When a large retailer files for bankruptcy, even if it going to reorganize, it will likely need to reduce its footprint, both in terms of locations and inventory. The way that happens is some type of deep discount sale at the stores. However, since the stores are closed, those types of sales cannot take place.

Also, once a retailer (or any company) files, it will need to start paying its ongoing expenses (called “administrative expenses” in bankruptcy). By not filing, it can delay paying these expenses.

What is happening for a number of the retailers is the lenders are offering “lifelines,” either in the form of additional financing or debt forbearance agreements, which will delay the restructurings, whether in court or out of court.

Small businesses should be doing the same thing. Right now, lenders will most likely be amenable to assisting the borrower. This is also a good thought for anyone who you owe money to or who owes you money. Planning now will make a difference down the road.

Small businesses should also wait to file for bankruptcy under the Small Business Reorganization Act. There are a number of reasons for this, one of the most significant being that the filing starts the 90 clock on filing the plan of reorganization. Better to wait until there is clarity as to what will constitute the “new normal.”

The same thing applies to landlords. Anecdotal evidence appears to be saying that the landlords are less flexible than the lenders. This may be because the landlords are pressured to continue paying their debt service. If so, the landlords should be making the same calls to their lenders. Also, you should check to see if your state or local government has issued any guidelines regarding rent payments or evictions. While most of these have been limited to residential tenants, you should check.

The other thing that small businesses should be doing is preparing short term projections. It is suggested that companies prepare projections going out 2 months, based on current revenue and expenses. It appears that the economy will start up, at least to a certain extent, within the next month. At that time, the projections can be revised, at which time the decision as to how to move forward can be made with better knowledge

Robert M. Bovarnick, Esquire
Bovarnick and Associates, LLC
rmb@rbovarnick.com
www.rbovarnick.com

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all of the information and content in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Nothing in this article is intended to create an attorney-client relationship, which would require an engagement letter. However, if you have any questions, please feel free to email me at rmb@rbovarnick.com