As the number of COVID-19 coronavirus (“Coronavirus”) cases continues to increase, and with the United States raising its threat assessment of Coronavirus to its highest level, business owners must be proactive in addressing and finding solutions to save their assets before it’s be too late to recover.
This Article will address real solutions and strategies for small retail businesses facing distress. This Article also addresses various restructuring and liquidation options that small retail businesses may consider, including bankruptcy, liquidation, and out-of-court alternatives.
- Small Retail Business Considerations
- Business Planning for Struggling Small Retailers
- Protecting Personal Assets
Due to market and outside factors, distressed retailers are not afforded the luxury of time to assess their future. As the cost of Chapter 11 retail bankruptcy continues to increase and the likelihood of a successful restructuring declines, small business retailers have a range of options to consider, including:
• Small business Chapter 11.
• Liquidation under Chapter 11.
• Liquidation under Chapter 7.
• Dissolution and winding up.
• Non-bankruptcy alternatives.
This Article discusses strategies for small retail businesses facing distress. It also addresses restructuring and liquidation options that small retail businesses may consider, including bankruptcy, liquidation, and out-of-court alternatives.
Small Retail Business Considerations
The trend among struggling retailers is either to reduce debt and expenses to restructure and stay in business or liquidate assets and shut down. The two broad types of distressed situations that a retailer may face are:
• A cash or liquidity crisis requiring immediate cash management and debt restructuring measures.
• Fundamental challenges to the sustainability of the business model requiring liquidation of inventory and store closures.
Business Planning for Struggling Small Retailers
Before making any decisions concerning the future of the business and contemplating a bankruptcy filing or liquidation, small business retailers must develop a feasible distressed business strategy, which includes:
Creating up-to-date financial statements. Management should evaluate the business history by creating a current:
- income statement or profit and loss statement covering a specific period of time;
- balance sheet of the business’s assets and liabilities at a particular point in time; and
- ”four wall” profitability analysis of the business or of each store.
Assessing your business. Develop a detailed understanding of the company’s liquidity position and debt covenants.
Preparing financial projections. Present a potential financial plan for the future to substantiate forecasts of sales, expenses, and profit by preparing:
- sales plan analyzing monthly sales trends from previous years and projected expected future sales;
- an inventory buying plan to manage and produce retail cash flow projection; and
- a cash flow budget estimating the cash inflow and outflow.
Reducing costs. Identify areas in the business where overhead and expenses can be reduced.
This requires a critical evaluation of business operations to determine areas where the business can conserve cash by reducing capital expenditures and administrative expenses. For example, subleasing unused retail space may generate additional cash, or reducing the number of employees or employee hours may save significant cash.
Contacting suppliers and lenders.
Management should contact lenders and vendors and advise them of the company’s financial situation. Lenders may be willing to negotiate lower interest rates and extended maturity dates, while vendors may be willing to adjust to more favorable payment terms.
Protecting Personal Assets
A key reason small retailers file for bankruptcy is often to protect personal assets from the reach of creditors. If a retail business owner adequately protected personal assets through the business’s structure and financial management, the retailer may be able to restructure or liquidate without the need for a bankruptcy filing. However, if a retail business owner has implicated personal savings or property into the business’s liabilities, filing for bankruptcy might be the best option to protect the personal assets of the owner (see Pre-Bankruptcy Planning and Assessing the Small Business).
The three primary scenarios in which a small retailer should consider filing for bankruptcy to protect personal assets are when:
- The business structure makes the owner personally liable. To some extent, the need to file for bankruptcy depends on how the business is structured. If the business owner is a sole proprietor or a member of a general partnership, there is no legal separation between the owner and the business. The business owner is personally liable for the full extent of the business debts, and the owner’s personal assets, including any personal savings, retirement accounts, college funds, and the family home, may be seized by creditors seeking to satisfy business debts.
- Personal and business finances are intermingled. Structuring a business as a corporation or LLC does not guarantee that an owner’s personal assets are safe from creditors. If a business owner improperly mingled business and personal finances, a court could potentially nullify the corporate structure and declare the owner personally liable for the business’s debts.
- The owner signed a personal guarantee. Many banks and alternative lenders require personal guarantees to finance newer small businesses, particularly those that are unable to put up collateral for their financing. If the business owner signed a personal guarantee when it obtained a business loan or startup capital, the business owner can and will be held personally liable for the repayment of that loan regardless of the business structure.
If you are facing a slowdown and are searching for solutions and have considerable assets to protect, Contact Us to personally talk to ESQ.title before you throw in the towel. Our seasoned lawyers can help you analyze and help you come up with a tactical and strategic plan during these uncertain times.