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Business Services Industry

Born Again

Entrepreneur, Sept, 2001 by Chris Sandlund

GOOD BUSINESSES DON'T HAVE TO DIE JUST BECAUSE THEY'VE GONE HOPELESSLY, OUT-OF-CONTROL IN DEBT. THERE IS A PLACE THEY CAN TURN FOR REDEMPTION: THE BANKRUPTCY LAWS.

This past April, Paul Ginsburg was anxious and scared as he negotiated with Sterling National Bank. The 47-year-old president of Manhattan clothier Moe Ginsburg Men's Better Clothing needed to secure financing quickly. The third generation of his family to run a retail clothing operation in New York City, Ginsburg was coming off his worst year ever. His business was declining significantly.

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Ginsburg had been hit with a triple whammy. The city's financial community had pared its wardrobe expenses last fall as dotcom shares crashed on Wall Street. To make matters worse, the sudden switch to business-casual dress policies at such stalwart suit-and-tie outfits as Morgan Stanley Dean Witter left him holding too much stock in tailored suits.

Ginsburg himself made the mistake that proved to be the coup de grace. He decided to remodel his store in 2000 and, because he had an aversion to banks, financed the renovation with money that might otherwise have tided him over.

Now banks represented his best chance to get the financing to keep him independent. Without Sterling's guidance and money, Ginsburg didn't stand a chance of filing a successful reorganization plan for his company and its debts under the bankruptcy laws. His creditors might use those same laws to dissolve his business.

The bank agreed to a loan in conjunction with Ginsburg's May 1 filing under the bankruptcy reorganization provision known as Chapter 11. He received so-called debtor-in-possession financing (money granted under special provisions to someone under bankruptcy court protection), won approval of his reorganization plan by his creditors and conducted the first layoffs of his life by reducing his staff from 45 to 25. He was on the road to rebuilding his business.

The American Way of Failure

The bankruptcy laws--of which Chapter 11 is but one portion--help individuals and companies that have suffered a bad turn of events resolve their debt problems.

Although the court shields both businesses and individuals from their creditors, they are treated differently under bankruptcy. Individuals can absolve themselves of their debts completely and get on with their lives--albeit with ruined credit for seven years. Businesses don't get off so easy. They must either repay their debts, whether partially or in full, after winning approval of a plan for doing so (Chapter 11), or dissolve the business by selling its assets for what they can bring immediately and divvying up the proceeds among its creditors (Chapter 7).

Bankruptcy provides business owners an essential refuge to regroup. Creditors, however, can force bankruptcy on recalcitrant entrepreneurs. If the court is persuaded by the argument of creditors, it can force the sale of a company's assets under Chapter 7 or--in rare instances--displace the entrepreneur with new management to run the organization under Chapter 11 protection. That's why it's better to act before being acted upon.

But confronting bankruptcy head-on is no panacea. Ginsburg is one of the lucky ones. According to former U.S. bankruptcy judge Michael McConnell, less than 25 percent of the nearly 10,000 companies that enter into Chapter 11 each year receive approval for their reorganization plans. Those that win approval almost always move steadily through their bankruptcy under the watchful eye of a judge and a board of creditors. They exit the system with a new lease on life--and a bill for lawyers and other professionals that can run more than $100,000.

That means, however, that about 75 percent of firms that enter Chapter 11 quickly move to the dreaded Chapter 7--and destroyed credit. With the odds weighted toward dissolution, is it any wonder that bankruptcy carries such dread? Simon Scott calls the Chapter 7 filing that closed his 8-year-old Los Angeles lighting manufacturer Simon & Co. last year his hardest decision ever: "It's the end of your business and life as you've known it for years." Scott is now running a lighting design subsidiary of Everest Lighting Inc. He hopes to run his own business again in the future, but after the tumult of the past year, it won't be for a long time to come.

More entrepreneurs may be joining him. Although total business bankruptcy filings have fallen by more than half since their 1987 peak, much of the decline happened during the prosperous 1990s. With the economic clouds darkening, many experts expect bankruptcies to skyrocket this year.

Those looking for protection had better hurry to the courthouse. Congress is negotiating the final details of bankruptcy legislation that includes a host of provisions that make it less attractive to file. As of this writing, both the House and Senate versions of the bill delay implementation of the new laws for six months after President Bush signs it, which he has indicated is certain. Entrepreneurs should use those six months to weigh the merits of bankruptcy and other options.

Business Services Industry

Born Again

Entrepreneur, Sept, 2001 by Chris Sandlund

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