Tag: small business

Thinking Strategically About Business Outcomes

In  The New Boardroom Imperative: From Agility To Resilience Julian Birkinshaw, (Professor of Strategy and Entrepreneurship, London Business School) discusses the critical issue of strategic resilience –  the ability  “to make smart choices about the scope of business activities in the face of uncertainty.”

Recent posts here have outlined key strategies for tackling business challenges and provided a sampling of resources helpful in developing an effective plan.   See Five Keys to Dealing Effectively with Disruption and Resiliency Resources.

This post “zooms” out (the word choice clearly reflecting too many videoconferences) to focus on three business outcomes in a time of disruption. What are those three outcomes?  Fundamentally:  reorganization, sale or liquidation.   There are many paths to reach any of these outcomes – including in-court and out of court avenues.   Each outcome, of course, has significant consequences.

Although some businesses strategically implement a sale or a liquidation on their own terms, many find themselves dealing with those outcomes only because the opportunity to achieve a reorganization has evaporated.  Indeed, the inability to reorganize can lead to a sale or liquidation – voluntarily or involuntarily.  Resilient business leaders work to avoid such results by strategically assessing higher value reorganization options and then working to implement successfully.

What options exist in aid of reorganization?  In the United States, the federal law governing business reorganizations is Chapter 11 of the United States Bankruptcy Code.  Unfortunately, over the years, Chapter 11 has proven to be an imperfect mechanism for allowing small or medium sized businesses to reorganize.   Last summer, Congress attempted to address that situation by passing the Small Business Reorganization Act of 2019 (SBRA), which became effective in February 2020.

The SBRA adds a new subchapter V to Chapter 11 with the goal of making business reorganization more affordable and more achievable for the nation’s small businesses.  Specifics about subchapter V are detailed here.  The Coronavirus Aid, Relief and Economic Security Act (CARES Act) passed yesterday expands the availability of  subchapter V by making its provisions applicable to a broader range of businesses.  Specifically, as amended, for the next year the debt limit for a small business eligible for relief has increased from $2,725,625 to $7,500,000.  Of course, businesses with debt above that limit can still seek relief under the non-small business provisions of Chapter 11.

Federal bankruptcy relief is just one tool in the toolbox for seeking to implement a business restructuring — and not a perfect  tool.  Other options also exist both in and out of court.  For example, out of court negotiations or mediation with key constituents towards new agreements can be remarkably effective as described here.  Be sure to think critically before selecting any particular tool as each has advantages and disadvantages.   As the saying goes — once the hammer is in hand, every problem begins to look like a nail.  Be sure to act proactively to take advantage of the utility of the most value-preserving and value-enhancing tools while time exists to do so.  And be on guard against the possibility that a key business partner may start wielding a tool that could have significant implications for your own business.

Understanding the options for implementing a successful business reorganization should help in thinking critically about your own business – and (just as importantly) the businesses of your key partners.  Ultimately, part of the ability to make smart choices about current and future business activities in the face of today’s uncertainty relies on such an informed understanding.

Trade Creditor Strategies

I was pleased to join Adrienne Walker from Mintz and Lindsay Zahradka Milne from Bernstein Shur on a business panel  yesterday hosted by Massachusetts Continuing Legal Education.   Our focus was on strategies for trade creditors to obtain  (and keep) payment in light of  issues arising in recent financial meltdowns including Sports Authority, Toys R Us, Sears,  Papa Gino’s and many other distressed companies.

We covered a lot of territory in a short amount of time with thoughtful insights and commentary from the audience.  Topics included  maximizing lien rights, obtaining critical vendor status, risks associated with post-petition administrative claim recoveries,  the value of reclamation claims, recent consignment issues, and minimizing preference exposure.

My focus was on lien issues which included the practicality of obtaining and perfecting a security interest under Article 9 of the Uniform Commercial Code.  The discussion also covered various non Article 9 liens including judgment liens, state statutory liens (including mechanics liens) and federal statutory liens (including the Perishable Agriculture Commodities Act).

My top takeaways for trade creditors from the session:

  •  Be Proactive:   Trade creditors who actively monitor and manage receivables are best positioned to avoid the pain of a customer’s financial distress.   Understand the reality that a customer’s  filing could completely extinguish all amounts owed and could also result in the forced return of certain funds paid to the creditor before filing as a “preference.”   Avoid putting off dealing with the unpleasantness of a customer issue; rather make it a priority to protect your right to payment.

 

  • Explore Lien Rights Early:   Creditors often explore lien rights only after experiencing non-payment.  A better strategy is to consider the possibility of lien rights at the outset of a business relationship.   Establishing lien rights requires strict compliance with detailed statutory elements such as those created by Article 9 of the UCC or other statutes.   If lien rights are important, take the time to ensure that the lien is properly created and not subject to attack.

 

  •  Understand Consignment:    Some trade vendors believe that shipping goods to a customer “on consignment” can insulate the vendor from any financial issues of the customer.   However, the law of consignment is highly complex drawing from both the common law and operative provisions of the Uniform Commercial Code enacted by the states.   If you intend to be protected by a consignment relationship, it is imperative that the relationship withstand judicial scrutiny.   Two decisions (available here)  issued on November 26 2018  in the Sports Authority case drill down into these issues and provide a sense of the complexities that can arise.

 

  • Treat DIPs with Care:  “DIP” stands for “debtor in possession” — the term used to describe a company that has filed for chapter 11 relief.    Conventional wisdom teaches that supplying a company in chapter 11 (a DIP) offers some protection to a creditor as claims arising from amounts due post-petition constitute “administrative expense claims” and not just mere “general unsecured claims” (the term given to amounts due for obligations arising pre-petition).   In Toys R Us, however, vendors holding millions of dollars in “admin” claims faced the prospect of no payment whatsoever given the retailer’s cessation of restructuring efforts and implementation of a liquidation.  Although a settlement was reached which provided some payment to holders of admin claims, the recovery was nowhere near 100 percent.   In short, before supplying any company operating in chapter 11, be careful to understand the dynamics of the case and the practical ability to compel payment.

 

  • Understand Preference Risk:    A trade creditor that receives payment in the 90 day period before a customer’s bankruptcy filing is at risk of having that payment examined and potentially challenged as an “avoidable preference.”   There are several defenses available to a trade creditor to defend against such an action.   The best defenses rest on good facts.  Thus, it is imperative that a creditor obtaining payment from a financially distressed firm do so with an eye towards strengthening available defenses in case of a later challenge.    Our session highlighted several recent decisions impacting the ordinary course of business defense, subsequent new value defense and other theories.   The time to think  about such issues is well before a preference lawsuit is filed.

In sum, the opportunity to collaborate with Adrienne and Lindsay was terrific.  The conference also included an excellent presentation on non-judicial options for restructuring and sales as well as an insightful judicial forum.

 

Paying it Forward: Helping Veterans Build Successful Small Businesses

Lee Goldberg is a former Army Officer who served in Vietnam. He is also an experienced business executive who has guided hundreds of companies through a variety of financial, operational and governance issues.   Because Lee understands the value of a professional network, decades ago he helped start the Northeast Chapter of TMA and served as one of the chapter’s initial presidents.

TMA is global non-profit organization numbering more than 8,300 members in 55 chapters. TMA professionals come from a variety of business disciplines. Members help companies improve performance, manage disruption, navigate change and enhance value.  Last year, I had the privilege of serving as the Northeast TMA chapter president — stepping into a role Lee created and held many years before. This year, I began serving on TMA’s Global board.

Over the past few years, Lee has worked hard to establish and build an independent non-profit enterprise called VETRN — Veteran Entrepreneurial Training and Resource Network.  VETRN is dedicated to helping military veteran entrepreneurs succeed in growing their small businesses.  In addition to commending Lee’s forward thinking and hard work  in making his vision a reality, this post is intended to help raise awareness of the program enabling others to benefit from it.

Coming Home

Lee returned home to Boston from a year-long deployment in Vietnam in the late 1960’s to an unwelcoming world. Despite holding both an undergraduate business degree from Northeastern University and a MBA from Boston College, Lee’s tour of duty had put him off track for employment opportunities.

Determined to find his path, Lee wrote application letters to many area businesses. Eventually, he heard back from John Quincy Adams, a Senior Vice President of  John Hancock Life Insurance Company, and a descendant of two of America’s earliest presidents. As Lee discovered only later in life,  “JQ” extended an employment  opportunity in appreciation of Lee’s military service and “JQ”‘s own personal military experience – a moving story Lee shared in this interview at the 1:45 mark.  In short, JQ “paid it forward” resulting in Lee commencing work in the company in the fall of 1968.

The Vision

Lee knew that military training provided veterans with many invaluable skills — dedication, commitment and perseverance to name a few.  But he also knew that military training did not necessarily provide business-focused training, mentorship opportunities, and ready access to a professional network.

Lee knew the importance of such resources in leading companies to successful outcomes and envisioned a program that could provide these essential items, free of charge, to any military veteran (or family member) responsible for running a small business.  Lee shared his ambitious  vision with others who provided invaluable encouragement, assistance and guidance. And he made it his mission to succeed.

The Program

In building the program, Lee focused on forging partnerships with others.  For business education, VETRN partners with Interise, a Boston based national nonprofit, which developed and administers the highly successful, award winning “StreetWise MBA”program in more than 80 locations across the country on behalf of the Small Business Administration. VETRN  now holds a  license to teach the program exclusively to veteran cohorts in New England.  Those enrolled into the program commit to attend thirteen sessions covering topics such as strategic growth goal setting, financial statement analysis, positioning a business within a competitive landscape, sales strategies, accessing capital and developing a three year growth plan.

Each program participant is provided an industry or financial mentor at the outset. For mentoring and networking, VETRN partnered with the Northeast Chapter of TMA to tap the expertise of professionals including those who had personally served in the armed forces, had family members serving or  those just looking to give back as a means of thanking veterans for their service.

Lee achieved the objective of offering the  VETRN program at no cost by enlisting financial sponsors (listed on the VETRN website) from his own vast network to cover all program costs.  The website also provides information about the organization’s dedicated board and advisors who have been instrumental to supporting Lee’s founding vision.  Marie Shirley, who serves as Executive Director of TMA Northeast, provides invaluable support as program manager for VETRN.

The Results

The impact of the program is best understood by listening to statements of those  who have gone through it.  The interview noted above and other videos and materials on the VETRN website includes first hand  testimonials from participants who express appreciation for the education, mentorship and networking access they experienced as part of the program. Program graduates often speak of business growth leading to the need for more employees – with military veterans of course often highly desired to join as team members.  By creating a program to pay it forward, Lee has enabled others to do so as well.

The Future

The success of the program has not gone unnoticed. In a 2017 celebration in Cambridge, the Massachusetts SBA awarded Lee with the  District Director’s Award for founding VETRN and his  “outstanding contribution to the entrepreneurial success of veterans and small businesses throughout Massachusetts and New England.”  I was pleased to attend along with many others.

The national SBA based in DC  invited VETRN to submit a proposal to rollout the program to other locations. The SBA approved the submission for a pilot project but unfortunately has not yet approved funding. In the meanwhile,  VETRN is now actively seeking private grant funding in order to roll out to other locations in New England.

The next class of VETRN in the Boston area starts in the Fall of 2018.  The class is filling but space remains. Detailed information and applications can be found on the VETRN website. Know a military veteran (or the family member of one) running a small business in Massachusetts, Rhode Island, New Hampshire or Maine with a  demonstrated desire to grow the business? Point them to the site and have them fill out the application – it is an easy way to pay it forward.