Distressed companies (companies which were always on the edge and then completely tip off it when the economy goes south, or very insolvent companies with a recent history of significant operating losses) present one of the biggest professional challenges I, as a part time CFO, have. Typically the owners of these companies never even admit that there’s a problem until it’s too late and they’re in deep trouble, so they usually haven’t prepared things like business or cash flow forecasts, or a strategic plan or exit plan. These companies are reactive instead of being proactive. Of course there’s also the small fraction of distressed companies who weren’t so avoidant of their own problems and were simply very unlucky. Business is, after all, 80% ingenuity and guts, but 20% dumb luck.

You always look for the softest landing possible when trying to work out the problems of a distressed company, and you have to be prepared for the owners of these companies to tell you this landing is their nightmare. It’s understandable that they would feel this way, considering the softest landing possible usually crushes the hopes and dreams the business owner had for their company (which is usually something along the lines of if they had to sell it, it would be for millions of dollars). Your job as CFO, in the case, is to crush those dreams, and it’s difficult.

The personal liability of the business is important to consider. Usually, the more personal liability exposure, the rougher you landing will be, because the more personal liability exposure the business owner has the less impact the corporation has to protect the business owner.

Here are three possible options to consider when you want to find the softest landing for an insolvent business (note that I briefly cover each option because I’m not an attorney, and I encourage everyone who is contemplating using any of these ideas to consult an attorney):

1. Bankruptcy – I think we are all familiar with this one. This may have to be combined with personal bankruptcy of the business owner due to excessive personal liability incurred in the business. Another consideration with this route is also the cost. It can be expensive especially the business bankruptcy. Sometimes a bankruptcy filing can be used as leverage with creditors and also at times with hostile partners. You have two forms of business bankruptcy, which are Chapter 7 (a complete liquidation and closure) and Chapter 11 (a reorganization). With a Chapter 11 or reorganization one of the most important factors is will the trade supply you? This is when the business owner has to rely on whatever relationship equity they have built with the trade. Chapter 11 is only viable if there is some type of debtor in possession financing available or if operations can only be funded by paying current expenses and a very small piece of old debt.

   2. Private Foreclosure Sale – This is when there is a bank or other senior creditor in first position to be able to take all of the assets under a security agreement with a filed UCC. An acceptable offer is made to the senior creditor by an outside investor usually for less than what is owed the senior lender but probably for more than the senior lender would get if they liquidated the company. Only the assets of the company are simultaneously seized and sold to the investor in a private foreclosure sale. The liabilities are left in the old company. A deal is made by the outside investor with the current business owner for either equity in the new company or a job/consulting position or both depending on the business owners desires. Available cash before the foreclosure sale is used to pay down or negotiate with personal liability creditors. Another consideration with the Private Foreclosure sale is how the trade will react. On one hand the trade loses what ever the company owed them, but on the other hand they could perceive new management and new majority ownership and a new day to do business with someone who will pay.

   3. Strategic buyer – This is when you can find a buyer who is in the substantially the same business. A strategic buyer will be in a better position to work fast and also will pay the most while seeing an opportunity to expand their business. The strategic buyer buys all or selected assets and none or selected liabilities. The purchase price and earn out (there is likely to be an earn out as we are talking about a depressed business with an uncertain future) needs to exceed personal liabilities and any secured creditors with perfected security interests (filed UCC’s). The seller needs to be prepared to offer settlements to creditors giving priority to creditors with personal guarantees. This is not easy to do but can be a way out. In this option the trade knows the strategic buyer and although the trade knows they have probably lost the receivable they have a stronger company to do business with who they are familiar with.

   Once again, these are all complex strategies and every situation is different. Experienced lawyers must be obtained to see if any of these options is right for you. I have personal experience with all of these scenarios and it is important to review each option carefully to flag the risks and opportunities. These are 3 possible options to provide the softest landing possible for an insolvent company. The challenge here for the CFO is to explore all of the options available to the company knowing that each option likely presents unpleasant downsides for the business owner and you must identify the option that presents the least unpleasant downsides. Keep in mind that it is also likely that the worst thing you can do is nothing. Therefore it is important that the Chief Financial Officer stays focused on continuously influencing the implementation of the softest landing possible.

Recently I had a client prospect that was all but ready to hire me, but before he went through with it, he said, he needed to ask the opinion of his bookkeeper. The bookkeeper and I did not know each other; we had never even met, so naturally I thought it strange that he would need the bookkeeper’s opinion regarding me. Nonetheless, I allowed it—and then regretted it immediately as when next I checked in with my prospective client, he told me he no longer wanted to hire me because his bookkeeper had deemed that a part time CFO was unnecessary to him.

I was surprised, and felt a bit bad for the business owner, that he would allow his bookkeeper to make such a decision for him. I told him that in my experience there were only two reasons a bookkeeper would say CFO services were not required without previously knowing or at least meeting the CFO first:

1. The Bookkeeper is taking advantage of their employer by inappropriately utilizing the day to day responsibilities they have (quite possibly stealing).

2. The Bookkeeper doesn’t want anyone coming in to scrutinize their numbers because they fear mistakes in their bookkeeping will be exposed.
CFO’s and bookkeepers work famously well together, their jobs complement each other, so a bookkeeper that says no to you getting a part time CFO is unusual and rather suspicious. Typically, a CFO is thrilled to go into a situation where they know a bookkeeper is on staff to prepare numbers, and a bookkeeper is thrilled to have someone to check their numbers against who understands how they should work. For the most accurate financial numbers possible and the best chance of making good business decisions, it’s highly suggested that a business owner hire both a bookkeeper and a part time CFO.