For many business owners, mention of the “B word” conjures up feelings of dread, frustration, and failure. Bankruptcy can be expensive, especially for small businesses, and despite the friendlier reorganization option that Subchapter V provides, the process itself can erode brand equity, stigmatize the company going forward, and damage relationships with vendors and customers.

Although bankruptcy doesn’t have to mean the end of the road for your business, it’s safe to say that most of us would prefer to avoid it if possible. Lucky for those so inclined, there are several options to research before calling your bankruptcy attorney. One of them might be just the fix you need to turn your distressed business around.

Making changes to the operational structure

This would probably be everyone’s first choice, and if your company is not past the point of no financial return, it is likely the least expensive and quickest option to implement. You simply sit down with your management team to set up parameters for an internal audit and review the results to determine what exactly is causing the company’s problems. The audit may yield easy answers or create more questions, but either way you’ve started down the path of identifying issues of concern and determining the best courses of action for repairing the damage.

It may be as simple as cutting unnecessary expenses or finding new markets for your products or obtaining new funding. Or you may find it necessary or advantageous to hire an outside consultant for financial or operational concerns and to help navigate the turnaround process. This option can be a great exercise to carry forward as a periodic standard practice once conditions improve.

Pursue a workout with your creditors

This option involves working with your lenders or major creditors to negotiate new terms on loans or other agreements that allow the company to make ends meet. No court time is necessary, but having an attorney, financial advisor, or temporary restructuring officer to help negotiations may be beneficial if you are less savvy with the numbers than you are at dreaming up new products.

Often the only thing a distressed company needs is more time to pay, a reduction in the principal, or a reduction in payments, even if it’s for a limited time, with catch-up or balloon payments scheduled in the future. The goal of the workout to establish a positive cash flow projection, as soon in the near term as possible, that convinces creditors that payment of their debt is likely. Any plan you come up with must work across the board to satisfy all creditors and ensure the financial viability of the business going forward. If all creditors can’t be persuaded to buy into the plan, it may be best to consider other less desirable options.

Asset sale

Another restructuring option that occurs outside the bankruptcy process is the asset sale, where a buyer purchases only the assets of the company, leaving the liabilities with the seller, which are extinguished using cash retained by the company or received from the buyer. Prior negotiation with certain creditors may be necessary to ensure buy-in, but this option often delivers higher overall enterprise value than other pre-bankruptcy sale options. And if you’re not overly excited about the prospect of selling your company, you can always negotiate an employment arrangement with the buyer if your expertise is crucial to ongoing operations.

UCC Article 9 sale

If a sale seems like the best way forward and you can’t find a ready buyer, a secured creditor who holds a UCC lien on certain assets may be encouraged to undertake an Article 9 sale of its collateral. Although the lienholder has the right to pursue this remedy regardless of your consent, your proactive acquiescence to the surrender of the collateral to satisfy debts may buy some goodwill with the creditor. That could be especially important if you’re worried about the creditor enforcing a personal guarantee on the loan. And whatever unencumbered assets remain after the sale are still yours to use how you see fit.

Assignment for benefit of creditors

If the previous options are not feasible or have failed, you can still sidestep the bankruptcy process by initiating an assignment for the benefit of creditors. Often called the “ABC” option, an assignment is very similar to the liquidation process, but does not involve the federal court system. Instead, the company transfers its assets into a trust overseen by an independent third party called an assignee, who is responsible for liquidating the assets and distributing the proceeds to creditors.

This process is often faster and less expensive than a bankruptcy and allows you to maintain some control over the process. It also prevents the reporting of adverse information to credit agencies that might harm your credit rating if you’re not protected by a corporate shield. Despite the benefits of the ABC option, there is no automatic stay as in the bankruptcy process, meaning that creditors can continue to pursue collection efforts in court and otherwise.

Receivership

Similar to the ABC option, a receivership is a state court-supervised process that results in the liquidation of the company. In this scenario, the court appoints a receiver, acting as custodian and fiduciary to manage the acquisition and sale of the debtor’s assets. Proceeds of the sale are distributed to creditors. You may prefer this option to maximize value obtained for creditors to minimize the possibility of enforcement of personal guarantees on secured loans.

Section 363 sale

While technically an alternative to a Chapter 11 reorganization, a section 363 sale occurs within the bankruptcy process, so a filing would be necessary to pursue this option. Named after a section of the bankruptcy code, the goal of this option is to resolve the company’s past liabilities and allow the business to survive after being sold. This is accomplished by way of a negotiated asset purchase agreement, which can be arranged before or after the filing of the bankruptcy petition, that is submitted to the court for approval. Other potential buyers are allowed to submit competing offers. All such bids are considered by the court until the one that is generally best for creditors, and which offers more value than a liquidation, is chosen. Despite having filed for bankruptcy, it is possible to retain your company by, either on your own or via an investment group, submitting a competitive bid. The successful buyer receives the business free and clear of any debts.

Conclusion

While it’s difficult to consider scenarios that result in the loss of your company, you can take comfort in knowing that you’re not alone, and you’re certainly not the only business owner who ever struggled with these issues. It may be time to make some tough decisions, but before you do, make sure you look at all the alternatives before making an assumption that bankruptcy is the only solution.

No matter the reason – whether it’s a sustained reduction in demand for your products or services, an over-leveraged balance sheet, or a faltering global economy – if your business is foundering in the zone of insolvency, there is help out there.