Hiring During a Workout?
So here is the dilemma: A client has a failing business – he cannot support his debt and his cash reserves are rapidly decreasing. We spoke with his bank and they agree to liquidate the business through sale while the business is still operational rather than liquidating through auction. That being said, in order to entice a buyer, my client needs to keep the doors open, cash flowing, orders coming in the door, etc… the business must run in the normal course of business until we close on a sale otherwise the business is doomed to face the minimal return of an auction.
It is obviously in the best interest of the client to find a buyer for the business as it will greater mitigate his losses with the bank and SBA – So the goal is very clear. However my client was steeped in fear. The liquidation period for the bank was likely to be 60-90days and he does not believe he has the cash reserves to get there from here. His only choice is to high an additional sales person who can increase sales and bring in more revenue during that period. However my client simply asked “How could the bank be OK with me increasing my payroll while I continue to not pay them and we enter into liquidation?”
A reasonable question.
Upon further inspection, the answer became clear. By keeping the doors open and the business operational, the client is acting in good faith to retain as much value in the operational business as possible. Yes, instead of hiring someone else the client could simply hand over that cash to the bank – believe me they would accept it. However that would leave the business crippled and rather than having an operational business for sale, my client and the bank would be left with a pile of assets which left to themselves are worth very little. They go from a sale of the business to essentially a tag sale.
When you look at this problem from this viewpoint you realize why the SBA and the bank do not interfere with these decisions. Yes of course they would like to be paid, but if there is not enough cash to go around, their objectives switch from monthly payments to assuring their underlying collateral can be liquidated for the highest value.
*Note* This article is based on one certain set of circumstances and is not necessarily applicable to all situations. Investing a reasonable salary into a sales person who is truly expected to increase sales is much different than increasing one’s own salary or adding payroll in areas that are not expected to increase short term revenue.
