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.