Struggling small businesses have legal options

Attorney says companies on the brink of bankruptcy can explore sale leaseback and receivership programs.
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In the height of economic turmoil, business owners have to make difficult decisions about their future.

Businesses such as J.C. Penney, Hertz, Gold’s Gym and J Crew, among others, all have made the decision to file for bankruptcy amid the COVID-19 pandemic, which forced nonessential workers to stay home.

Many of those stores have locations in West Michigan. The Business Journal reported that according to J.C. Penney’s location finder, the company has locations in Woodland Mall in Kentwood, Rivertown Crossing in Grandville, Greenville West Mall, The Lakes Mall in Muskegon and Crossroads Mall in Portage. Decisions on store closings have not been made public.

While those large businesses all have made headlines, there are many small businesses that have fallen victim to the pandemic, as well. Brendan Best is a partner and co-leader of Varnum’s banking, restructuring and finance practice team. His practice focuses on Chapter 11 restructurings, out-of-court workouts and insolvency-related transactions and litigation.

He said retail, restaurants and specialty food locations like coffee shops, ice cream shops and movie theaters have especially been impacted by COVID-19 and many struggling businesses are on the brink of closing and are seeking advice. Amendments were made to the bankruptcy code during the crisis. Under the revised bankruptcy code, a small business constitutes a business that has up to $7.5 million in debt, Best said.

“Bankruptcy lawyers are getting a lot of calls from companies that want to talk about the situation they are facing and what are their options and how it will affect them personally,” he said. “We are busy having those conversations with small business owners. Without this pandemic, we would not have these conversations. (The conversations) would be with businesses that are struggling and weren’t profitable, but they would never talk about never reopening again and shutting down. We are having a lot of those conversations in West Michigan, no different than other places in the country. The new companies that I talk to in a week or a month that have (financial) issues that they want to talk about have at least tripled.”

Businesses also seek advice about the Paycheck Protection Program that is available for small businesses through the Coronavirus Aid, Relief and Economic Security (CARES) Act.

“The PPP loans are hugely helping a lot of businesses right now,” he said. “Without the PPP loans, you would have a lot of businesses that would be completely closed by now and never reopened by now. If you are almost out of money and you get a $2 million PPP loan, which you hope will be a grant so you don’t have to repay, that is a huge help. Without that there would be no hope. However, when the money runs out, which it will for some of these businesses that weren’t able to stabilize and return to the level of sales and profitability they were before, what happens then? We might need the government to do another round of PPP funding to help as many small businesses stay open as much as possible and help those businesses keep as many jobs as they can.”

Prior to COVID, Best said he would talk to businesses about profitability regarding new products or new locations that were putting a strain on revenue.

In the daunting new reality, Best said most small businesses cannot afford to file for bankruptcy, so they have to seek other options to try and stay afloat. He said there are several options for small businesses that can prevent them from closing permanently.

He said small business owners can find new sources of cash either from new lenders or through selling some of their assets, like real estate, that they don’t need to function. If a small business operates out of a building and owns valuable real estate, one option could be a sale leaseback transaction.

“They can sell the real estate to a buyer and get some much-needed capital, and the buyer would agree to a long-term lease with their company,” he said. “They can continue to operate, continue to run their business, (but) they don’t own the property anymore. But they have a long-term lease and they’ve monetized an asset that they didn’t need to hold on to. Companies are going to have to be creative and look for opportunities to be able to run their business going forward.”

While the federal government has its way for companies to restructure their business through bankruptcy, Best said states have their way of restructuring a business, which is called “assignment for the benefit of creditors” that can avoid a full reorganization.

Companies also can be put into a receivership, which is usually started by a creditor but often the borrower will cooperate. In those situations, Best said they would look for a new owner and operator of the company who can buy the company and continue to operate the company, which saves jobs and allows for continuing business, but doesn’t allow the former owner to continue to own the property unless the company is bought out of receivership.

“That can also happen in bankruptcy and also the assignment for the benefit of creditors where the former owners will just sell the assets and then try to attract investors or get new money to buy the asset out of the proceeding,” he said. “There are a variety of legal means to restructure debt, but bankruptcy is by far the broadest legal structure and the most comprehensive.”

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