Negotiated Settlements – Case Studies

Negotiated Settlements

Three and one half years ago, we met members of a family owned business in severe financial distress, caused by the downturn in the economy and the carrying of heavy debt.  Bankruptcy was not an option.  The business had earlier moved to a new location in a like kind exchange of property.  It had also taken on a substantial mortgage despite the full knowledge of the bank of the existence of environmental contamination.  It has purchased a similar business and owed to the sellers a high interest bearing obligation that was then in default.  Add to this a substantial amount of unsecured debt that was way past normal credit terms and it was no wonder that the family felt discouraged and hopeless.

We analyzed the components of the situation and determined the critical piece was the satisfaction of the secured debt to the lender.  Taking advantage of an acknowledged mistake of advancing against contaminated property, we were able to achieve a settlement on a renegotiated mortgage that was both affordable and reduced overall debt by $900,000.  Next, we were able to negotiate a settlement with the junior secured creditor representing the seller of a business purchased earlier.  To effect this, we secured a commitment from a quasi-public finance agency that provided a additional amount for the first mortgage lender and sufficient funds for the negotiated settlement of the balance of the junior creditor as well as some critical working capital which was partially used to negotiate some long outstanding unsecured debt.  The net effect of this extended effort was the elimination of over $1.5 million of debt, the restructure of the remaining bank debt on affordable terms and the embarkation on a slow progression back to financial stability.  Recently, a competitor contracted with our client to produce on a private label basis, all of its output.  The competitor provided all of the requisite equipment for production and this current year, revenue will more than double, providing for meaningful economies of scale and the potential for significant profitability.

Creditor Settlement – Case Studies

Creditor Settlement Before the Fact

A client had made the decision to sell his business since he had determined that the amount of capital to continue was prohibitive.  He approached his secured lender and asked that an agreement be put in place whereby he would undertake an orderly “wind down” of the affairs of the business, making a ratable distribution of the proceeds between the secured lender and the unsecured creditors.  The unsecured creditors were informed by us that while payment could continue for a defined period, the debt of the secured creditor would require the majority of payment through its priority lien.  An offer was made to the secured creditors of a settlement at substantially less than face value, but much higher than could be achieved through a bankruptcy petition.  This included several leasing companies who agreed to settle for far less than their balances.  The result of this initiative was the satisfaction in full of the debt of the secured lender, the settlement of all of the creditor debt at a substantial discount and the ability of our client to sell the name and customer base of his company for a stream of royalties that netted him well in excess of $1 million.  This would not have happened if settlement had not been achieved before the fact.

 

Bankruptcy – Case Studies

Bankruptcy as a Positive Tool for Working Capital

A client found itself in the awkward position of having had its secured debt sold to a third party that had subsequently made demand to be paid.  Even though we knew the notes had been sold at a substantial discount, legally the obligation had to be paid at its face value.The new note holder refused to negotiate a settlement and, in fact, caused the assets to be repossessed.  The only solution to forestall this action was to have the client file for protection under the bankruptcy court.  Once the petition was approved, we sought a new loan for the business which was operating as a Debtor-In-Possession (DIP).  This request was approved and we then had the leverage to negotiate a settlement with the note holder for less than 30% of its balance and were able to use the balance to fund the reorganization and successfully re-emerge from bankruptcy.  All of the other creditors including the unsecured creditors, were able to get paid in full and several years later, the client, with whom we continue to work, has paid all but a small portion of its secured debt used to emerge from bankruptcy.

Company Needs Funds to Acquire a New Building

Solution – A former client of ours contacted us as he was planning to move to a new facility and needed help to raise money to purchase the new building. He was planning to sell the existing facility which was too small and not configured properly for the expansion of the business.
We analyzed the situation and recommended he explore the possibility of acquiring the new property under a Like Kind Exchange. It proved to be feasible and ultimately saved our client approximately $200,000 of taxes that would have been payable upon the sale of the existing facility. These funds were able to be deployed instead toward the purchase price of the new building.
While we are not CPAs or attorneys, we have experience covering hundreds of transactions over many years, and can often suggest alternatives for our clients that they or their advisors may not have considered.

Cancellation of a Major Order Leads to Cash Flow Problems

Challenge – Cancelation of a Major Order Leads to Cash Flow Problems

Solution– A client had been working on a major project for over a year when it was determined that work could not continue unless the customer agreed to additional charges. When the customer declined, our client had to cease work on the project. Tremendous expenses had been incurred and, while some payment had been received, it was not enough to cover the expenses and disruption to the flow of business caused by repeated delays and unfunded rework on this project.

We assisted the client to identify the magnitude of the problem and establish a plan to move forward. We drafted a letter, explaining the situation to all of the key vendors involved with the project. We set aside the amounts due to the vendors for this program and it was paid out over a sixteen month period in equal installments. While not the normal commercial terms, all the vendors appreciated the information and being treated equally with other vendors. All went along with the program, allowing the company the time to earn sufficient profits and cash flow to meet these obligations. Not a single vendor was lost to the company in this process, nor did any vendor demand to be paid differently than the plan.

We have found repeatedly that objective assessment, development of a realistic plan, and active communication of the plan to all concerned parties is the basis of maintaining positive relations during a troubled time period.