04 August 2014

The Bankruptcy Boon

The US bankruptcy process is amazing. When a large mismanaged company goes under, it is a boon for many parties. Consultants and attorneys bill four figures an hour, opportunistic investors prey on the carcass, all in the vein of cashing in on a distressed situation. Despite all the excess, however, the process does work in many instances. The high priced consultants are often able to make the structural changes required to create a sustainable business. Is it the process in play, or should we hire these experts on the front end in the business building game? More importantly, while it may work on the large business side, why isn’t there a similar process for small business?

The GM bankruptcy is a classic example. They needed over $30B in debtor financing just to navigate through the process. Like most in similar situations, they hired high priced advisors to lead them through the intricacies of the bankruptcy code (including a $16M a month contract to a single firm). I never understood why maneuvering through the process is so complex, but it is extremely lucrative for the few that are versed in it. As the city of Detroit was paying lawyers millions of dollars a month during its bankruptcy, their citizens would wait more than 30 minutes in response to a 911 emergency call due to lack of funding. Is there really no other way?

Sure it is easy to fault the winners in the process; but there is something to be said for how often the trustees are able to turn these companies around so quickly. Generally speaking, there are large fundamental issues that need to be resolved in a short time window. These turnaround specialists cut costs, prioritize payments, cut deals with debtors, and divest assets in such a manner that oftentimes entities thrive post-bankruptcy. Certainly leveraging the benefits of the process helps (ie. cramming down creditors), but there have been some impressive successes. Most of the airlines, for example, have all gone through the process; now just this week they announced record profits and huge stock buybacks. Six Flags, Trump, and many other household names are also in this group.

And what do small companies do that can’t afford $1000 lawyers? The law of small numbers works against them as they don’t have access to bankruptcy financing or experts to navigate through the process. When a small entrepreneur over-leverages the company, he or she loses all personal assets. When private equity pays too much for TXU Energy, they get most of their money back. Small companies generally don’t get a second chance like the big boys do and are usually forced to liquidate. It’s a complicated process for small business owners and creditors aren't as willing to work with entrepreneurs as they are in bigger deals.

So perhaps there is an opportunity for the experts to move downstream into the SMB market. Or maybe small business owners should look to take a page out of the GM bankruptcy playbook. It would seem reasonable that at least in the instances in which struggling entrepreneurs could be helped, they should. One idea is an SBA loan restructuring program for those that are behind; perhaps banks can have more flexibility to convert the loans to equity or higher interest loans. There could also be programs to incent creditors to give businesses some more time. While bankruptcy is never good situation to be in, it would be great to afford small businesses similar support that big businesses have during this dire time.


  1. Great post! I don't know much about the bankruptcy process - but when GM went bankrupt, did they actually take out a $30B loan to navigate through the process? How did the government bailout figure into this process?

    Agree with the opportunities on the SMB side.

  2. Yes. The $30B (financed mostly from the government) went to pay the consulting fees but also to run the business during bankruptcy and to pay off debt.