Time to Surrender? In an embattled economy, many small businesses face tough choice

His profile on networking Web site LinkedIn tells the story: He calls himself the “CEO of numerous unsuccessful companies” – six, in fact, in the last three years.

“I’ve kind of been through one restructuring after another,” Theobald said.

Theobald is not alone.

“I’m seeing a lot more companies coming to me needing help figuring out how to close their business,” said Raymond Plaster, a partner with Springfield law firm Moon, Plaster & Sweere LLP.

Small businesses face a significant number of challenges, from finding an adequate customer base to determining the best audience for their product or service.

And those problems can be magnified during lean economic conditions. That combination can leave some business owners with the task of making a difficult decision: Should I close my doors, file bankruptcy or take some other step to mitigate my potential losses?

That’s where bankruptcy experts such as Plaster enter the picture.

“I make the analysis as to whether or not it makes more sense to file for bankruptcy and close the business or close without filing,” he said.

Theobald has taken both of those steps at one point or another; he has closed several businesses including taxi-top advertising company Emphasis Marketing, and he filed personal bankruptcy in January.

Notice the warning signs

Financial advisers and attorneys say there are some red flags that should tell business owners they may need to consider drastic measures.

Most can be found in a company’s financial statements – and if those aren’t in place, that’s another problem altogether.

“When you look at financial statements, you can sometimes see it coming, but one of the key factors is that they’re actually preparing good financial statements, which a lot of companies don’t do until it’s too late,” said Joseph Page, accountant and partner with Whitlock, Selim & Keehn LLP.

If accurate financial statements are in place, Page said there are a few items in particular to consider.

The first is cash flow – an item that can easily mislead owners if they’re not paying close attention.

“They may think they’re doing fine with cash flow, but it may be by way of borrowing more and more every month on their line of credit,” Page said.

Other items to look out for are working capital and business equity; Page said a lack of working capital can mean the business requires loans to operate, and lack of equity in the business means those loans could be harder to come by.

“If they have very little equity in the business, whether it’s because they just didn’t put much money in or they’ve suffered losses, they’ll have a hard time getting additional financing,” Page added.

Bankruptcy attorney David Schroeder said the most important aspect, however, is catching the signals early enough in the process to mitigate the personal impact.

“A lot of times businesses won’t get advice from their CPA or attorney until the last minute,” he said. “If that’s the case, you’re probably looking at the threat of bankruptcy.”

Theobald added that business owners need to be brutally honest about the state of their business, as he ultimately had to do with Xponix, a technology company that’s among his failed ventures. Theobald described Xponix’s financials as “terrible,” though it wasn’t easy for him to come to that conclusion.

“It makes a huge difference if you can be really honest about where you’re at, because then all of the problems are on the table, and you can make a decision on how to move forward,” he said. “You can decide, is it possible to pull out without some sort of restructuring, or is there a systemic problem with the market?”

Theobald closed Xponix, which offered interactive marketing, last year, just a year after launching the business.

Plan of attack

When a company reaches the point where the warnings are too loud to ignore, the next step is determining the best plan of action.

Ken Reynolds, senior partner with Reynold, Gold & Grosser PC law firm and a board member for Consumer Credit Counseling Services, said he most commonly advises business owners to simply close the company and walk away.

He noted that most creditors require small business owners to put personal guarantees on any borrowed money or goods, meaning that if the business goes under, the owner will be responsible for those goods anyway.

“I tell them, ‘Look, don’t waste your money on me to file a business bankruptcy. Just let it go by the wayside, let it be administratively dissolved, and let’s do a personal bankruptcy,’” Reynolds said. “‘Take all your business debt that you’re personally obligated for, put in on your personal bankruptcy and wipe it out that way – and only pay for one bankruptcy.’”

Once a business owner has made the decision to close, the next step is figuring out the least financially damaging way to go about it – and that’s where the attorney comes in.

“The whole goal is to maximize the return for the people involved,” Plaster said. “That includes preserving credit. Sometimes we can close a business much more expeditiously outside (a business) bankruptcy.”

Exploring all options

Despite the possible advantages of closing a business without going the bankruptcy route, business bankruptcy numbers are up – and not just among businesses that are ceasing to exist.

In the first quarter of 2008, 73 businesses filed for bankruptcy in the western half of Missouri, according to the Administrative Office of the U.S. Courts. That’s up 62 percent from the first quarter of 2007 and 11 percent from the fourth quarter of last year.

Dan Nelson, a bankruptcy attorney in Springfield with Lathrop & Gage, said there are advantages to filing a Chapter 11 bankruptcy, which requires businesses to file a reorganization plan to repay at least part of outstanding debts over a longer period of time.

“Chapter 11 … gives them some tools they don’t have outside of bankruptcy to stretch out their payments ... ,” Nelson said. “It’s not uncommon in those kinds of bankruptcies for businesses to have some unpaid tax liability, and the bankruptcy code affords them some (extra) time to repay those delinquent taxes … and avoid further accrual of penalties.”

Nelson, however, notes that many businesses aren’t well suited to file Chapter 11 bankruptcy. He said that the number of calls to his office inquiring about filing bankruptcy has increased significantly, but not all the businesses that call have bankruptcy reorganization as a viable option, particularly if there are no signs of an upswing in revenues.

In contrast to rising business bankruptcies, Reynolds said he doesn’t think that filing Chapter 11 bankruptcy is the right way to go in most cases.

“To me there would be an advantage only if you see some light at the end of the tunnel, if they see something changing in their particular market or business that will generate more income for the business and generate a profit,” he said. “But a lot of times, people are more hopeful than what reality dictates.”

As for Theobald, he’s not letting his past experiences deter him from trying new ventures.

He is now working with partners on both a Web design company and a used-car sales business, Zion Auto Sales, on Division Street.

“You have to be willing to say that things are failing, and you have to be willing to be a failure over and over until you succeed,” he said of navigating small-business waters. “You need that never-say-die mentality.”