What Is Your Experience Working With Closely Held Corporations That Are Struggling Financially?
Black’s Law Dictionary, a law student’s bible, defines a closely held corporation as “A corporation where the stock is held by a small number of shareholders and not publicly traded.” The reality is that so many closely held corporations generally consist of just one person, two people, or a family as the stockholder(s). That’s where the trouble often starts.
I’ve had family in a closely held corporation come to blows and start rolling on the floor in my office. Friends often do not agree. The first and second generation in a family business do not always have interests that sync.
When the stockholders are struggling, it becomes something more than just about the business. A lot hinges on the success of the business. Oftentimes, all of the shareholders’ salary and expenses, both business and personal are covered by the business. If the business starts to struggle, it becomes difficult to continue to pay business and personal expenses from the corporation, such as salaries. I’ve been working with these types of “closely held corporation” of companies for over 40 years. When I was a young attorney, I worked for a gentleman by the name of Arnold Goldstein. He wrote books on how to buy businesses, how to buy businesses with no money down, how to save your business, how to acquire and insolvent business and numerous other “how to” books of the same type. He did all sorts of things with businesses and was the best salesperson I have ever seen!
Typically, a company with debt would come to him. They would have decent cash flow, but perhaps they reached a point where they couldn’t pay their creditors or had a secured creditor that was knocking at their door. We would then recommend a state liquidation called an Assignment for the Benefit of Creditors rather than a Chapter 11. The corporation’s assets would be liquidated through the Assignment for the Benefit of Creditors and oftentimes become the new venture of the principal(s) or a purchaser without the debt. This would rescue their business and clean up their financial statement so they could presumably survive.
Sometimes, it reaches the point where there is nothing left to save, and you need to determine what the downside would be of the company’s failure to the closely held stockholders – a family, two close friends, or mother and son. Sometimes, the denouement is not pleasant.
Over the years, I’ve learned that it pays to prepare for the worst in advance when dealing with these companies. Very often, people who start their own company tend to bootstrap it. They put in their own money. They lend money to the company. They borrow money from dad to put into the company. I always suggest that your friend, brother, sister, mother, or whomever be treated like to a bank or other lending institution. It’s worthwhile to put a promissory note together with a security interest. That way, you’re giving them a lien on the assets of your business. If something goes wrong at some point, it can be a saving grace to have a friendly secured creditor.
Why Did You Choose To Work With Closely Held Corporations That Are Struggling Financially? Is It A Timely Topic Right Now?
Currently, the times are strange in the bankruptcy business. There are a lot of these small companies phumphering along. Nobody knows which way they are going to go. Are they going to get more loans? Are they going to survive? It’s never too late for people to look at their business and personal financial situation to determine what’s going to happen if things go south. If people are taking actions against you and you wait too long, you may not be able to do certain things, whereas if you had four months to a year in advance, you would have ample time with minimal pressure.
For more information on Working With Closely Held Corporations, an initial consultation is your best next step. Get the information and legal answers you’re seeking by calling (978) 922-8440 today.