Last month I wrote about valuing goodwill in divorce situations. Among other things, I said that an ordinary person struggling for an ordinary living probably doesn't have much goodwill.

A few hours after the issue hit the streets I got a call from a reader who strongly agreed with me. He had purchased a business at several times its realistic value and the debt service was crushing him. While his purchase had been agreed upon, his pain was no less real. He was desperately looking for answers. Following are some of the things I told him, and some I didn't think of until later.

In any difficult life situation one has three choices - or some combination to them. Those choices are:

1. Live with it,

2. Change it, or

3. Leave it.

While that may sound simple, it often isn't.

Living with it

The first necessary step is to obtain a realistic assessment of the problem. Is it a survivable situation? If not, what changes must be accomplished so that it is? A business that finds itself paying out more that it is taking in must either increase revenue of decrease expenditures. To increase revenues one must either increase effort (work harder) or increase investment - or both. For a strapped business operating at its maximum capacity this is often not an option. On the other hand, a decrease in expenditures can result in decreased revenue (you can't sell from an empty wagon). You are damned if you do, and you are damned if you don't. If this is the case, living with it is not an option.

Changing it / Leaving it

The line between changing and leaving is exceedingly fuzzy, and sometimes appears to go in a circle. Real change is often not possible until one is prepared to leave, which is of course a change.

The most expedient solution to a crushing debt load is to renegotiate the debt, provided the creditor can be induced to do it. Unless forced by a bankruptcy process, a creditor generally has no legally compelling reason to bargain. Nevertheless, the creditor may have very strong social and economic reasons to renegotiate, particularly in a small community. Few people want the public image that can accompany forcing an associate into ruin. Also, getting paid something is generally preferable to repossessing a ruined business. I am convinced that negotiation is the obvious second step. That failing, mediation should come next (mediation is essentially negotiation with the help of a neutral third party).

If the seller steadfastly refuses to budge, and the situation is sufficiently untenable, a reorganization under the umbrella of the Federal Bankruptcy Court should be considered. According to Bob Spader, a local attorney practicing bankruptcy law with MacDermid & Liebert, P.S., some limited relief is possible to both individuals and corporations under various chapters of the Bankruptcy code. While a corporate reorganization under Chapter 11 can be both complicated and expensive, a Chapter 7 liquidation or Chapter 13 individual repayment plan may provide a reasonable basis for a new beginning.

Next month I'll discuss ways to avoid such problems in the first place.
 
 

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