In our Valley, the coronavirus pandemic has been wreaking havoc on industries and supply chains for weeks. Many Valley businesses are shuttered. Many hardworking people are unemployed. Rents are not being paid. Property tax delinquencies are up. These are very difficult times and many business owners have never faced challenges like this.

What issues do business owners and managers face operating in the current high stress environment? What precautions should businesses be taking to address current business conditions forcing their own situation and risks dealing with financially distressed customers created by the pandemic?

The following checklists contain some action items for business owners and managers to help mitigate their risk of financial distress. Every situation is unique, each business is different, and there is no universal, one-size-fits-all solution applicable to every business in the face of this unprecedented social and economic disruption. However, there is one thing I know given my work on financially distressed business for 40 years – don’t just wait and hope. Take action sooner than later.

Here are some thoughts for your consideration and action.

 

1. Consider whether to fully draw down on current bank line availability. Cash is king.

 

2. Determine, anticipate, and calendar critical dates, including, but not limited to: Prepare financial projections and cash flow projections on low, likely, and high scenarios.

o Loan/credit facility maturity dates

o Debt service payment due dates and amounts

o Material contract/lease payment due dates

o Due dates of product delivery commitments

 

3. Prepare financial projections and cash flow projections on low, likely, and high scenarios. Review your debt structures. Who holds what as collateral? Who has given guarantees? Who has liens on what?

 

4. Review credit agreements and anticipate potential breaches of financial covenants. Consider if any cooperation is needed from lenders. Have a plan for communicating with lenders, suppliers, employees, and other key contributors.

 

5. Remain current on payments of federal and state employment, and sales taxes as well as wages. This is critical in the face of financial distress. Certain corporate officers, directors, and employees face potential personal liability if such taxes and wages remain unpaid (particularly for “trust fund” taxes that are withheld from employees’ pay or collected from customers), even if the company files for bankruptcy protection.

 

6. What costs and expenses can be eliminated, reduced, or suspended pending recovery?

o Evaluate and model the long-term impact of potential short-term cost reduction measures.

o Review nonessential contracts for force majeure provisions, and consult with legal counsel regarding the potential applicability of such provisions.

 

7. Evaluate and communicate with your workforce. To the extent you can, protect your employees.

 

8. Limit visitors to the extent possible, evaluate firm wide ability of employees to operate remotely. Check licenses for software, teleconferencing, and so forth to ensure sufficient access to key technology.

 

9. Review insurance policies for business interruption and other coverages. Be mindful of any upcoming renewals, payment dates, and notice periods. Consult with knowledgeable counsel regarding potential new exclusions in renewal policies, and consider other means of managing risks that insurers will no longer cover. Consider and evaluate all of your coverages.

 

10. Where your business is the seller of goods or services to customers who are at serious risk, evaluate potential use of any relevant contractual provisions and, for sales of goods, Uniform Commercial Code remedies to seek adequate assurance of future performance, stop goods in transit, reclaim delivered goods, require prepayment or otherwise seek to curtail credit sales to buyers at heightened risk of default. Now more than ever, you must know and evaluate your customer’s credit worthiness.

 

11. Where your business is the purchaser of goods or services:

o Evaluate the continued ability of your supplier to provide goods and services on a timely basis

o Be prepared to respond to a possible demand for adequate assurance of future performance, stoppage of goods in transit, or other efforts by the counterparty to mitigate its perceived credit risk.

o Suppliers may request proof of your ability to perform.

 

12. Consult human resources and employment counsel regarding procedures and protocols for furloughs, layoffs, or terminations. Be aware of legal obligations in terms of paid/unpaid time off, WARN Act requirements, and ensure continued compliance with applicable exempt/nonexempt wage and hour laws.

 

13. Determine if extended payment terms should be requested from vendors.

 

14. Anticipate requests from customers for extended payment terms, and implement a protocol for responding to such requests. Have the protocol in writing.

 

15. Anticipate inquiries and potential demands from lenders. Have crisis communications professionals on the ready. You need a plan.

 

16. Anticipate:

o Requests for updated financial projections and cost-curtailment measures from lenders

o Requests/demands for additional collateral and guarantees

o Requests/demands for payment of default interest, and lenders’ professional fees

o Requests for payment of forbearance fees and demands for updated appraisals

o Consider proactively engaging with lenders.

 

17. If bankruptcy protection is a likely outcome–either to restructure debt or sell the business in an orderly manner–have a strategy in place early, with input from experienced legal counsel, to ensure appropriate messaging to customers, suppliers, employees, and other key stakeholders to avoid panic and impairment of value.

Some predict there will be a considerable demand for the services of experienced counsel and they may soon be in short supply. Even if you are “certain” you will “never” seek protection you may want some advice anyway.

 

18. Short of filing for bankruptcy protection, relief from your lenders may be available through an out-of-court workout, forbearance, or restructuring:

o Do not be afraid to seek relief from your lenders. But be prepared to substantiate the relief you request.

o If you anticipate seeking lender relief, approach your lenders sooner rather than later, and be well prepared for the negotiation. The lenders will ask for updated financial projections. Think through the bases for assuring the lenders that your situation will improve. Detail expense reductions. Demonstrate that granting relief is better for the lenders than the alternative–which may include bankruptcy. Develop a liquidation analysis, which reflects that the lenders are sufficiently collateralized in the (hopefully unlikely) event of liquidation. Or, demonstrate that the alternative of liquidation is worse for the lenders than granting temporary relief.

Conclusion

Times are tough and may get tougher. To survive you need to be proactive. Please act sooner rather than later. If help is needed, we are here to help.

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Riley C. Walter is a Fresno bankruptcy attorney with Wanger Jones Helsley. He can be reached at rcwalter@wjhattorneys.com, (559) 490-0949, https://www.wjhattorneys.com.