Joe Pack, Pack Law partner in Miami(Photo: Courtesy Photo)

In these days of "unprecedented times," during which Americanbusinesses have been hit hard by COVID-19, business owners arestruggling to determine how to be proactive and arm themselves forthe economic threats that are still to come.

Following is guidance based on my experience as a Chapter 11bankruptcy attorney representing businesses and creditors in someof the most contested cases ever filed:

First, get your financial snapshot in focus.This means: compiling a balance sheet, listing all of your assets,all of your payables (or liabilities), including what may become aliability down the road (i.e., contingent liabilities), anddetermining what equity (if any) is left for owners. Following from that, is there an operational plan that can beimplemented to lower costs while salvaging the competitiveadvantage of the company?

Second, take inventory of your contracts andagreements. Which contracts are critical for the businessto continue operations? What constitutes an "event of default"under those agreements? While businesses are generally seeingpayment waivers across the board, the vast majority of contractsand virtually all loans include other obligations (or covenants)that if not satisfied or specifically waived still render theagreement in default.

This means, borrowers who are negotiating their loans should benegotiating more than just payment forgiveness. Is there a "forcemajeure" provision that applies to your business's obligationsunder the applicable agreement?

Force majeure clauses are included in many commercial contractsand set forth the very limited circumstances under which a partymay terminate or fail to perform without liability due to theoccurrence of an unforeseen event. However, whether that "out"applies to your business requires its own legal analysis. The lawis evolving every day.

Third, create a budget for professional advisors neededto help you through legal and financial analyses.

Fourth, assess the realistic and honest outlook of yourbusiness. Is the problem really the pandemic? Or is thepandemic the proverbial nail in the coffin for a business that wasstruggling to turn profits long before its arrival?

Finally, understand generally informal and formalbusiness restructuring options:

• A "Workout" or Forbearance: Business owners and creditorsamicably agree on a new set of terms that are "right-sized" for thebusiness.

• State Law Assignment for the Benefit of Creditors: Akin to aChapter 7 liquidation, but with specific assignment arrangementsfor specific creditors. Companies engaged in an assignment for thebenefit of creditors are not afforded protection from the"automatic stay," a "breathing spell" provided by federal law in aformal bankruptcy proceeding, which freezes all creditorcommunication and action in their efforts to collect uponfiling.

• Federal Bankruptcy—Chapter 7: A "liquidation" of thecompany where the business is abandoned and a trustee will beappointed to sell off assets.

• Chapter 11: A "reorganization" that enables management to stayin control of the business, but wipes out equity if creditors arenot paid in full. The timeline can be very short if the work is putin prior to the filing and major creditors are on board.

• "Small Business" Subchapter V of Chapter 11: A brand new, "fasttrack" bankruptcy procedure that enables companies with less than$7.5 million of debt to not only stay in control of theirbusiness, but also retain equity ownership so long as creditors arepaid over the course of three to five years with the business'disposable income. Preparation is key, as the commencement of thecase must be accompanied with a set of financials, and the caseproceeds on a very compressed timeline.

Most importantly, take a deep breath. Organize your files. Andit all becomes surprisingly manageable.

Joseph Pack, a New York and Floridaattorney and Florida Certified Public Accountant, is the founderof Pack Law, a Miamibased law firm specializing in business restructuring andbankruptcy including Chapter 11, Subchapter V and Chapter 7. He maybe reached at [email protected].