Pacific Lifestyle Homes famously entered into Chapter 11 federal bankruptcy protection last October. Famously, mainly, because Kevin Wann is one of the few CEOs willing to speak openly about his business’ difficulties.
“If you are having challenges,” he said, “the best way to handle it is to be head on and open, and to communicate with all the stakeholders, (who are) customers, employees, vendors and the public.”
The fact is, small business owners can’t always see that bankruptcy is on the horizon. Being a small business owner has always been a challenge – financially and otherwise – and many believe that keeping the nose to the grindstone is the best way to weather another challenge.
Not so, said attorney Richard Ross. He has practiced business and personal bankruptcy in Vancouver for 15 years.
He has never been busier.
“Oftentimes, businesses wait too long to seek professional help,” Ross said. “What happens is that they’ve already run out of some of their alternatives by the time they do.”
Anytime a business starts having trouble with its cash flow, it is time to seek professional help, he said. Other signs are being late on accounts payable, not keeping enough money in the bank to cover checks or not paying taxes when they are due.
Options for small business
“Small business people are always optimistic, and they have to be,” Ross said. “It’s a wonderful character trait, but that same optimism can be a killer if it’s not tempered with a nice measure of reality.”
Wann, whose residential building company sold 350 homes at its peak in 2005, agreed wholeheartedly.
“I didn’t contact attorneys until the last minute, and the more you rush, the more expensive it’s going to be,” he said. “The natural tendency is that you don’t want to go there.”
“There,” said Ross, is a broad and relative term.
The first step small businesses need to take when they are on shaky ground financially is “a basic accounting of their business,” he said.
Ross said many mom-and-pop shops don’t have sound bookkeeping practices and need to get a realistic picture of their cash flow, look at debts, monthly costs, gross revenue projections and the bottom line.
Companies need to figure out, he said, “what business is likely to be like in the near future, whether things are sustainable or whether they have to make major changes.”
After creating basic interpretable records, the business owner should seek help from a business consultant, a certified public accountant, or an attorney – any competent professional that has experience dealing with troubled businesses, Ross said.
If a business is headed toward bankruptcy, it has three main options: a workout, a formal reorganization or a shut-down and liquidation.
• A workout means there is not formal court action involved. Instead, the business owner, stakeholders and creditors work to come up with a solution that satisfies all parties and keeps the company is business.
• Formal reorganization is essentially the same as a workout, but all parties are bound by federal law to the agreements established during the process. Companies file under Chapter 11 or Chapter 13 of the United States Bankruptcy Code.
Any incorporated business can reorganize under Chapter 11, while Chapter 13 is an individual bankruptcy, but includes $1 million in secured debt and $300,000 in unsecured debt – essentially covering a small business and its owner.
• Liquidation is a formal process under Chapter 7.
“Reorganization is simply a plan to restructure debt,” Ross said.
The plan can take many different forms, including paying back a percent of the debt, paying back the debt over a different period of time, or making an equity for debt swap.
Moving forward
Pacific Lifestyle Homes filed under Chapter 11. At time of filing, the company held $56 million in debt and had been through several rounds of layoffs. Today, the company is about halfway through the reorganization process, and expects to come out of bankruptcy in the fourth quarter of this year.
Pacific Lifestyle has $8 million in cash and is self-financing the building of its homes. Along with other local homebuilders, Pacific Lifestyle is liquidating its inventory, which has been stagnant since the downturn began. As the company sells a house, it builds a house.
Even at the bottom, Wann recognizes that he is ever the optimist.
“I don’t think the market is going to bounce right back, but it feels like we have reached a bottom,” he said. “It’s really nice to see March sales in Clark County increase over March sales in 2008.”
Wann expects his company to close just 50 homes this year, but, he said, “I can see us getting back to 300 homes within five years.”
By the numbers
The number of bankruptcy filings in the Western District of Washington federal bankruptcy court in Tacoma, which covers Southwest Washington and Grays Harbor, Lewis, Mason, Pierce and Thurston counties.
Chapter 7: In April, 689 were filed, up 72 percent from April 2008
Year-to-date, 2,382 have been filed, up 67 percent from last year
Chapter 11: In April 3 were filed, the same as last April
Year-to-date, 5 have been filed, down 44 percent from last year
Chapter 13: In April, 202 were filed, up 9 percent from last April
Year-to-date, 690 have been filed, up 14 percent from last year
Source: U.S. Bankruptcy Court, Western District of Washington
Jessica Swanson can be contacted at
jswanson@vbjusa.com.
