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Bankruptcy vs. Turnaround

Under the U.S. Bankruptcy Code, businesses have several options when facing financial distress. Each type of bankruptcy serves different needs and circumstances. Keep in mind when looking at complexity and cost, it’s nearly impossible to apply a “one size fits all” approach and estimate of cost. There are many options, but here’s a general overview:

Types of Bankruptcy Options for Businesses:

1. Chapter 7 Bankruptcy:Description: A liquidation process where a trustee sells the company’s non-exempt assets to pay off creditors. After the assets are liquidated and debts settled, the business is typically dissolved. Use Case: Often chosen when a business cannot continue operations and has no viable path for recovery.
2. Chapter 11 Bankruptcy:Description: A reorganization process that allows a business to remain operational while restructuring its debts. The company develops a reorganization plan, which must be approved by creditors and the court. Use Case: Suitable for larger companies but also accessible to small businesses needing time and space to reorganize their debts.
3. Subchapter V of Chapter 11:Description: A more streamlined version of Chapter 11 designed for small businesses with debts below a certain threshold. It allows for a quicker and less complex process. Use Case: Ideal for small businesses looking for an efficient way to reorganize without the extensive requirements of traditional Chapter 11.
4. Chapter 13 Bankruptcy:Description: Primarily for individuals but can apply to sole proprietorships. It allows for a repayment plan over three to five years. Use Case: Best for small business owners with regular income who want to reorganize their debts while maintaining their business operations.

Turnaround and Restructuring:

• Turnaround Strategies: Focus on improving a company’s performance without formal bankruptcy. This can include operational improvements, cost management, and renegotiating debt terms.
• Is Turnaround Better?: A turnaround can be less costly and offer more control over business operations compared to bankruptcy. However, if the business is severely distressed, bankruptcy might provide essential legal protections and a structured path to relief.

Role of External Consulting in Restructuring:

• Consultants’ Functions: External consultants, including turnaround specialists and financial advisors, bring expertise in financial analysis, operations, and strategic planning. They help in developing recovery strategies, preparing financial forecasts, and negotiating with stakeholders.
• Benefits: They provide an objective perspective, identify inefficiencies, and can enhance the chances of a successful turnaround.

Duration of the Process:

• Timeline:Chapter 11: Typically lasts 12-18 months, though complex cases can extend beyond that. Subchapter V: Generally faster, often concluding within a few months. Turnaround efforts: Outside of bankruptcy can also take several months, depending on the specific challenges the business faces.

Role of a Financial Advisor (FA) vs. an Attorney:

• Financial Advisor (FA): An FA focuses on the financial aspects of the bankruptcy process, including assessing the company’s financial condition, forecasting, developing financial plans, and advising on negotiations with creditors.They play a critical role in managing financial strategies, cash flow, and restructuring proposals.
• Attorney: An attorney handles the legal aspects of bankruptcy, ensuring compliance with bankruptcy laws, filing necessary documents, representing the business in court, and advising on legal implications of decisions.

Pre-Petition vs. Post-Petition:

• Pre-Petition: Refers to the period before a bankruptcy petition is filed. During this time, businesses might engage in efforts to negotiate with creditors or prepare for filing bankruptcy.
• Post-Petition: Refers to the period after the bankruptcy petition is filed. Once a business is in bankruptcy, it operates under court supervision, and actions regarding debts and assets must comply with bankruptcy laws and court orders.

The comparative costs of a typical business bankruptcy versus hiring a consultant for turnaround and restructuring can vary widely depending on the complexity of the business’s situation, the industry, and the specific consultant’s fees. Here’s a breakdown of the potential costs associated with each option: 

Business Bankruptcy Costs:

1. Chapter 7 Bankruptcy: Legal Fees: Typically ranges from $5,000 to $250,000, or more, depending on the complexity.Trustee Fees: Paid out of the assets sold; the percentage varies based on the amount recovered. TotalCosts: Can be relatively low if the business has few assets, but if there are disputes or complexities, costs can escalate.
2. Chapter 11 Bankruptcy: Legal Fees: Can range from $30,000 to over $250,000 or more, depending on the complexity and duration of the case. ConsultingFees: Often necessary for financial advisors, which can add additional cost.Administrative Costs: Includes court fees, filing fees, and other related expenses. Total Costs: Typically totals $50,000 to several million dollars for larger companies, depending on the length and complexity of the proceedings.
3. Subchapter V Bankruptcy: Legal Fees: Generally lower than Chapter 11, potentially between $15,000 and $100,000 or more, depending on complexity. Total Costs: Can be more manageable for small businesses, often totaling under $100,000.

Cost of a Consultant for Turnaround and Restructuring:

1. Consulting Fees: Hourly Rates: Can range from $250 to $1,500 per hour, depending on the consultant’s experience and expertise and the complexity of the case. Project-Based Fees: Consultants may charge a flat fee for a specific engagement, often ranging from $25,000 to $250,000 or more based on the scope and duration and size of the company.
2. Total Costs: For a typical engagement, costs may range from $25,000 to $250,000 or more. However, for larger or more complex businesses, this could rise significantly.

Comparative Analysis:

• Bankruptcy Costs: While filing for bankruptcy might seem straightforward, the costs can escalate, especially in Chapter 11, where the process can be lengthy and complex. Additionally, the business may face reputational damage and loss of customer trust.
• Consultant Costs: Hiring a consultant can sometimes be more cost-effective, especially if the business can avoid bankruptcy and instead implement operational and financial improvements. This approach may save the business and potentially generate more value in the long run.

In summary, while bankruptcy can incur substantial costs, particularly for Chapter 11, hiring a turnaround consultant may provide a more flexible and potentially less expensive route to recovery. The effectiveness and overall cost-effectiveness of either option depend heavily on the specific circumstances of the business, including its financial health, the industry, and the nature of its challenges. A thorough analysis of the business’s situation is essential to determine the most appropriate path forward. In short, businesses have multiple bankruptcy options, each suitable for different circumstances. Turnarounds may provide a preferable route under certain conditions, and both financial advisors and attorneys play essential but distinct roles in navigating the bankruptcy process. Understanding pre-petition and post-petition phases is crucial for managing the overall bankruptcy strategy effectively.

While QORVAL has extensive experience managing insolvency and bankruptcy related work, we are not a law firm, and in any such filing, you should consider retaining experienced legal counsel as well as a business/financial advisory firm specializing in turnaround, restructuring, and financial and operational improvement.

Paul Fioravanti, MBA, MPA, CTP, is the CEO & Managing Partner of QORVAL Partners, LLC, a FL-based advisory firm (founded 1996 by Jim Malone, six-time Fortune 100/500 CEO) Qorval is a US-based turnaround, restructuring, business optimization and interim management firm. Fioravanti is a proven turnaround CEO with experience in more than 90 situations in more than 40 industries. He earned his MBA and MPA from the University of Rhode Island and completed advanced post-master’s research in finance and marketing at Bryant University. He is a Certified Turnaround Professional and member of the Turnaround Management Association, the Private Directors Association, Association for Corporate Growth (ACG), Association of Merger & Acquisition Advisors (AM&MA), the American Bankruptcy Institute, and IMCUSA. Copyright 2024, Qorval Partners LLC and/or Paul Fioravanti, MBA, MPA, CTP.

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