Chapter 11 Plan of Reorganization – Part 2 Step-By-Step Guide

Develop a plan to reorganize your business before you create the Plan of Reorganization

This article assumes you have already read Chapter 11 Plan of Reorganization – Part 1 Where to Start. And, in case, if you haven’t read it yet, we encourage you to do so before going to Part 2.

About this methodology

This “Chapter 11 Plan of Reorganization” article presents a series of steps – a method – to develop a plan to reorganize your business and restore profitability. 

Our methodology is based on fundamental principles and basic, sound business practices. 

There are many methods you could use to accomplish this; and Credit- yogi.com cannot claim that this is, indeed, the best approach for you.

You should consult with your bankruptcy attorney or your CPA. They can advise
you if our method or some other method they recommend is appropriate for you.

Free yourself and your
business from all
“encumbrances.”

Starting at “square one” means your business now consists of you, just you (and
your partner(s), if any). You have no staff, no materials, no products or inventory,
no equipment, not even a physical location. It’s just you and NOTHING more!
GOT IT?
Okay, now you can start building (notice we didn’t say “re-building”) your business following the steps outlined below. DON’T assume that anything you had or did in the “old” business has a place in this “new” business.
Maybe “yes.” Maybe “no.” Any product, service, person, operation, and process you include in this “new” business is included only because it is profitable to do so, or it supports the creation of profit better than an alternative. Challenge EVERYTHING and EVERY decision!

Challenge and debate are
important to success

If you have a business partner or partners…

  • Each of you should individually complete steps 1, 2, and 3. Then compare your results.

These are the steps that are most dependent on critical thinking and require the greatest degree of objectivity.
Whatever is hurting your business is likely to be found within one or more of these 3 steps.

  • If you independently reach the same conclusion or decision … that’s a “keeper.
  • Wherever you differ is a matter of debate. If you can’t resolve it between yourselves, ask someone outside the business whose judgement you trust to arbitrate the debate.

In case, if you don’t have a business partner…

  • Engage your most trusted manager/employee or another person whose business judgement you trust (maybe your most important client or supplier?), to participate as if they are a co-owner and proceed as above.

Detailed Step-By-Step Chapter 11 Plan of Reorganization

Step #1
Determine Core Product
Lines and Services

What minimum number of product lines and/or services MUST your business offer to continue to be in the business you’re in. These are your business’s “core” products.

  • Is your business offering a greater variety of products or services than your market wants? In that case, your business is offering too much and can “thin out” its offerings.
  • Does your market want a greater variety of products or services than your business offers? You may need to add products or services for your market to perceive your business as a preferred source for addressing their needs and wants.

Case Study example

If you read the “Chapter 11 Plan of Reorganization” case study (previous page), it could not be more obvious that Willow needed to eliminate its electrical supply department at least 2 years ago. While it certainly was (painfully) obvious to Wendy, Ollie just couldn’t see it.

What Ollie did see was the electrical supply department as his “baby.” Lighting and interior design was Wendy’s. Ollie was “emotionally invested” in the electrical supply department to acknowledge it was never going to be profitable.

So how did they agree that the electrical supply department had to go?

First, they re-ran their Profit and Loss statements for the last two years eliminating all revenue and expenses that would not have occurred had the electrical supply department not existed. And, consequently the result clearly showed that had there been no electrical supply department, Willow would have generated a profit in both of those years, instead of the overwhelming losses.

Set up a separate page for each product line or service you decide to be included as a “core” offering. Even better, set up an Excel worksheet for each product line or service.

Download our Sample and Worksheet Template.

Complimentary and AddOn Products and Services

Identify non-core products and services that customers typically purchase at the
same time as core offerings. You should only consider offering non-core products and services that meet ALL the following criteria:

  • You want to offer the non-core product to your customers, AND
  • Your business has the skill and capacity to offer the product, AND
  • You can be price them in your market at an acceptable profit margin, AND
  • They are highly likely to sell in sufficient volume to justify the offering.

If your business will offer any non-core products or services, create a page for
each of them as well.

Step #2
Identify the processes,
operations, and
resources needed for
each product line or
service offered.

On the core and complimentary product lines or services pages you created in Step #1, list the processes and resources needed to make or offer that product line (not individual products within a line) or provide that service.

  • Can you streamline any of the processes or operations?
  • Can redundancies be eliminated?

Divide each of your product or service pages into 2 columns. Title the (wide) left
column “Process and Resources” and the (narrow) right column “Cost.”

Do NOT include general business operations in this step. Ask yourself: “if this
product line or service were not offered, would the business still need to perform this
process or need the identified resources. If the answer is “yes” then the process
should NOT be included here. Only include those processes that you would respond
to with a “no.”

Sub-headings:
  • In the left-hand column, list sub-headings for each major process, activity, or step needed to either make or prepare the product for sale, or to be able to provide the service to clients.
  • You should also include sub-headings for the following:
  • Headcount of persons (or fractions of a person) dedicated to the preparation, manufacturing, retailing, selling, distributing, delivering each product line or technician providing the service. (Do not include general business personnel, such as clerks, cashiers, office personnel, etc.)
  • Special permits and licenses
  • Statutory environmental or regulatory compliance (if applicable)
  • Floor space and off-premises storage dedicated exclusively to the product line or service
  • Miscellaneous to account for everything else attributable exclusively to that product line or service.

Under each sub-heading, list the categories of resources needed to complete that process, activity, or step. For example, categories might include raw materials, software, tools and machinery/equipment, furniture and fixtures, computers, vehicles, and anything else your business needs to pay for in the completion of each specific process or activity.

If anything under the above sub-headings is shared across multiple product lines or categories of services, then include it on the pages for each product line or service for which it is shared. Also include “Shared” in its description.

The purpose of this is to identify what is required and the actual cost (determined in a later step) for each product line or category of services offered by your business.

Step #3
Identify General Business
Requirements and Activities

What routine general business activities and requirements are needed to operate
your business, regardless of what products and services you offer.

  • Are you leasing more space than you need?
  • Could an upgrade in technology enable you to reduce headcount?
  • Can your business make do with fewer employees?

Title a new page: General Business Requirements. Like the layout of the pages in
Step #2, divide the page into two columns, one titled “Description” and the other
“Cost.”

Sub-headings:

For a large business if the general business operations are organized
and staffed in separate departments (e.g., Accounting, Human Resources, IT,
Marketing, etc.,) then your sub-headings should mimic your organizational
structure.

Categories of resources needed are then listed for each department. Be sure to also include sub-headings for non-departmental expenses such as insurance, floor space, permits and licenses, maintenance, utilities, etc.

If your business is NOT large enough to be organized by department, the subheading should correspond to categories of expenses, such as:

  • Headcount (personnel not dedicated to making or preparing products or services)
  • Advertising
  • Floor space (not dedicated to specific product lines or services)
  • Furniture and fixtures
  • Office Equipment
  • Office Supplies
  • Insurance
  • Utilities
  • Maintenance
  • Professional Services (CPA, Lawyer, Consultants, etc.)
  • Other business expenses (such as legal fees, permits, licenses, subscriptions, etc.)

Step #4
Determine the Cost of
Goods Sold (COGS)

Determine the cost for each item identified in Step #2. Can you reduce costs or
increase economies? Since you will group everything in Step #2 by product line or service offered. This will give you a true picture of the cost to make or offer each product line or service. The grand total for all products and services is your Total COGS.

Enter the cost of each item listed in Step #2 – Process and Operations in the column on the right side of the page. But DON’T automatically assume you will pay the same prices and salaries you are currently paying. You need to scrutinize every expenditure.

  1. Will you get comparable quality materials and equipment for less cost, or better quality for the same cost?
  2. With zero headcounts as your starting point, add only as many employees (or fractions of an employee) as are essential to each specific process or operation. Can you staff these vital positions for less total headcount or wages than you are currently paying? Can you upgrade the staff skills or increase the headcount for the same total wages you are currently paying?
  3. Spread the cost for shared resources, among the product lines or service categories that use them.

Do NOT include the following in the process and operations calculations:

  • The value of any of the above listed resources that the business already owns and are fully paid for. (Also, make a list of any resources your business currently owns but will not need. Your business may sell these to raise cash.)
  • Monthly or periodic payments for any resources – property, tools and equipment, vehicles, furniture and fixtures, licenses, and franchises, etc., – that the business currently uses and will NOT continue to use.
  • Wages, commissions, fees, royalties, or any other form of cash compensation for yourself or co-owners of the business
  • Commissions, fees, bonuses paid to employees or other parties, which are NOT determined directly or indirectly based on sales
  • Repayment of any outstanding debts, arrearages, or delinquencies
  • Priority and Administrative claims (discussed later)

However, DO include the following in your calculation:

  • Payments for any resources, Monthly or periodic – property, tools and equipment, vehicles, furniture and fixtures, licenses, and franchises, etc., – that the business currently uses and will continue to use.
  • Cost of employee benefits for employees who are dedicated to a product line or service – about 30% of total employee compensation

Total the cost column for every product line or service process and operation. This total is the COGS for EACH product or service.

Next add all the COGS per product or service to arrive at Total COGS for your business

Step #5
Determine Business
Overhead Expenses (BOE)

Determine the cost of each item identified in Step #3.

Again, look for ways to reduce costs or increase economies, especially regarding your headcount and wages.

Enter the costs on the General Business Requirements page you set up in Step #3. Do
NOT include owner(s) compensation in this step.

The total of these expenses is the Business Overhead Expense.

Step #6
Calculate Total Operating
Costs

Add the Total COGS (Steps #4) and Total BOE (Step #5) PLUS Owner(s) Total
Compensation
(including the value of all perks). The result is the Total Operating Cost for your reorganized business.

In case, if this amount less than what it has been costing to run your business, go to Step #7.

If it is greater than what it has been costing to run your business, go back to Step #1 and repeat the process. However, if the higher cost is the result of adding to or upgrading your product/service offerings, and the increase is entirely in the Total Cost of Goods Sold, you can go to Step #7 as well.

Owner(s)’ Compensation

Naturally, you (and your co-owners if any) expect to continue to receive at least your current level of compensation and dividends from the business.

In a Chapter 11 Plan of Reorganization case, the creditors are entitled to all the business’ “Disposable Income” up to the amount of their claim. Every dollar of compensation and/or dividend paid to a business owner is one dollar less for the creditors. Creditors are likely to object to your owner’s compensation if it seems “unreasonably high.”

Unlike other bankruptcy chapters, the Bankruptcy Code does NOT require a “Means Test” for calculating owner(s)’ income in Chapter 11 Plan of Reorganization cases. If creditors raise an objection to your owner(s)’ compensation, the determination of what is or is not reasonable compensation will be decided by the court on a case-by-case basis.

Step #7
Develop your “Pricing
Strategy” and “Pricing
Policies”

Before you can begin projecting revenue (Step #8), you need to determine your pricing.

Truthfully, we have no idea how you should price your products and services. But we do know that before you price anything, you need to think through a sound,
comprehensive, “pricing strategy” and “pricing policy” to guide you in setting prices.

Why you need and want
these.

Good pricing strategy and pricing policy make it possible to effectively price various products and services that are …

  • Profitable (if not more profitable), AND
  • Price-Positioned as competitively as you choose to be in the marketplace, AND
  • Consistent Reinforcement of your value offering to your target market(s).

Pricing strategy defines “why” your business prices its products and services in the way that it does. What is your business trying to accomplish through its pricing?

And the Pricing Policy specifies “how” the Strategy is applied in the setting of prices.

The (very) brief explanation shown below and the examples that follow, will help you better understand the “Why” and “How” to use Pricing Strategy and Pricing Policy.

What factors go into
developing a pricing
strategy?

Depending on the nature of your business’s products and services, as well as its unique circumstances, your pricing strategy will consider some or all the following:

  • Your business’s value proposition/differentiating value to its markets
  • Competition’s prices versus your competitive edge
  • Demographics (economic, social, and cultural characteristics) of the target market or selling territory
  • Current economic environment
  • Supply Chain
  • Cost of Goods
  • Target Profit Margin
  • Any other factors that determine, describes, and explains who your customers are, what they want to buy, when they are likely to buy, how they buy, and from whom they will buy

What factors go into
developing a pricing policy?

The pricing policy takes these factors into account:

  • Your Pricing Strategy
  • Cost of Goods
  • Target Profit
  • Markup Needed
  • Competitors’ Pricing
  • Consumer Price Tolerances (a/k/a “Price Elasticity of Demand” which evaluates the effect that a price or change in price has on sales volume.)

Retail Business
Case Study Example

If the purposes and subtleties of Strategy versus Policy seem a little confusing, our case study should make things clearer.

Willow’s lighting sales have been robust and profitable. But how can a pricing strategy increase and sustain profitability into the future?

After much thoughtful consideration, fact-finding, and debate, Wendy and Ollie
developed the following pricing strategy.

Willow’s Core Product Line
Pricing Strategy

Willow’s market and profit potential is based on the sale of “designer” lighting fixtures for the home and office – its core product line – priced at 160% – 250% markup on wholesale cost; and supported by the offering of free, professional lighting design services.

And, now have a look at key facts influencing the formation of their pricing strategy while developing Chapter 11 Plan of Reorganization::

How and why, they chose
this strategy

  • Big-box stores and Do-It-Yourself centers, sell a high volume of deeply discounted utility and task lighting fixtures. Since low-price and large inventory are the value offering of these competitors, they have a limited offering of high-end, designer fixtures or special-order fixtures, if they offer these at all. They also offer little, if any, lighting design services.
  • There are no other small-business lighting stores in Willow township and only five other stores in the county.
  • Wendy has a flair for how lighting can complement overall interior design. Her talent has become a competitive “value offering” for the business and she is well-known and well-regarded by interior designers statewide. This is a distinct “edge” Willow has over its competitors.
  • Willow Township and Monarch County residents represent the entire spectrum of income strata. The second-largest segment of the county’s households is in the higher-middle-income segment, and there is a substantial number of affluent and highly affluent households. These potential customers typically put quality and personalized service ahead of price in their buying criteria. They are not likely to go to the DIY or big box store for their chandeliers or living room lighting.

The bottom line

Willow does not have to compete based on price. It can price at a higher margin –
within reason – than the other competitors in the county, provided their product lines and personalized services remain “best-in-class.”

Willow’s Core Product Line
Pricing Policy

Guided by their Pricing Strategy, Willow implemented the following Pricing Policies:

  • In-stock designer lighting will be sold at 160% markup, which is 10% more than the average price charged by the other five stores in the county. Willow’s broader line of manufacturers and free design services will more than offset the minimal advantage of lower-priced competitors.
  • Special-order (high-end) fixtures will be sold at 250% markup, 25% more than the average charged by the five competitors. Special orders are typically purchased by more affluent clients who use high quality, selection displayed, distinctiveness, and better-than-expected service as their buying criteria. Willow’s representation of more manufacturers, greater number of high-end units displayed, and outstanding design services, offset the price difference.
  • The most expensive lighting fixtures ($2,500 and up) are most often purchased by interior designers for re-sale to their clients. Typically, an interior designer makes 3 – 4 of these purchases per year and value Wendy’s helpful suggestions. Willow will discount its markup by 50% on sales to interior designers. At half the markup, the dollar amount of profit from each of these sales is three to five times more than Willow makes on its average sale. The discount and Wendy’s reputation should draw interior designers from the surrounding counties.

Complementary Product Line Pricing Strategy

In addition, Willow will also offer utility, task, outdoor and security lighting as “complementary” product lines, priced to generate showroom traffic.

Why they chose this strategy

  • Showroom traffic is the lifeblood of brick-and-mortar lighting stores. The sole purpose in offering these products is to generate more showroom traffic so that customers see the designer fixtures that are not available in a big-box store or DIY center and come back to make a high-profit purchase later.
  • These products are smaller, lightweight, deeply discounted wholesale cost and compact packaging. Willow can buy, stock, and display a wide selection of these fixtures for a comparatively small investment of cash and floor space.

Complimentary Product Line
Pricing Policy

With that strategy in mind, Willow adopted the following pricing policy.

  • Complimentary product lines will be priced at a 5% markup. At that level, Willow can be comparable to the big box stores and DIY centers for these lighting products. If price is comparable, Willow’s larger selection, customer service, and customers’ preference for a small business should result in increased showroom traffic.
  • There is no discount if these products are sold to an interior designer.

Pricing Strategy Factors for
Other Industries

Obviously, Willow Lighting is an example of a retail business. The purpose of Pricing Strategy and Policy is equally important in every other industry. Though the objectives and factors maybe just a little different in Chapter 11 Plan of Reorganization.

For the restaurant and hospitality industry …

  • Since there is no shortage of places to dine, what is it that draws customers one establishment versus another? It’s the “key differentiators.”
  • What differentiates your restaurant? Is it your cuisine, your target clientele, features (e.g., live music, ambiance, scenic view), the notoriety of your chef?
  • How do your key differentiators and your menu offerings influence your pricing strategy?
  • If your menu is based on dishes that do not require much advanced preparation and need only short cooking time, you can generate a high rate of profitable table-turnover with a low-margin pricing strategy.
  • Conversely, more elaborate dishes prepared to order require a lower rate of table turnover. Hence, higher-margin pricing is needed to offset the reduced number of seatings.
  • A well-established restaurant with a loyal clientele can price on the higher side without materially affecting its volume of customers.
  • A unique menu – e.g., Italian Japanese Fusion – allows prices to be set according to the affluence of the locale and the popularity/novelty of the cuisine.
For “Blue Collar” Service Industries …
  • Typically, you’re bidding on a job, even if your firm has a well-established and trusted reputation. Pricing is very elastic in its impact on sales.
  • In many cases, services sold are “one per customer.” For example, if yours is an office cleaning firm, your customer will only hire your firm to clean its premises once per night. The keys to generating more revenue are growing the customer base and offering complimentary products and services.
  • The result is that in these industries, pricing strategy needs to drive the acquisition of new customers and purchases of complimentary products and services from existing customers.

For Professional Service Industries … (doctors, lawyers, accountants, engineers, etc.)

  • Compared to others, these industries are “price inelastic” meaning that price is not a key consideration when a provider is being chosen. Usually, selection is based on referral, reputation, specialty, location, range of services offered, etc.
  • A pricing strategy helps accomplish your growth and target client objectives. For example:
  • Flat fees for services support rapidly expanding your client base, especially with the less affluent market sub-segments.
  • Hourly fees suggest custom, more personalized services, especially for more complex needs and more affluent clients.
  • Retainer fees and Assets Under Management support the development of recurring revenue streams from clients with continuous needs.

Now it’s time to develop a pricing strategy and policy for your business. If you have coowners, this should be a group effort. When you are satisfied with your creation, write it down and share it with anyone and everyone in the business who participates in the pricing process.

With your pricing strategy and policy in place, you are now ready to project revenue.
For EACH product or service:

  1. Carefully estimate your anticipated sales volume for each product or service
  2. Apply your pricing policy to each product or service and multiply by the estimated volume to arrive at Gross Sales Revenue for EACH product or service.
  3. Calculate any commissions, fees, or royalties, which are payable on the Gross Revenue for each product or service
  4. If prices charged to consumers include applicable sales tax, calculate the taxes that will be due. If you will charge customers sales tax in addition to the sales price, value this as zero.
  5. Subtract the results of 3 and 4, from the result in 2. The remainder is the Net Sales Revenue per product or service. If the result for any product or service is negative, Do NOT go any further until you have remedied the problem and can show a positive Net Sales Revenue for every product or service offered. Otherwise, you need to drop the unprofitable item.
  6. Total the Net Sales Revenue for all the products and services to arrive at Total Net Sales Revenue.

Step #9
Net Operating Profit

Subtract the Total Operating Costs (Step #6) from Total Net Sales Revenue (Step #8).
The result is your reorganized business’s Net Operating Profit.

If this number is positive: CONGRATULATIONS!!!

You have completed the development of a viable “Plan TO Reorganize” your business.
You can now go directly to Chapter 11 Plan of Reorganization – Part 3 Debt Reckoning

WARNING!!!

The Plan must show
profitability, or the court
will deny your petition.

If Net Operating Profit is negative, either Business Overhead Expenses (and owner(s)
compensation) are too high; OR Net Sales Revenue is too low. Revisit Steps #5 and #8.
And don’t get discouraged if you need to repeat the entire process from Step #1.
If you cannot get this result to a positive Net Operating Profit, you don’t have a viable
business model.

GO NO FURTHER!

You need the help of a professional business consultant who can bring a truly objective perspective to the process to determine IF and how your business model can be profitably reconfigured.

Otherwise, the court will deny your Chapter 11 Plan of Reorganization petition and you may have no choice but to convert the case to a “Chapter 11 Plan of Reorganization” Liquidation Plan.

You should revisit Steps #1, #2, and #3.

Potential Remedies

In case, if there is more profit to be found, you will find it in reassessing what your business needs to offer to customers and how and what it needs to offer it.

Unless you discover a mistake, do NOT change the operating costs in Step #4 except to reflect the impact of any change(s) you make in Steps #2 and #3.

Go through your general business expenses in Step #5 and try to find places where you can reduce costs WITHOUT disrupting the business.

Take another critical look at your pricing. Can you increase markup without losing sales to competition? The best place to increase your markup is on those products and services your competition is not offering.

You can eliminate the operating costs associated with them, if you determine that one or more product lines or services included in Step #1 should not be offered. However, you will also need to eliminate the revenue for those products and services.

When the result at #7 yields a positive Net Profit, you can then go to Step #8. (Yes, reducing owner(s)’ cash compensation is a valid change to help get to the desired goal.)

If you still cannot get to a positive Net Profit, you need a business consultant to determine if your business can become viable, otherwise, the chances are, your business faces liquidation.

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