How to Develop a Chapter 11 Plan of Reorganization?
How to Develop a Chapter 11 Plan of Reorganization– Part 1: Where to Start
~ An Overview ~
You Must Prove That Your Business Reorganized Profitably
“Developing” a Plan Vs “Preparing the filing” of a chapter 11 reorganization Plan
To develop chapter 11 reorganization plan, it is essential to know where to start. There is a big difference between “developing” a Plan of Reorganization and “preparing the filing” of a Plan.
The development of a plan to reorganize your business is a process for reengineering part or all your current business model to revitalize its potential to prosper.
Preparing the filing of a Plan of Reorganization is an activity that requires lots of number-crunching and completing multiple forms. The purpose of this activity is to be able to show to the bankruptcy court and creditors, that the develop chapter 11 reorganization plan will enable the business to pay more to its creditors than they would get if the court liquidated the business.
When it’s Not Necessary To Change Your Current Business Model
Do I really need to reengineer my business model?
If your business’s financial woes are the result of an unforeseen event – fire, flood, hurricane, accident, pandemic, etc. – AND your business was operating profitably before that event, you do not need to change your current business model. Your business needs to reorganize its debt, not its business model. In this case, you can skip this entire discussion and proceed to How to Prepare the filing of a Chapter 11 Plan of Reorganization.
(However, note that the most successful businesses use a process similar in many respects to what we present here to “fine-tune” or modify their current model every 5 to 7 years. They do it as an exercise to eliminate inefficiencies, identify opportunities, and to assure their continued success in an evolving marketplace. So, you may want to keep this discussion handy for use after your business exits bankruptcy.)
Getting To The Root Cause of Overwhelming Debt
A guide to help you reorganize your business
Now, if you are still reading this discussion…
We assume that there is something significant in your business model that is the root cause for getting overwhelmed with unmanageable debt.
- Maybe it’s more than one thing
- Maybe the cause is not so obvious; or it’s obvious to some but not to others
- Maybe the cause is obvious but there doesn’t seem to be a practical fix for it?
- Maybe the cause and the fix are known but the problem is knowing how and where to start making changes to your business model?
The following discussion outlines a step-by-step approach intended to help you accomplish two goals:
- To help you identify and remedy inefficiencies in your business and remove roadblocks in the way of its prosperity and success
- To help you build a sound basis supporting a Plan your business files with the court and creditors.
Creditors Will Not Accept, And The Court Will Not Confirm Chapter 11 Reorganization Plan Unless..
Something or things need to change!
To quote Albert Einstein: “The definition of insanity is doing the same thing over and over again expecting different results.”
Unless an unforeseen, uncontrollable calamity caused the setback of your business, you need to make some impactful changes. Your business and your bankruptcy case are going nowhere (good) until you identify and change all the things that need to be done differently. Creditors will not accept, and the court will not confirm a Plan of Reorganization unless it is based on changes that can be reasonably expected to restore profitability to your business. And why should they?
If your business is going to continue doing exactly what it was doing, the same way it was doing it, managed in the same way as before, it would be insane to think it would be any more successful a second time around.
According to Forbes, about 75% of businesses fail after exiting Chapter 11. Though there are many reasons why they ultimately failed, almost all of them boil down to just two. Overwhelmingly, their planning overlooked the root cause of their business problems. Or, in fewer instances, these businesses simply failed to follow their Plans. Therefore, this results in the need to develop chapter 11 reorganization plan.
Something or things in your business must change. The challenge is determining what that should be. No one will judge your changes on how big or how many changes you make. What’s more important is how likely and to what degree the change(s) will result in sustained profitability. Whether or not your business survives Chapter 11 depends on your identifying and fixing its fatal flaw(s). The rest of this discussion focuses on exactly that: identifying and fixing fatal flaws lurking in your business model.
Seeing Your Business Model In A Different, Clearer Way
Seriously, you need to have an epiphany NOW!
The Miriam-Webster dictionary defines having an epiphany as “a moment in which you suddenly see or understand something in a new or very clear way.”
You need to see every component of your business model in a different, clearer way
How to have your epiphany?
The easiest and surest way to have an epiphany is to get struck by lightning or to barely survive a life and death situation. There is an alternative, but it’s not as easy as having a near-death experience. You must induce one.
You need to objectively assess every aspect of your business as it really is – not how you think it is or wish it to be. If you can achieve true objectivity, you will have your epiphany. And you will formulate a Plan of Reorganization that leads your business out of Chapter 11 and into prosperity. If you can’t achieve the requisite level of objectivity… well … you may want to reconsider the near- death experience.
Examine All Your Business’s Operations
If a competitor wanted to replicate your business, what would they imitate? What would they change or discard?
This requires “critical thinking” and works only if you can “get outside your business” (and maybe outside yourself as well). You need to examine all your business’s operations in an objective, unbiased and dispassionate way. This IS the most challenging task in the entire Plan development process. But it is also the necessary first step in reorganizing your business to succeed.
An overview of a “step-by- step” method to develop chapter 11 reorganization plan
If you follow the steps we summarize below with a truly objective mindset, you will “see” things about your business, its processes, and operations, in a whole new way. You may even see things you hadn’t previously noticed. You will have both the requisite epiphany and a viable Plan of Reorganization.
The following discussion outlines a series of steps – a method – to develop your Plan. Our methodology is based on basic, fundamental principles of good 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 suggested method, or some other method they recommend is appropriate for you.
At this point, we are providing just the outline of our method. If, after reviewing it you feel it could be right for you, you can access Credit-yogi.com’s Developing a Chapter 11 Plan of Reorganization – Expanded Version. The Expanded Version provides a detailed discussion – more like a recipe – on how to execute or apply each step. A case study is also included to see an example of how the steps are applied. Check out how to develop chapter 11 reorganization plan.
Starting The Actual Process-Chapter 11 Reorganization Plan
Starting The Process
Accept that as a mere mortal, you will likely get nowhere looking at your business and trying to figure out what needs to stay and what needs to change or go. That’s too hard to do, especially when as the owner of the business, it likely was you who configured your business model, hired your managers and key staff, developed the method of operations and processes, set the budgets, and approved all the expenses.
Free yourself from “encumbrances.”
A better approach is to start your critical thinking at ground zero … just as if you were starting the business from scratch. Except, this time hindsight, experience, and wisdom aids you.
For this exercise, your business comprises 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 thing, any person, any method, any process you include in your “new “business is included only because it is profitable or supports the creation of profit better than an alternative thing, person, method, or process. Challenge EVERYTHING and EVERY decision!
Partners or No Partners…
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.
- Wherever you independently reach the same conclusion/decision, that’s a “keeper.”
- Wherever you differ is a matter for debate. If you can’t resolve it between yourselves, ask someone outside the business whose business judgment you trust to arbitrate the debate.
- We can complete the rest of the steps working together
If you don’t have a business partner…
- Engage your most trusted manager/employee or another person whose business judgement you trust (maybe one of your most important clients), to participate as if they are a co-owner and proceed as above.
Determine Core Product Lines and Services
Rethink the “core” product lines and/or services your business absolutely MUST provide to your customers to continue to be in the business you’re in. 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 more important source for addressing their needs and wants.
Necessary Resources For Preparing Chapter 11 Reorganization Plan
Identify the Processes, Operations, and Resources Needed for Each Product Line or Service Offered
What processes and materials, systems, tools, equipment, vehicles, floor space, personnel, etc., needed to make or offer each product line (not individual products within a line) or provide a service. Can you streamline any of the process or operations? Redundancies can be eliminated? At a later step you will need to price the cost of these items so that you will arrive at the full cost because of each product line or service. Do not include general business expenses in this step.
Identify General Business Requirements and Activities
What routine general business activities and requirements – furniture, fixtures, office equipment, floor space, utilities, insurance, personnel, etc., 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?
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 product line or service grouped everything in Step #2 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 COGS.
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. Do not include owner(s) compensation in this step.
Calculate Total Operating Costs
Add the total costs in steps #4 and #5 PLUS owner(s) total compensation (including the value of all perks). The result is the total cost to operate your reorganized business.
If this amount is less than what it has been costing to run your business, proceed to Step #7. If it is higher, go back to Step #1 and repeat the process (unless it is higher because you added to or upgraded your product/service offerings, and the increase cost is entirely in the Cost of Goods Sold.
Pricing Strategy While preparing chapter 11 reorganization plan
Calculate the “Break-Even Factor”
In Step #8 you will develop your “Pricing Strategy” and “Pricing Policy.” But before you begin that work, you need to know the “Break-even Factor” is for the product lines or services your business offers. The following formula will help you make that determination.
Break-even Factor = Total Operating Costs (Step #6) divided by Cost of Goods Sold
The result will be a multiplication factor that looks like the following: 1.xx (The value of xx will vary based on your actual Step #6 and #7 results.)
This means that to cover both the COGS for each product line or service, as well as the BOE and owner(s)’ compensation, the sale price needs to be at least equal to the price of the product multiplied by the Break-even Factor. And at that price, there would be NO profit.
Develop your “Pricing Strategy” and “Pricing Policies in Preparing Chapter 11 Reorganization Plan
Before you can begin projecting revenue (Step #9), 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.
A good pricing policy not only makes it easier to price various products and services more profitably; but it also reinforces 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. A pricing policy specifies how the policy is applied in the setting of prices.
Both are covered in greater detail, with examples, in developing a Chapter 11 Plan of Reorganization – Expanded Version.
Project Your Anticipated Revenue
Once you are done with the above step, you are now ready to project revenue. For EACH product or service:
- Carefully estimate your anticipated sales volume for each product or service.
- 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.
- Calculate any commissions, fees, or royalties that are payable on the Gross Revenue for each product or service.
- If prices charged to consumers include applicable sales tax, calculate the taxes that will be due. If the consumer is charged sales tax in addition to the sales price, skip this step.
- 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, you’ve got a problem. You need to determine the cause and resolve how to fix it. 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, or you decide to drop the unprofitable item.
- Total the Net Sales Revenue for each product and service to arrive at Total Net Sales Revenue.
Finding Your Net Operating Profit
Net Operating Profit
Subtract the Total Operating Costs (Step #6) from Total Net Sales Revenue (Step #9). 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 of Reorganization for your business. You can now go on to How to develop Chapter 11 Reorganization Plan ?
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!
The chapter 11 reorganization Plan must show profitability, or the court will deny your petition for Chapter 11 relief.
- 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 petition and you may have no choice but to convert the case to a Chapter 11 Liquidation Plan.
Develop chapter 11 reorganization plan today.