Advertisements
Following the coronavirus lockdown, many business owners are under immense financial pressure caused by the economic impact of a near global standstill. Some may be in or at risk of default or default. Creditors may be trying to get a payment and exert pressure through lawsuits and threats of legal action.
Meanwhile, for many professionals, such as doctors, dentists, technical specialists, and professional consultants, the value of their businesses is often tied much more to their personal services and goodwill than to their hard physical assets. For these owners, go out of business It can mean leaving heavily leveraged or leased equipment with the opportunity to bring your licensed skills and talents into a new business.
Advertisements
Business owners in debt often ask me if they can just close an existing practice in deep debt and open a new one. The answer, in some cases, is yes – but it should only be considered by the right people (those whose debts don't follow them) and done the right way.
Advertisements
DON'T DO THIS
An example of what not to do is found in an old Florida case, Munim, MD, PA v. Azar, MD Defendant's medical practice was sued for breach of contract and lost. Twelve days after a judgment for a substantial amount of money was granted, the owner-physician incorporated a new practice, stopped seeing patients and providing medical services at the old practice, and immediately began seeing patients at the new practice. The new practice was in the same office building, used the same furniture and equipment, employed the same manager and office staff, and served the same patients. The new office was simply a reincarnation of the old one with a new hat.
The judgment creditor followed the new practice based on a fraudulent transfer of assets, a de facto merger and the mere continuation of the business and won. Consequently, the creditor was entitled to enforce the original judgment (issued against the old practice) against the new practice of the doctor.
With a more strategic approach, the result may have been different.
Instead, start with a detailed analysiseither
Although it may be tempting go out of business riddled with debt and starting anew, such a drastic measure should not be taken without carefully evaluating the personal risks and long-term consequences. Bankruptcy, whether business or personal, may be an answer for some, but many professionals may want to avoid personal bankruptcy for fear of the effect on their license, credit, reputation, and other long-term implications.
Instead, strategic resolutions are often plausible. In my experience, most reasonable creditors would prefer to work with historically strong borrowers, lessees, and tenants for long-term success. Here are some steps that business owners, particularly those in healthcare or other professional service practices, should take when considering their options.
Read More: What to do if you have used your savings during the pandemic
Conduct a business exposure analysis
First, assess the financial obligations of the company. What are the ramifications if those obligations are not met quickly? Can the practice continue to work in the short or long term? What solution options -such as the extension of deadlines, leniency, renegotiation or other more creative alternatives- can exist? For example, will the owners move to evict, or will the equipment be seized or repossessed, or will creditors be able to pursue other options, which may involve modifying existing agreements?
Business owners should have already created a separation between business and personal interests and assets. Proper use of legal entity structures, such as corporations, limited liability companies, and professional associations, often insulates business owners from the personal obligation to assume business responsibilities (except in cases of misconduct or misconduct). professional practice).
Assuming that the company operates as a separate entity, the possibility of a liquidation of the company with a fresh start can be considered. This further depends on the extent to which the individual owners are liable for the debts of the business, rather than go out of business.