Structuring a Chapter 11 Plan for Long-Term Viability

Crafting a successful Chapter 11 plan goes far beyond simply reducing a company’s debt. It requires a deep, strategic overhaul of the business’s financial and operational structure. The goal is to create a resilient enterprise that returns to solvency and can thrive for years to come.

Here are some strategies for structuring the Chapter 11 process with a view toward long-term success:

1. Conduct a deep and honest viability analysis — Before a viable plan can be drafted, the company must perform a candid self-assessment to determine what parts of the business are worth saving. A successful reorganization often involves surgically removing or selling off the underperforming parts of the business to save the healthy core. The company also must realistically assess its place in the current market. Are its products still relevant? Can it compete effectively on price, quality or service? The strategy must be grounded in present-day realities.
2. Develop realistic and defensible financial projections — Accurate financial projections are the backbone of any reorganization plan. They must be meticulously prepared and able to withstand intense scrutiny from creditors and the court. Avoid projections that show a sudden, dramatic turnaround. Instead, base forecasts on historical performance, known contracts and conservative, well-documented market assumptions. The plan also should include a detailed, multi-year cash flow model that dictates how much debt the reorganized company can handle. It must account for all post-emergence expenses, including capital expenditures for new equipment, marketing initiatives, and any new financing costs.
3. Provide for meaningful operational restructuring — Financial adjustments without operational fixes are like patching a cracked foundation without addressing the shifting ground beneath it. The underlying problems that led to the bankruptcy must be solved. This involves a fundamental re-evaluation of all major costs. A key power of Chapter 11 is the ability of a company to reject burdensome obligations. The company can exit expensive real estate leases, unfavorable supply agreements or outdated labor contracts. Management also should identify and correct inefficiencies in its supply chain, production processes and sales pipeline. 
4. Build consensus and negotiate a fair plan — A reorganization plan is a bargain between the company and its various creditor groups. Management should maintain transparent and frequent communication with all key stakeholders, including the creditors committee. The plan should articulate a compelling vision for the company’s future. It should tell a clear story about how the reorganized business will be different, more efficient and ultimately more profitable, ensuring creditors that their restructured debt will be serviced by a healthy enterprise.

An experienced Chapter 11 attorney can provide vital assistance by negotiating effectively with creditors, and, most importantly, crafting a confirmable plan of reorganization that complies with the requirements of the Bankruptcy Code and that anticipates and overcomes creditor objections.

The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced Chapter 11 bankruptcy law firms, with 12 locations across the region. If your business is facing overwhelming debt, please call 310-271-6223 or contact us online to schedule a consultation.