Published by Mark

Small Business Owners Have Lots Of Big Company In Bankruptcy

January 1, 2009 at 11:45 am

Just one year ago in my bankruptcy blog, I told the story of an entrepreneur in Dallas, Texas who had been interviewed by Fortune Small Business Magazine. The article was called “Filing Was The Smartest Thing I Ever Did.” As a long-time bankruptcy attorney in Indiana, what I found so fascinating about the Jeff Yarbrough saga was that, despite having proven business skills and a history of success in business, Yarbrough was forced to close his restaurant. The business failure was not due to any mistakes he made, but was due to negative events happening at the same time, things beyond his control.

When debtors come to see me about their financial problems, they tend to have negative feelings about themselves. This seems to be particularly true of entrepreneurs. But, in my years of dealing with business owners all over the state of Indiana, I’ve seen many Yarbrough-type stories about businesses brought down by forces beyond their owner’s control. Even when a business plan has been well-thought out, and even when that business has been well-managed, sometimes the timing is just bad. Sometimes shifts in an industry become a small business’ downfall.

A study published in 2005 by the non-profit organization called Ewing Marion Kaufman Foundation for Entrepreneurship. emphasized that many business owners fail because of reversals in their marketplace and in their industry (see It’s The Business, Stupid!). Not only is that very conclusion borne out in my own experience counseling small business owners in Indiana, but, as I tell disheartened entrepreneurs, the same holds true for some very large and very well-known corporations.

Here are just a few examples from my own reading of the news. Polaroid filed Chapter 11 bankruptcy in 2001. This was not because they overpaid executive bonuses, nor because of poor management. The industry was changing, and the rise of digital cameras made Polaroid’s many one-hour photo shops obsolete. Baldwin Piano and Organ Company filed bankruptcy in that same year. Their main lender had tightened the terms of credit to the point that Baldwin could not keep up with the interest costs. Sneaker maker Converse, a very well-managed company, found their product lacked the high-tech image younger buyers wanted. Zenith took a risk, moving from producing TVs into pay-per-view DVD players, but the market embraced open DVD instead. Frederick’s of Hollywood, the lingerie maker, needed to adjust its image and be more mainstream in order to compete with rival Victoria’s Secret.

There are several lessons I hope my Indiana small business bankruptcy clients will take away from these examples of large companies that filed bankruptcy. First, the very essence of business is taking risk, and, whatever size company you are, not all the risks will pan out as hoped. Second, these stories each had positive endings. What the bankruptcy process did is to “buy time” for each company to restructure. Converse, for example, signed a deal with Global Brand Marketing, making it a licensee of footwear manufactured overseas, where the brand continues to be popular. Polaroid and Frederick’s of Hollywood were each sold to new owners; it was the relief from creditors’ collection efforts provided by the bankruptcy process that allowed each company time to negotiate the sale.

My work as an Indiana bankruptcy lawyer has focused on individuals, families, and small business owners, not on the big corporations whose stories appear in headlines. But I use these well-known entities as examples of how bankruptcy is not “The End”, but often a time for new beginnings.

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