Assignment for Benefit of Creditors – Simple As ABC

 
 
The third alternative to liquidating your own business or filing for bankruptcy is to follow a procedure called an “assignment for the benefit of creditors,” or ABC. Here you work with one of the many ABC companies or law firms that specialize in liquidating insolvent businesses. Basically, the ABC company will liquidate your assets and pay off your creditors (for a percentage of what it is able to sell your assets for), while you and your co-owners move forward with your lives.

This option generally works well if your business is a corporation or LLC with a lot of debts and assets. A large liquidation can take months or years to wind up—something you probably can’t afford to spend your time doing—so it makes it worth selling your assets to a third party in one fell swoop.
How Does Assignment for Benefit of Creditors Work?

Your business assigns (transfers) all of its assets and debts to the ABC company or law firm, meaning that liability for the business’s debts moves to the ABC company or firm. You might still be liable for debts with personal guarantees (or all debts if you are a sole proprietor or partner), however, so you want to discuss with the ABC company paying these debts first.

EXAMPLE: Angelo’s Meatpacking, Inc., has been suffering from poor sales for the past year, and now Angelo’s accounts payable list is growing, creditors are demanding payment, and the company will be out of cash within a few months. Angelo consults with two ABC companies and finds that one company has experience with liquidating meatpacking companies, meaning that this company is more likely to get top dollar selling Angelo’s business equipment. Angelo signs a contract with the ABC company (now called the assignee) and provides a list of the company’s creditors as well as all of the business assets to be assigned.

First, the ABC company investigates whether Angelo’s company can be sold as a going concern. If not, it will send a letter to all creditors notifying them of the fact that the assignment has been made and providing a claim form for each creditor to submit a claim to the ABC company. At the same time, the company advertises the assets for sale in industry publications and, using its contacts, searches for another company to take over Angelo’s lease, for a fee. It also publishes a press release simply stating that it has acquired the assets of Angelo’s Meatpacking, Inc. After all of the assets have been liquidated, the ABC company takes a percentage of the proceeds as its fee and distributes the rest based on the creditors’ claims. In six months, it’s all done.

An ABC company will almost always get more for your assets than a bankruptcy trustee will, and it may be able to sell any intellectual property you own to help pay debts, something a bankruptcy trustee usually will not do. Going the ABC route is also usually faster and more private (and less embarrassing) than a bankruptcy.

To learn more about ABCs, you should speak to a business lawyer. You can submit your question or case to a local business lawyer on Nolo’s website. https://www.nolo.com/legal-encyclopedia/free-books/small-business-book/chapter13-3.html

When Does a Sale Become a “Sale”?

 

We recently received an email from an old friend who was looking for clarification and help for her husband’s daughter.

The daughter works as a sales person for an optical equipment company receiving 100% of her compensation as commission.

There is also a bonus structure based on “sales” at the end of the fiscal year.

 

WHEN THE YEAR ENDED …

When the fiscal year ended, there were several last minute “sales” for which the company was declining to recognize for her bonus.

The “reasons” given in the email included: The orders arrived on the East Coast too late to be shipped; the Sales Manager didn’t want her sales to exceed the sales of the owner’s son, and other emotional issues.

But it was clear from the various issues, that she didn’t really understand what constituted a sale on the part of the company.

 

WHEN IS REVENUE RECOGNIZED?

There are several International Financial Reporting Standards criteria for the recognizing revenue on the sale of goods and services.

They break down into Critical Events and General Rules with some exceptions.

 

Critical Events Approach

The Critical Event Approach provides five criteria for identifying the critical event for recognizing revenue on the sale of goods:

1. Risks and rewards have been transferred from the Seller to the Buyer

2. The seller has no control over the goods sold

3. Collection of payment is reasonably assured

4. The amount of revenue can be reasonably measured

5. Costs of earning the revenue can be reasonably measured.

 

General Rules Approcah
Under the General Rule:

1. Revenues are realized when cash or claims to cash (receivables) are exchanged of goods or services. The revenues can be recognized when the asset received in such an exchange are converted to cash or a claim to cash

2. Revenues are earned when such goods or services are transferred or rendered. Both such payment assurance and final delivery or completion (with allowances for warranty, returns, etc.) are required for revenue recognition.

 

 

UNIQUE CIRCUMATANCES …

There are unique circumstances that are related to revenue recognition:

1. Revenue from rendering services are recognized when the service is completed and invoiced

2. Revenue related to the use of company assets (money, rent from using fixed assets or royalties for using assets) is only recognized as time passes and the asset is used and is or maybe invoiced for the percentage use of the asset.

3. Revenue from the sale of an asset, other than inventory, is recognized at the point of sale when it takes place.

 

SEVERAL EXCEPTIONS …

There are several exceptions to the revenue recognition criteria both for revenues that cannot be recognized at sale and for revenue that can be recognized prior to a sale:

1. If the sale contains a buyback agreement in which the company sells a product and agrees to buyback the product after some time. If the buyback covers the cost of the product and any related holding costs, the “sale” cannot be recognized until the buyback expires.

2. If a company experiences a high rate of returns and cannot reasonably estimate those returns, it cannot recognize the revenue until the returns can be reasonably estimated and reserved for against the revenue.

3. In companies with long term contracts such as construction or development and the contract includes a provision for invoicing based on a percentage of completion clause, then revenues may be recognized based on the agreed upon percentage of completion.

4. There is also and exception that allows revenue recognition even when there is not a “sale” at all. This generally applies to agricultural products and minerals. There is generally a ready market with reasonably assured pricing and the units are interchangeable with a low cost of selling and distribution.

 

A GOOD EXAMPLE …

A good example of the problems that can occur with improper revenue recognition was a company that became a client of Revitalization Partners where they shipped product prospectively to dealers with rights of return if not sold and also gave 180-day payment terms.

They were essentially using the dealers as warehouses, however they invoiced them, treated the shipment as revenue and an as account receivable when shipped. They had no idea if the product would get sold and their process led to problems with their bank and credit line. Part of our process was to restructure their sales process for a new bank.

As for our sales person and her bonus, a discussion with her management as to how her “sales” do or do not fall into these categories, may be helpful.

 

 

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

United Airlines….Again!

 

Almost exactly one year ago, we wrote two blogs regarding United Airlines. If you recall, the major episode involved using armed authorities to drag a man off a United flight that he had booked, paid for and was in his seat.

The reason was that United needed four seats to move a flight crew from one city to another.

At the time, the United CEO, Oscar Munoz apologized and indicated that they would put all their customer facing employees through a new training program.

A year later, over the past two weeks, United has done it again. Several times!

A flight attendant forced a women passenger to place a dog, in an approved carrier in the overhead compartment where the dog died during the flight. That was bad enough, but the flight attendant insisted the dog go in the overhead despite the woman and her child screaming that it was a dog.

 

FOR ALMOST 3 HOURS …

Supposedly, because the woman spoke little or no English, the flight attendant claimed that she did not know it was a dog. Yet, the woman had paid $125 in fees to carry the dog onto the plane and the dog barked and whined in the overhead for almost three hours. 

The airline says that the flight attendant did not understand that there was a dog in the carrier, a story the family and other passengers state is only not true, but given the noise, could not be true. United Airlines says they are “investigating”.

In other incidents, a ten-year-old German Shepherd was sent to Japan when it was supposed to be going to Kansas. In that case United chartered a private jet to fly the dog home at a reported cost of $90,000.

In another case, two days later, a St. Louis bound United flight made an unplanned stop in Ohio because a dog was, once again, on the wrong plane.

 

CAUSED MORE ANIMAL DEATHS …

United has caused more deaths of animals than any other airline in the United States. And once again, Mr. Munoz states that thousands of workers will be going through a new training program that will train them to better handle situations based on safety, compassion and efficiency. 

He further stated that “We put our folks in bad places when we give such definitive, specific, concrete, rigid rules that they’re not allowed to show a little caring and compassion.

To top all of this off, United tried to bump a passenger off a flight based on her having the lowest priced ticket.

She started tweeting her experience in real time and by the time she was done, her compensation was $10,000. She’s probably created a new level of compensation for a flight being overbooked.

 

STARTS AT THE TOP …

Airline expert George Hobica says the airline’s failures start at the top, with CEO Oscar Munoz. It’s just a lack of integrity in their leadership,” Hobica stated. And a lack of integrity trickles down from the top. The flight attendant who lied about the dog should be terminated immediately. There were enough witnesses to know what happened.

And speaking of witnesses; where were the passengers when this flight attendant was being “rigid”?  This dog barked for almost three hours while suffocating to death.  

Have we become so fearful, as a country, of someone with even a little authority that we cannot speak up. It makes a mockery of the term “See something; say something”. How about: “Say something, get kicked off a flight”?

The animosity between management and employees became more clear earlier this month, when the company briefly replaced quarterly, performance-based bonuses with a lottery that would hand out a smaller number of larger bonuses – and tried to frame it as a positive development. After a weekend of employee outrage and negative press, the company halted the change to “consider the right way to move ahead.”

 

MORALE ISN’T GOOD ….

In March, the airline introduced “core4,” a new training program for employees who interact with customers. The program was designed to improve their efficiency and prevent customer service issues from escalating into scandals. Wasn’t this the training that was promised a year ago?
“Morale isn’t good,” a United employee told Inc.

“There’s so much bad blood after the lottery bonus scandal. Everyone is wondering how they could even suggest something like that. And we still don’t know whether they’re going to take our bonuses away anyway.”.

“An underpaid and overworked staff will be unhappy, and they’ll take it out on customers.” Hobica said. “It needs to be fixed, or it will get worse.” Something that those who own and manage companies should remember.

This is a disastrous outcome for United, because not only has it lost control over the narratives; (which it was never going to have) but it has it leaned into it in a way that reinforces every single previous stereotype the public has of airlines, not only has it fed into the current fascination with the arbitrary exercise of power – but it has shifted all of these narratives onto itself.

United has now become the living embodiment of everything godawful about air travel.

 

AN ORWELLIAN HELLSCAPE …

It didn’t have to be this way. But recovering now may be too little too late; United doesn’t simply need to make this situation right – it must rectify the larger systemic issues which make air travelers feel as though they are potentially navigating an Orwellian hellscape every time they need to get on a United flight.

In other words, it needs to transform “come fly the friendly skies” from a slogan into a value statement – and then bring it to life in its day-to-day operations. It has compensated passengers.

But none of that addresses what has become at this point, years of increasingly callous, inhumane service characterized both by reducing capacity while jacking up prices in an ongoing mission to ensure every possible seat is filled and by creating conditions in which people can expect to be treated poorly.

United owns the terrible experience of travel.

Getting out from under that is going to take a lot more than a public apology and the promise of an investigation. It means taking a good hard look at its attitude toward its service and its customers, and the structures it has put in place that perpetuate these situations. It means taking immediate steps, that may cost them short-term profit but generate real, positive goodwill.

 

And it means that United needs to stop chasing the golden snitch of efficiency to the exclusion of all else. Efficiency will never and can never take the customer experience into account except insofar as it measures the amount of suffering that can be inflicted before one starts losing money.

Maybe then, the Board of Directors will recognize the lack of integrity in management.

Nobody expects United to be a charity, but cramming miserable, resentful people into a sardine can while killing their pets, isn’t the only way to make a buck. It’s a recipe for disaster that has seemed to reach critical mass, and it’s time United got serious about doing better.

 

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Capital Restructuring

 

Restructuring a company is usually only considered when all “business as usual” options have been tried and have failed.

It is generally only then that operational executives and owners believe that the business cannot continue in its present form and start exploring viable alternatives.

All of the options shown below are typically considered as part of the process of exploring the various options available to restructure a company’s finances and business operations.

Those who own and manage the firm then pick the best available alternative and often hire experienced executives, like Revitalization Partners, to manage the process of implementing the restructuring a company method they select.

Executives who have never had to manage restructuring a company before are most often not familiar with the myriad of business restructuring options available to them and are also typically not familiar with the actual process of implementing such restructuring methods.

 

Our Primary Objective …

Restructuring a company is intended to enhance the overall value of the business and thus make the firm or surviving assets more financially attractive to creditors, investors and the primary capital markets.

This restructuring “process” is thus intended to streamline the company in order to enhance operational efficiency and profitability or make the assets as financially attractive as possible to facilitate a sale.

 

Our Primary Functions

We can help with restructuring a company in the following ways:

Corporate Realignment: restructuring a company through this process we analyze the entire business and develop a plan that would reorganize the firm’s operating units into the most profitable and efficient business structure.

This can include the transfer of businesses units or company assets from one group to another or the sale of identified business units. It often results in the release of capital that has been previously locked in the balance sheets of these business units.

Liquidation:  Many times, the liquidation option is rejected by management because it is initially seen as a public acknowledgment of business failure.

The fact is that some businesses have reached the end of their life cycle or the market has changed so dramatically that continuing the business in its present form is unrealistic. In such cases, a liquidation makes the most sense so restructuring a company is not a viable option.

Managed Exits: We can assist by providing interim management to wind down the business with the goal of restructuring a company by maximizing the overall return to investors, owners and creditors while minimizing associated risks to customers and employees.

De-mergers: Should you need to structure a de-merger, we can make arrangements such that the emerging entities will result in a financial structure that is tax efficient and creates an effective path for separation of the business units involved.

Debt For Equity Swaps: Restructuring a company through a debt-for-equity swap involve one or more of your creditors agreeing to cancel some or all of your debt in exchange for equity in your business. This is a valuable option when you want to reduce the businesses debt load but don’t have the cash available to pay down debt or need to better use that cash for business expansion.

Our experienced business restructuring team can assist with planning and implementing the most effective debt-for-equity swap option.

Assignment For The Benefit Of Creditors: This is an alternative to Chapter 7 (or a liquidating Chapter 11 bankruptcy) that is growing in popularity and becoming an viable reorganization tool in Washington and other states. Essentially, restructuring a company through ABC is a method that enables a business to end its obligations to its creditors and also avoid the time, costs and and stigma that often occurs in a bankruptcy proceeding.

These are a few of the many techniques for restructuring a company we have used to help client firms return to profitability of professionally wind down operations. We are ready to help you.

Restructuring a company is what we do so please CONTACT US and we would be happy to confidentially discuss your situation.

 

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Integrity & Accountability

 
 

The March 8, 2018 issue in the Seattle Times presents the story of a former Coast Guardsman who injured his leg during a fall in 2011. He went to the Puget Sound VA and had surgery on his leg.  

After having excruciating pain following the surgery and having three more surgeries, he finally went to a private doctor.

The doctor determined that the VA surgeon had inadvertently pushed a surgical screw about a centimeter into a nerve bundle, causing him chronic and excruciating pain.  Despite multiple X- rays by the private physician showing the screw, the VA doctor denied that he had done this and denied medical negligence.   However due to the delay in getting the proper care, the lower leg had to be amputated.

In this case, due to a donation to an organization that uses amputated limbs to train rescue dogs, the limb was still available. A pathologist that examined the leg found that the screw had indeed been pushed into the nerves.

 

UNDENIABLE EVIDENCE IS “SILLY” …

The VA doctor, in the face of this evidence continued to deny any responsibility and claimed that the evidence by the private doctor and the pathologist was “silly”.

Yet, in pretrial mediation the VA agreed to pay the individual $1.75 million to “avoid further litigation.  $1.75 million to an individual who had been in pain for years, lost his job, lost his wife and finally had his lower leg amputated.

In the final blow, the Justice Department had rejected the settlement, offering $1.4 million and denying any wrongdoing by the VA. Exhausted, the individual accepted the settlement.

The Orthopedic Surgeon and his management continue to work for the VA.

 

THE ORGANIZATION’S OPERATING CULTURE …

We have all read about the horrors outlined by those who have had difficulties with the VA. 

Those who manage the VA, from the top down are focused on avoiding accepting any responsibility for errors made by them and those who report to them.

In this case it was a leg; in others it has been life and death.  But always, admitting an error is to be avoided at all costs.

But what about when it isn’t life or death, but the conduct of your company or business.  Like the VA, rarely do the character flaws of a single individual fully explain corporate misconduct. 

More typically, unethical business practices involve the tacit, if not explicit cooperation of values, attitudes beliefs and behavioral patterns that define an organization’s operating culture.

Ethics and integrity is as much an organizational as a personal issue. 

Managers who fail to provide proper leadership and fail to institute systems and behaviors that insure ethical conduct are as much responsible for those who benefit directly from the lack of integrity of the company.

 

NEW FEDERAL SENTENCING GUIDELINES …

Executives and managers who ignore ethical behavior run the risk of personal and corporate liability in today’s increasing tough legal environment. New federal sentencing guidelines are increasingly recognizing the organizational and management roots of unlawful conduct by members of the organization.

We see and have seen these issues in companies ranging from the largest to the smallest entrepreneurial business.  Consider the recent Wells Fargo fiasco.

Several years ago, Wells Fargo decided it was not doing enough cross-selling, Cross-selling means getting customers who use one service, such as checking, to use other services, such as savings or credit cards.

Wells Fargo developed a specific strategy to encourage cross-selling, which was to involve its employees in telling customers about other products and services. In order to encourage employees to support the program, Wells Fargo employed the strategy of providing incentives to employees who succeeded at cross-selling. 

 

WHERE EVERYTHING WENT WRONG …

This is where everything went wrong. Employees not only responded to these incentives by cross-selling, they manufactured fake accounts in the names of existing Well Fargo customers.

Some customers figured this out, but many didn’t and ended up paying fees on accounts they didn’t even know they had. 

The problem was huge.  In attempting to correct the problem the company fired 5,300 employees including its CEO, John Stumpf.

The Wells Fargo mess teaches a clear lesson which is that you get what you pay for. 

Specifically, you can talk yourself blue in the face about ethics, as many Wells Fargo managers did, but you cannot send employees a clearer signal than their paycheck.

 

ALL ALMOST ALWAYS IGNORED THIS …

The first reason this is important is that when organizations think about creating an ethical culture, they almost always ignore the organization’s reward system. They print codes of conduct, mandate training and establish ethics hotlines. But if you are rewarding the wrong things, you will get the wrong behaviors.

This is as true of the teller at your local branch bank as it is of the top levels of an investment bank. Organizations signal what they really care about through their reward systems. Remember that the one corporate document every employee reads is their paycheck.

The importance of this lesson goes well beyond ethics. The idea is that you can get better performance out of employees if you abandon pay for performance in favor of one or another strategy that rewards “the whole person” and not just the paycheck. The peak of this phenomenon is, a veritable tangle of cross cutting evaluations and peer-enforced group-think.

 

WHAT BEHAVIORS YOU “REWARDING”?

The Wells Fargo case shows once again the power of paying for performance. Unfortunately, it also showed the power of paying for performance when you pay for the wrong performance.

The performance systems of most organizations are the jealously guarded hostages of either executives or in larger companies, HR.

Executives who want to run truly ethical – and effective – organizations need to take responsibility for ethical behavior before engaging in silly talk about the greater good.  

You will have a lot better chance of avoiding the sort of ethics crisis that Wells Fargo has undergone if you effectively manage your organization’s reward system.

 

WE DISCOVERED SOMETHING …

At the other end of the scale, Revitalization Partners was recommended by a bank to assist one of their clients that did not have any financial management.

In attempting to establish proper systems, we discovered that the company was placing funds in another bank, which was in direct violation of their loan agreement.

When challenged on this issue, their response was that they were worried that the bank would stop lending to them.  Additionally, they were signing certification documents that they knew were not correct.

Because of their unethical behavior, the bank elected to ask the company to find a new bank and the company is no longer a client of RP.

Unethical behavior and lack of integrity has a cost. And it is often not only the managers and executives that pay the price.

 

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.