Here are three words you never want to hear from a customer/client: “We’re declaring bankruptcy.” Fortunately, I’ve only heard these words once in my 27 years of freelancing. A colleague and I had been doing media relations for a small chain of party goods stores for less than a year in the late ‘90s when we heard that ominous phrase. Initially, the owner filed for Chapter 11, hoping to get things back on track, but that didn’t happen so within a few months the company was gone.
Amazingly, those few months were very good for my colleague and I because of the nature of our work. The judge overseeing the bankruptcy allowed the company to continue to pay us because our work on customer/vendor communications was considered vital to helping the company succeed at reorganizing. So we actually had more work than normal during those final months and ended up losing no money.
This, of course, is rarely how things go. This past June, the local media here in the Research Triangle were abuzz with stories about the bankruptcy of Southern Season, a much-loved gourmet emporium headquartered in Chapel Hill, NC. The company had been purchased from its founders in 2011, and it appears the new owners, a couple of venture capital firms, had tried to expand too quickly. New locations in Virginia and South Carolina weren’t working out and online sales were lagging. So the company declared Chapter 11 bankruptcy. Things quickly went down hill from there as a major secured creditor demanded that the company be sold, which it was in late August. A well-established Delaware company, Calvert Retail, bought Southern Season for a bargain basement price and is now trying to get things back on track.
The trickle-down effect
Here’s a story from the Raleigh News & Observer that details how the woes of the large retailer poured down onto the heads of its thousands of small suppliers, some of whom were owed thousands or even tens of thousands of dollars.
What is a small business owner to do when they face this situation? Here’s an article from Inc. magazine entitled “11 things to do when a client files bankruptcy.” Some of these ideas work better if you’re a service provider rather than a company selling a product. But, still, there is good general advice in this piece.
When I read the stories about Southern Season, I couldn’t help but think that some of the vendors could have done more in advance of the actual bankruptcy filing to protect themselves from this financial hit. Here are three issues that leapt out at me when I read the numerous articles about this particular bankruptcy:
-Putting too many eggs in one basket. Southern Season had been around since 1975 and had been a big success right up until the Great Recession. It appears that some start-up food companies were just so thrilled to have their products accepted by Southern Season that they didn’t do the hard work needed to grow their business base much beyond that. Rule number one of small business is this: Never, ever tie your success to one customer.
-Not being alert for signs of danger. Southern Season’s vendors had been dealing with slow payments (up to 90 days) for months and months. As payment times grew longer, surely it had occurred to them that the company was in trouble. Yet they kept shipping their products to the company, including in at least a few cases, extra big rush orders made just a few weeks before the bankruptcy filing, at a time of year when one wouldn’t expect to get large orders, let alone on a rush basis. Yes, when you’ve done business with a company for years, it’s hard to think that they might be in trouble. But when the handwriting is on the wall, read it! Don’t continue doing business with anyone you constantly have to chase to get the money you’re owed. Constantly worrying abut whether you’ll be paid exacts an emotional toll that keeps you from being proactive about growing your business and seeking good clients who will pay on time.
I once had a very lucrative client that became a very, very slow payer. Promise after promise was broken about when a check would be put in the mail. Finally, I said I was no longer willing to do more work until the old bills had been cleaned up. Then, once I finally had my money in hand, I told them that going forward I would work strictly on a payment-in-advance basis. That worked for a few months until they decided they could probably get someone to do their PR who wouldn’t demand their money up front. Good luck to whoever that poor soul was!
-Not having adequate cash reserves. Southern Season’s $18 million in liabilities ranged from millions owed to secured lenders to a few hundred dollars owed to small vendors. What surprised me was that a few small vendors who were owed relatively small sums of $1,000 or $2,000 implied in news coverage that the loss of this money might put them out of business. Had they no cash reserves or no line of credit to tide them over? It’s possible these were business owners who had put all their eggs in the Southern Season basket and had not developed other customers. But if that wasn’t the case and a business would have to shut its doors after losing a mere $2,000, then that business possibly wasn’t viable over the long term to begin with.
A final piece of advice: Bankruptcy is a complicated subject, so please don’t hesitate to get appropriate legal advice if a customer says those unfortunate three words to you. As one example of the things you should know, if you filled an order within 20 days of when a customer files for bankruptcy, you can file what is called an administrative claim. Such a claim may mean that you will get paid on a priority basis, even ahead of companies with secured claims. This is the type of advice it would be well worth paying an attorney to receive.