Business triage: Kill what's ailingApril 14, 2009: 9:00 AM ET
Some sales aren't worth winning. If parts of your company are successful and others aren't, it's time to purge.
Sharron Stankiewicz, Ohio
I own three hearing aid businesses, all listed under the same corporate name but located in different areas. Two of them are going bust. Can I get out of my lease and still keep the one successful business running? What could the landlord do if I simply walked away from those leases where the businesses are failing?
By Kathleen Ryan O'Connor, CNNMoney.com contributor
Some times you have to cut off ailing branches to save the rest of the tree. The trick is to do it without killing everything.
If you simply cannot continue with a commercial lease, the first step is to dust off the paperwork you signed when taking the property, read the fine print, and hope you were farsighted enough to negotiate an "out" in case of business failure.
If you didn't, your next step is to talk to your landlord. In a down economy the landlord might be prefer to live with less rent instead of an empty storefront - and that might buy you time to reorganize and renegotiate with other creditors.
If cheaper rent won't save the business, walking away has its own issues.
The landlord has the right to try to recoup the money outlined in the lease with one caveat: they do have to make an effort to mitigate the loss, such as trying to find a new tenant. But if they find one and the new tenant can't pay your full rent, you could get stuck owing the difference.
Alternatives to walking away include asking to buy out the rest of the lease with one discounted lump sum, or simply declaring bankruptcy and forcing the landlord to stand in line with everyone else you owe money to.
Say the landlord goes after the money. Your personal assets might be safe, but that's assuming there was no personal indemnification clause in the contract and that your company is "actually a legal corporation where protections have been maintained and remain unbreeched," says Deena Burgess, a New York City lawyer specializing in small and online businesses.
That said, the assets of the business - and that includes your remaining, healthy location - are fair game for the landlord and other creditors.
"Failure to separate the companies means that they would be treated as a single entity, and that the creditor [or landlord] could chase the assets of any and all of the businesses that comprise that corporation," Burgess says.
If you need to start triaging, what first?
Edward Stevenson, a corporate partner in the Newark office of the law firm Herrick Feinstein LLP, suggests the following:
— Minimize or restructure the debts of the two unhealthy stores by negotiating with creditors.
"The first thing is to contact and meet with each creditor of the different stores in an attempt to work out a payment plan or a reduction of the liabilities so the two unhealthy stores can operate at break-even, or possibly at a profit," Stevenson says.
— If you are unable to negotiate a resolution with the creditors, file for Chapter 11 protection. You would have to include all three stores, even the healthy one, in such a filing, but it might allow you to re-emerge with a leaner, more profitable operation. "It doesn't have to be the death knell for the business," he says.
— Test the market to see if a sale of any or all of the stores is feasible.
If you do emerge in a stronger position, be sure not to make the same mistake twice. Have a lawyer review your corporate structure, Stevenson advises. Maintaining each store as a separate legal entity can save a lot of headaches down the road.
Keith Gerson, president and COO of Tamarac, Fla.-based PuroClean, has first-hand experience with moving a company with different operations into a more streamlined and profitable model.
PuroClean began as PureSystems Inc., a jack-of-all-trades company that dealt with property damage mitigation, restoration and reconstruction. The model was successful, but after the depressed construction industry of the early 1990s rebounded and the contractors PureSystems worked with "went back to their first loves," Gerson says, the reconstruction part suffered.
Although the overall model was strong - the company added 82 franchises between 1991 and 2000 - its managers had to take a tough look at their business and admit that certain aspects weren't working.
One franchisee was doing nearly a million dollars worth of sales per year but was still losing money. Which led to PureSystems' big revelation: "Not all business won is worth keeping," Gerson says. "Sometimes you want to concede that to the competition. That work might just be tying up your bandwidth."
From that epiphany came the tough choices. "We went ahead to move into a brand called PuroClean [and] tailored it to focus on the mitigation work," Gerson says. "The margins were significantly improved."
In 2001, the company franchised the first PuroClean. The change paid off: It's since expanded to 263 locations, three times the growth it had in the '90s.
"You need to obviously understand your business and your margins or get someone who will help you," Gerson says. "The rest will take care of itself."
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