EXIT STRATEGY
Credit: Jon Krause
- Self-finance. The first reaction of many builders has been to dip into their own pockets to keep their businesses alive. The wisdom of that depends on how big a hit the owner can afford if his business ultimately fails. This option, of course, is limited by the owner’s resources and assets.
- Find new financing partners. Builders and developers keep insisting there are private equity funds out there itching to buy land and companies. However, their financing doesn’t come cheap and is likely to require the owner to relinquish at least some management control of his company.
- Shut down and liquidate. Many builders have taken this option, which (theoretically, at least) is less expensive and quicker than filing Chapter 11 or 7. However, this option seems less feasible as companies get larger, with multiple lines of collateralized credit, and subs and suppliers who think they’ll get a better shake through a court-sanctioned process.
- File Chapter 11. Protection from creditors will give builders breathing room to figure out a plan to reorganize and re-emerge as a new company or conduct an orderly asset liquidation. Chapter 11 also provides a platform for companies to renegotiate debt with lenders. The irony of Chapter 11 is that debtors short of cash to pay for a bankruptcy’s considerable upfront and sustained costs—lawyers, restructuring experts, accountants, and the like—can find this option futile. And so far, few builders have emerged from Chapter 11 as operating entities.
- File Chapter 7. The most common form of bankruptcy, it differs from other types of liquidation because it doesn’t involve filing a plan for repayment. A court-appointed trustee gathers the debtor’s nonexempt assets and uses the proceeds from their sale to pay creditors. This process can include an owner’s personal property, although several states exempt certain assets, such as an owner’s house, from being liquidated.