Can’t Go IPO?

Posted: 11/1997


Can’t Go IPO?
You’re Not Helpless

Take Control By Restructuring

By Michael H. Wirpel

Here’s the scene: Your margins, profits and self-esteem are
shrinking. Your cash flow is negative; you are not positioned for
either an IPO or new debt. There appears to be no way to salvage
the business. Pictures of your inevitable ruin flood your mind–
your spouse runs off with your best friend; the IRS seizes all
your assets; your friends pretend they don’t know you; your
12-step group kicks you out; and you die in a puddle of cheap
wine on the floor of a welfare hospital.

Stop! It’s really not that bad. You have alternatives you may
not even know about. If you know how to play the game and let the
financial system work for you, you may find the financing you
need by restructuring your existing debt or inequity.

Understand What the Process Is About

Restructuring involves taking your current mix of revenues,
expenses, assets and liabilities and recombining them in a plan
of restructure, such that adequate cash flow is created. To
engineer a successful restructuring you need to accept a harsh
reality–what you want and how you do better are not the issues.
What your creditor wants and how it does better are the issues.
Look at what your creditor will need and proceed using the same
check sheet as your creditor. That is, proceed the same way the
creditor will: by looking after the creditor.

Prepare Before Approaching the Creditor

To be successful, it is most important to recognize when you
need to have your finances restructured. You are more likely to
be successful if you act while your company is stronger rather
than later on, when a difficult burden has made the company less
attractive. Once you realize restructuring will be needed, lay
the groundwork by establishing a clean record in terms of
communications with your creditor about your situation before
rather than after the deal becomes troubled. You also should use
this time to put together your restructuring plan properly.

Your creditor will want to evaluate your financial reports
carefully and make certain it understands your operations. You
should be sure your financial reports are current, ready and in a
presentable package, and that you have conducted your own
valuations of your collateral.

Make the same review of the status of your existing financing
that your creditor will make. Review all documents thoroughly to
determine the precise amount of the debt, the status of any
default and the legal sufficiency and priority of any claims to
collateral. Carefully recalculate the balances involved, whether
precomputed interest must be backed out, the application of
payments and proceeds (to pinpoint a precise balance and per diem
rate), the date of defaults, the amount of any default rate of
interest and delinquent charges and other expenses.

Review your existing promissory notes for compliance with
applicable usury laws and any special state or federal
requirements. Examine all mortgages, security documents, loan
agreements, financing statements and any other legal documents to
determine whether they also are legally sufficient to provide the
intended liens on the collateral. Find out whether the lien
documents are properly filed and recorded with all required
parties and government entities.

To summarize: In negotiating a restructuring, know as much
about your finances as the creditor does and use that information
to meet the creditor’s needs quickly and to prepare a proposal
that works. Yes, it gets complicated, so here is a quick review
of what to do before you go to your creditors:

  • Start communicating about your situation.
  • Get your financial reports current and put them in a
    presentable package.
  • Conduct valuations of your collateral so you know how
    well or poorly the creditor is currently protected.
  • Review all of the loan documents and determine loan
    amount; interest backed out or accelerated in a
    refinancing, any defaults, etc.
  • Review the notes for validity.
  • Review security documents, that is, the agreements as to
    loan collateral, to see if they are enforceable.
  • Check for proper filing and recording of security

At this point you will have laid a lot of groundwork to get
more dough. Now you’re ready for the last step before talking
restructuring with your creditor.

Do a Liquidation Analysis

Before negotiating, prepare a reasonable and conservative
liquidation analysis. In preparing this analysis, look at how
collectible the accounts receivable are and investigate any
hidden problems in the business. Your updated valuations of
collateral and other assets should be used. You also should
consider the possibilities of a quick or drawn-out liquidation
based upon conditions in the market. In addition, the number of
other creditors that might have interests, and the degree to
which they would cooperate with this creditor, are factors.

A liquidation analysis gives you the bottom line. That is, you
know what the creditor can clear if it refuses to make a deal and
forces a liquidation. This will tell you the net gain baseline to
beat for an acceptable proposal. I’m going to expand a little on
this because it’s the real key to the whole thing. The
liquidation analysis tells you what the creditors will clear if
they refuse to help you and, instead, just crash the business. If
your restructuring plan gets the creditors more than the
analysis, it’s generally in their interest to give you what you
want. Always draw up a plan that gets them a better result than

Obtaining a Standstill Agreement

Once these steps have been taken, you’re ready to approach
your creditor about restructuring. The first thing to do is
negotiate a standstill agreement, which states how your loans
will be handled while you work on the restructuring. It should
state whether credit will be extended or modified, how the
priorities and right to collateral will be maintained and how
much time will be required for the restructuring. The creditor
typically will want any guarantors of the loan to sign continuing
guarantees as a condition for any concessions. The creditor also
will seek language releasing it from any type of previous
liability of whatever kind.

What Goes into the Plan

To propose a restructuring that makes sense to the creditor,
you must have goals that make sense to the creditor. To the
creditor there has to be a greater gain to your restructuring
than to shutting you down and liquidating. Formulating a plan to
do this means focusing on certain factors. First, the creditor
must determine its collateral position will improve rather than
deteriorate over the long term. Second, your prediction of future
profit must be supportable and solid. Third, the creditor may
have goals of its own that can work in your favor. For instance,
the creditor may need to rectify defective documents, resolve
past problems in its own procedures or eliminate creditor
liability vulnerability on its part.

The final goal is to establish firmly the viability of the
plan. This requires that short-term and long-term cash flow
projections be realistic and supportable; the gross profit is
sufficient to fund the large debt payments; the plan assumes
realistic revenue and expense projections; and the proposed
restructured payments can’t be substantially below the interest
rate or the amount the bankruptcy court would normally approve.

To reiterate, the steps in negotiating acceptance of the plan

  • Perform a reasonable and conservative liquidation
  • Make sure the creditor would do better accepting the plan
    than crashing your business.
  • Make sure the plan improves the creditors’ collateral
  • Make sure cash-flow projections are supportable.
  • Make sure you can pay the financing down.
  • Use realistic expense projections.


Wondering what kind of concessions are available to you? It’s
up to each creditor what you might be eligible for; however, the
creditor may forgive principal or past due interest, reduce your
interest rate, extend the payment terms, revise the formula for
lending rates or forgive a portion of the debt conditioned on
partial repayment if future profits or future appreciation reach
specified levels.

Restructuring II: The Revenge

Unlike restructuring the deal with an existing creditor, there
are times when it is advantageous to bring in a new creditor.
However, the existing creditor might not like losing the account
and can make the process difficult. In that case, you’ll have to
split your attention in two directions, and that can get messy.
Accordingly, when arranging that new deal, pay close attention to
how you wrap up the old deal. The new creditor can take out the
old creditor by either purchasing his position or paying him off.
Purchasing his position means that the new creditor takes over
the existing debt position of the old creditor. There are
advantages and disadvantages to both courses of action.

Purchase of Position

There are certain advantages to a new creditor purchasing the
position. Later-filed or otherwise junior creditors remain junior
to the new creditor without the need for the new creditor to
obtain new subordination agreements. Also, a new creditor will
not need to terminate the old creditor’s filing and make new
ones. The new creditor may be able to keep some of the existing
loan documents in effect without having to create new ones. Plus,
purchasing the position often is faster than a payout.

There also are disadvantages to the new creditor in a purchase
of position that are not readily apparent. In reality, the new
creditor doesn’t know what it’s getting. There can be
correspondence or other dealings the new creditor doesn’t know
about that have modified the deal. In addition, there can be
claims or defenses lurking in the background that the new
creditor doesn’t know about (and old creditors who are unhappy at
being taken out of a business relationship are notoriously
reluctant to give extensive representations and warranties).
Creditors also have to prepare one set of papers for the takeover
and another set to amend the old papers to reflect the new deal,
and if there is substantial increase in the total financing
(which there always is) you need to file new financing
statements. Finally, there is a quirk in the Uniform Commercial
Code (UCC) definitions of "name of the secured party"
and "secured party of record" that can defeat the
coverage of new advances of funds after the date of assignment to
the new leader.


As you may have determined by now, I tell new creditors I
represent that a payout is better than purchasing a position. In
a payout, the new creditor does have to get the junior creditors
to agree to a subordination, and this can be a hassle. But, the
new creditor already is junior to the existing deal and should be
happy to see the debtor get stronger. Plus, the new creditor is
in control of its own destiny and can withdraw if it needs to.

How to Do It

Here is a crash course in obtaining a valid purchase of

  • Get all relevant documents, accompanying guarantees,
    security agreements, etc.
  • Review the documents for both validity and
    transferability and fix any defects (if parties who hold
    subordinates, etc. will do so).
  • Review any negative covenants and consents to see if they
    will apply to a new creditor.
  • Run a lien search.
  • Prepare transfer documents.
  • Get warranties from the prior creditor (if you can) as to
    amount owed, perfection of liens, priority of liens,
    compliance with documents and law, enforceability and
    completeness of the documents.

The crash course for a payout is less demanding and easier to

  • Conduct a summary review of prior creditor’s
  • Get consent or waivers for any conflicts or restrictions.
  • Run a lien search.
  • Prepare releases for all liens, intercreditor agreements
    or subordinations from any competing creditors.
  • Check for litigations or judgments.
  • Establish payoff procedure, "pay-off letter"
    and "per diem."
  • Reassign collateral.

It may surprise you, but, depending on the deal, if I don’t
think the other side’s corporate records are in order, I don’t
insist on reviewing them. Likewise, if I don’t think the other
side can get a legal opinion, I don’t ask for it. Why? Well, if I
review it and find the problems, I am charged with that
knowledge. That’s fine if the other side will fix any defects.
But, if it won’t, I either quit or take subject to the defects.
If, instead, I get certifications by the other side rather than
doing my own review, I can rely on those certifications and our
rights are enforceable despite the defects. But, don’t try this
at home. Let a trained professional make that decision.

Watch Your Back, Your Bucks and Your
Behind–Avoid Unnecessary Liability

Aside from restructuring their arrangements with creditors,
those who can’t do an IPO can go back to their investors and
restructure their equity. In this type of deal, avoiding any
liability is just as important as getting the money. One of the
most common sources of liability is improperly selling a
security. It is unlawful in the United States to sell a security
except pursuant to a registration statement or a specific
exemption. Investor agreements, notes, debt instruments,
collateral-trust agreements, privileges, certificates of deposit,
limited partnership units, granting of security interests,
pledges, investment contracts and others can be securities.

You are trading a security if the deal involves an investment
of money in a common enterprise with profits to come solely from
the efforts of others. What does this mean?

Investment of Money
Cash or cash equivalents are not required to constitute
money. In fact, unfortunately, any
consideration including services and deeds will satisfy the test.
Defining an investment is trickier. It denotes a laying out of
something of value in the hope of future return. Mere spending is
not enough to constitute an investment. This does not mean the
return must be financial. It can be any return the investor hopes
for in the future.

Common Enterprise
There are two clear formulations. Vertical commonality
exists when the interests of the investors are interwoven and
dependent upon the managers. Horizontal commonality exists when
the interests of the investors are dependent on each other.

Don’t waste your time analyzing this one. The profit element
will be found to exist.

Solely from the Efforts of Others
If the efforts made by the managers rather than the
investors are the undeniably significant ones, the
"solely" test is satisfied.

What This Means

Before you restructure or get any financing, find out if you
are trading in a security. If you are selling a security, you
either have to register it or make sure your transaction comes
within a registration exemption. If you plan to use an exemption,
you must structure the deal carefully so all exemption
requirements are met. This rarely happens by accident, so don’t
leave it to chance.

Don’t Be Personally Liable for Anything

You know that corporations, LLCs and other forms of
organizations are designed to keep you from personal liability.
You may believe that if you don’t sign personally, you are not
personally liable. This is incorrect. Even if you personally
don’t sign a single thing, you can be personally liable for
corporate obligation in any kind of financing, including the
entire debt. If you don’t follow the proper procedures, or if you
fail to document that you did, you can become personally liable
without even thinking about it. Here are some guidelines to

Conduct Regular Board of Directors Meetings
When the corporation undertakes certain types of actions, a
board meeting should be held to formalize the action. Generally,
the following actions should be accompanied by a board meeting
with a resolution passed authorizing the action:

  • Lease, mortgage or sale of property
  • Loan involving substantial amounts (such as a
  • Contracts involving substantial amounts
  • Employment contract for managerial employees
  • Purchase or sale of substantial corporate assets
  • Election of new officers
  • Amendments to the bylaws
  • Declaration of dividends
  • Any transaction involving a director

Even when none of these actions is required in the course of
the year, it is a good idea to have at least one regular meeting
of the board of directors each year. The corporation’s bylaws,
for example, may call for the annual election of the officers of
the corporation, and the board is charged with a duty to oversee
the financial well-being of the company. At a minimum, the board
meeting should elect the corporation’s officers for the coming
year, set the date of the annual shareholders’ meeting, nominate
new directors and authorize or approve financial reports and tax

No meeting need be held in states that permit the board to act
instead by written consent. When meetings are held, notice
requirements must be met, or a waiver of notice must be prepared.
In a small business, the waiver of notice is usually desirable.
Each meeting must be recorded in the corporate record book by
means of the minutes, including resolutions passed by the board.

Annual Meetings of Shareholders
The statutes of most states require shareholders meet at
least once a year to elect board members. Most of these statutes
set out elaborate requirements for calling the meeting, giving
notice of the meeting and setting a record date that establishes
which holders of shares may vote and give proxies. Most of these
technical issues are of little concern for many small businesses.
When the owners of the corporation want to keep procedures at a
minimum, it is usually possible to avoid the notice requirements
by including a waiver of notice, signed by all shareholders. Some
states also may permit the use of a consent to action taken in
lieu of a meeting, signed by all shareholders.

Written shareholder consents should be used for actions that
require detailed, formal statements. These include:

  • Amendments to the bylaws
  • Purchase or sale of substantial corporate assets
  • Acquiring another company
  • Dismissing officers
  • Voluntary corporate dissolution

Be Able to Show You Did It
It’s not enough just to comply with corporate formalities.
When someone wants to make you personally liable, you will need
admissible evidence of compliance. To ensure that a corporate
minute book is admissible to prove the corporate formalities, the
minute book should be in the appropriate corporate officer’s
possession. In addition, the minutes should be prepared as soon
as possible after the meeting, the minute book should be signed
by the appropriate officer and by an officer who attended the
meeting and the minutes, notices, waivers, resolutions, etc.
should not contain any erasures or similar changes.

Now you know what to do and how to avoid liability in doing
it. It’s also very important to have good consultants–a good CPA
who is familiar with restructuring and an attorney with similar
experience. Do it right, and you have a chance of getting the
money you need to keep going and prosper.

Michael Wirpel is an attorney with Breazeale, Sachse &
Wilson LLP, who handles domestic and international business and
regulatory matters in telecommunications. He can be reached at
(504) 387-4000.

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