July 2009

Last Resort
When Bankruptcy is the final answer
by Lori Weber

Steve Paskan founded TLM Properties, a real estate holding company in Mentor. When a promised increase in business never materialized and the banks foreclosed, TLM filed for Chapter 11. Photo by Toby Shingleton

The road to business bankruptcy is usually paved with big dreams that wind into scary terrain, potentially leaving business owners bereft of livelihood, savings, friends and home. Not every tale of bankruptcy destroys lives, but the strain of a failing business and bankruptcy brings major changes to owners’ lives – testing the original energy that made their ventures seem unsinkable at their origin.

No one likes to think about failure, let alone reminisce about how it happened, but since the subprime mortgage collapse and subsequent woes of the financial and auto industries, bankruptcy has become reality for many people who never thought they’d be facing it.

Take Steve Paskan. Since 1983, this machine-shop owner had been running Atfab, a successful business that made valves and fittings for the semiconductor industry. His biggest client, a major Northeast Ohio company, strongly suggested in the mid-1990s that Atfab expand from its 30,000-square-foot Tyler Boulevard location in Mentor to accommodate an inevitable production increase.

“We were definitely on a growth path,” Paskan says. “We had expanded in Mentor as much as we could, but our client insisted that we keep growing, so with this knowledge, I took the plunge.”
This client had identified Atfab as a strategic supplier, top rated for quality and delivery, making Atfab’s prospects for business growth excellent.

And things did look good for awhile. Paskan founded TLM Properties, a real-estate holding company with Atfab as its tenant, and put nearly $4 million into a 10.2-acre lot in Painesville
Township, laying sewer pipe, adding driveways and constructing the building.

When the new location opened in February 1997, Paskan took his 85 employees plus 15 temps to a state-of-the-art, 54,000-square-foot facility with an additional adjacent 53-acre parcel. Everything was in place to handle the new workload.

Fast forward to 2005. The promised work never materialized. In fact, the shop’s sales were at one-third of where they had been projected. After a few meetings and prickly conversations between Paskan and his client, things went south. In July 2005, after Paskan rejected a hostile takeover attempt by Atfab’s biggest client, he watched his business diminish as orders were pulled from him and sent overseas.

“It literally happened overnight,” Paskan says, adding that Atfab couldn’t survive the suspended cash flow and had to lay off all its employees. After having spent millions of dollars, Paskan had no income. The banks foreclosed on TLM Properties in September 2006. TLM filed for Chapter11 bankruptcy protection June 15, 2007. Living on his dwindling assets, he has been selling everything he can as he works to find a buyer for his property. He hasn’t had a paycheck in two years, leaving his home in foreclosure.

He has been accepting help from family and friends, and has been able to avoid filing for unemployment.

“I just keep finding ways to get by,” he says. “I never imagined this could happen. People don’t realize how much the fallout from a business bankruptcy affects personal life. Everything has changed for me. Everything. But, I’ve learned who my friends are and how to be resourceful enough to survive.”

For a man who could be the subject of a country-music song, Paskan is remarkably upbeat. He calls himself the “last man standing” and is in negotiations with Bard (Biofuel Advanced Research & Development), an algae biofuel startup company that is interested in his property. He still goes to work every day, looking for financing for his potential buyer.

“For me to be successful, they have to be successful,” he says. “And there is a lot of potential for this company to produce a necessary fuel and bring jobs back to this area. There’s this perception that foreclosed business properties have a dark cloud over them, and to an extent that’s true. If that’s what people think, then it’s hard to get a fair deal. But, the reality may be that the space is perfectly fine and would be an excellent facility for someone else.”

Business Bankruptcy 101

Perhaps the biggest misperception regarding business bankruptcy is the idea that business owners are personally protected against losses should their businesses fail. Most of the time companies go into bankruptcy to reorganize, which is what General Motors is currently doing. It does little good to put a company into bankruptcy because, according to Glenn E. Forbes, a lawyer who specializes in bankruptcy at the Painesville law firm Cooper and Forbes, liquidation is inevitable.

“And the problem is that there’s usually nothing to liquidate by the time they’re in deep trouble,” he says.

Creditors get their money. Closing the shop’s doors to let the chips fall where they may doesn’t keep the banks at bay because to have secured a business loan, entrepreneurs would have had to personally guarantee the loan and oftentimes pledge their personal assets including their homes. When companies go belly up, they usually have no money, which is what got them into a bankruptcy situation in the first place. Because the bank can’t get money from the company, it looks to the owners’ personal assets. In most cases, banks only give loans with a personal guarantee that the money will be paid back.

“Business owners have to think of themselves and their business as a package,” Forbes says. “It’s a practical consideration. If a business has guaranteed debt, it’s the owner’s debt too. The legal entities may be separate, but the debt is packaged.”

So, in a shaky market where foreclosure signs seem to self populate, struggling business owners may be asking themselves whether it might be prudent to declare bankruptcy. Two main signposts often signal that bankruptcy is a good idea:

The volume of sales is not making up operations costs.

All personal money and credit reserves have been tapped.

If either of these cases is the situation, then it may be time to cut your losses and begin bankruptcy proceedings. If the business must be closed and liquidated, the business owner may need to discharge or restructure his personal debt through bankruptcy proceedings. Depending on a business owner’s asset structure, he may be able to completely discharge all the guaranteed business debt, as well as his other debt, and start over.

However, if business owners think they can service their debt or if they are able to work with their creditors to reduce interest or negotiate better terms, then they may have a chance to survive.
Forbes says one reason he sees many small business owners go under is because they spend too much money getting off the ground. The dream may be noble, but it may not catch on right away. Entrepreneurs would help their positions if they could find another source of income, at least during the start-up and early phases of the new business’ growth.

If, for instance, a new venture begins while the entrepreneur has a day job, Forbes suggests keeping the steady income a bit longer than anticipated.

“What happens if you borrow $100,000 to start a restaurant,” he asks, “and business doesn’t take off as fast as desired?”

What happens is that the owner is left with a stash of equipment he paid top dollar for including tables, chairs, décor and appliances. The day-job income isn’t there to ensure payments can be made and the capital expenditure items are now worth a lot less. Potential purchasers are not going to pay what the owner did. So, some items may be sold at discount prices, which may stretch the possibility of survival. When the company finally does go under, banks won’t get any money from liquidating. Nothing is left.

Another consideration is taking care in choosing business partners.

“I tell people to pick their business partners more carefully than they pick their spouses,” Forbes says. “When business partnerships are forged, those business assets are bound. The money is pledged. If you go bankrupt, the debt is still guaranteed. If you let your relatives cosign or invest in your business, then you can end up with a personal bankruptcy petition naming your mom.”

The moral? Have an alternative revenue stream before totally committing yourself to your enterprise, and know who you are in business with.

Right now, Forbes, who has more than 30 years of bankruptcy practice experience, is seeing an increased number of bankruptcies in construction companies and the trades that support them along with food service. Some of these companies are beginning to bounce back, but the ride has been rough. He can name dozens of local mom-and-pop small-business ventures that have gone into bankruptcy in the past four years along with several large companies struggling with foreclosure and bankruptcy.

Paskan is one of his clients.

After the fallout

Steve Paskan still reports to his Atfab office every morning. There may not be any background office chatter at the water cooler, but he finds plenty to talk about as he helps his potential real-estate buyer find financing and create marketing and distribution channels for this algae biofuel company. The good news is that he has a purchase agreement, but funding has not yet come available. With more than a year invested into helping this company buy the space, Paskan has high hopes.

Part of the problem with foreclosure is that vacant buildings, especially out-of-business property, have a stigma that makes it difficult to get a good price. One of Paskan’s motivations to file bankruptcy for TLM was to help him get a proper deal drawn on his property. Often, sheriff’s auction appraisers are not reflective of the proper value of the land and building.

Like many business owners facing or dealing with bankruptcy, uncertainty has become a way of life.

“My privacy has been invaded so badly,” Paskan says. “I’m at the point where there’s no getting out this alone. Whatever my buyer’s fate is will affect every area of my personal and professional life.”

Back when Paskan founded Atfab and TLM, he had no idea that one day, he would want someone else to take his dream facility and do something completely unrelated to his initial business plan. But that’s the kind of resiliency that entrepreneurs need to survive.

“If this is the way my business and my life have to evolve, then I’ll do what it takes,” Paskan says. “That’s how business goes.