The economic downturn that began in 2008 has taken a toll on businesses, and the fitness industry is no exception. Declining memberships and greater competition have been among the challenges facing fitness facility owners. However, some owners have taken the opportunity to regroup by filing for Chapter 11.
The idea of filing for bankruptcy may seem intimidating and scary to club operators. Although a bankruptcy is not always the first option for business owners facing financial difficulties, for some operators, it can be a smart business decision and investment.
One of my clients, the owner of several fitness facilities in Connecticut, almost closed his business in early 2009, but after we restructured the facilities’ debts through Chapter 11 bankruptcy proceedings, the clubs are performing better than ever two years later. In October 2010, the company successfully emerged from bankruptcy when the United States Bankruptcy Court for the District of Connecticut approved their Chapter 11 plans of reorganization.
The bankruptcy proceedings offered the owner time to stabilize operations, develop and implement fresh marketing strategies, and negotiate with equipment lessors/lendors and landlords to create more feasible payment plans. The reorganized facilities now are viable, healthy businesses in a position to expand and grow to new cities.
When fitness facility owners understand their responsibilities during bankruptcy proceedings and get involved in the process, they are more likely to have positive results. When they lead their businesses through a successful Chapter 11 reorganization, owners must call upon the same dedication, perseverance, focus and hard work needed to reshape their bodies through fitness and nutrition. Filing for Chapter 11 bankruptcy allows owners to remain in control of the operations and work with their counsel to restructure debts. Once owners and their counsel devise a plan that demonstrates how the business intends to repay its debts, the plan is filed with the court and sent out for creditor approval.
The following are some items to keep in mind before deciding to go through the bankruptcy process:
Understand the time commitment. At the inception of the Chapter 11 proceeding, business owners must spend significant time gathering documentation that shows the business’ debts and then provide that information to their counsel. That information is then organized into a format that is filed with the court and shared with all of the company’s creditors and parties in interest for review and analysis.
Gathering the information and attending necessary meetings for the Chapter 11 proceeding combined with tending to operational issues can prove to be daunting for any business owner at times. Businesses that have successfully emerged from bankruptcy have owners that learned to effectively delegate operational tasks to managers and employees to free up the requisite amount of time that the owners need to dedicate to the bankruptcy process.
Get debts and expenses in order. After the Chapter 11 cases are filed, the owners’ time is then spent with their counsel and accountants to discuss negotiations with creditors, expenses and general operational matters. Time in court can certainly be limited for owners depending upon creditor cooperation and success in negotiations. The Chapter 11 process can take anywhere from a few months to up to 18 months from start to finish. Throughout the Chapter 11 bankruptcy process, business owners have the ability to pay each creditor an amount equal to the value of the equipment, as opposed to what is actually owed to each creditor (which is usually more). For example, a fitness facility may be able to pay hundreds of dollars less per month on each secured equipment loan. Also, up to 98 percent of unsecured trade and vendor debt can be forgiven in some cases.
While in a Chapter 11 proceeding, club owners must get any business purchases not considered “within the ordinary course of business” approved by the court. Expending funds for equipment maintenance or protein shake products most likely will not require court approval. However, the purchase of 20 treadmills most likely will need court approval because of the significant cost and the likely infrequency of such a purchase. To obtain court approval to make large purchases, owners must demonstrate to the court and creditors why the purchase is essential to operations and ultimately to the reorganization process.
Don't worry about stigma. Most clients contemplating a bankruptcy filing fear that the stigma associated with bankruptcy will negatively affect their operations, but that fear is overexaggerated. Chapter 11 is processed through the court systems, which means that although detailed information about the Chapter 11 can be obtained by professionals in the bankruptcy industry, the information is not usually broadcast through conventional public means. Thus, in some Chapter 11 cases, some individuals associated with the business (such as members) may not even be aware that the company is going through a restructuring. After all, the goal of a reorganization effort is to restructure the company’s debts and to have the company continue on with its operations with no disruptions.
Rethink purchases. Going through a successful Chapter 11 reorganization seems to improve every business owner’s approach to budgeting, purchasing and management. In my experience, after a company successfully emerges from Chapter 11, owners become more careful and cognizant of purchases, decreasing their chances of getting back into a financial pickle.
At the conclusion of a successful Chapter 11, business owners typically view the time, effort and expense as an investment into their operations. As with the Connecticut fitness centers, sometimes the Chapter 11 investment results in owners not only keeping their once financially troubled business, but in having new resources to fuel the growth of their operations.
Jessica Grossarth is a partner in the bankruptcy practice at Pullman & Comley LLC. She is a former NCAA Division I basketball player and a current fitness fanatic. She can be reached at jgrossarth@pullcom.com.