Rebounding from Bankruptcy
It’s a bad word—maybe the worst word—for a business owner to hear. Nobody wants to go through it. Nobody wants to even acknowledge it. Once you’ve put in all the hard work to open a business, what’s the very last thing you want to think about?
That’s how Jody Gatchell—a 20-year industry veteran who started out as a technician—felt when he opened A&J Collision Repair in Conway, Ark., 18 years ago. Except now, having just completed the Chapter 11 process and regaining control of his once-struggling business, he doesn’t look upon the word with such disdain.
In fact, going bankrupt saved his business.
“I’ve learned more about my business in my last 18 months than I did during the first 18 years,” Gatchell says.
Those 18 months of Chapter 11 have not only taught him some tough lessons, but they also made his shop more efficient and profitable than ever.
On June 1, 1997, Gatchell cut the ribbon and opened A&J Collision Repair. Turns out he had a knack for running a business: The two-man shop generating $300,000 annually quickly grew to 13 employees pulling in over $2 million per year.
Gatchell was doing so well that the 8,900 square feet of shop he had simply wasn’t enough. So, four years
ago, he decided to invest in a single, 18,000-square-foot location.
“I decided to get out of renting and wanted to own my own building. That's the dream, to own your own
building,” he says. “I was able to find a building that I thought would allow me to grow. I was caught in that expansion type of mentality.”
He looked at several buildings in town until he settled on a cost-effective location. He paid $600,000 for the
building, which was only one mile south of the original operation. He opened the new location in March 2011, and by November, he had moved his entire staff into a facility that was twice as large as his previous. His payments on the new building were slightly higher than his rent.
It was an exciting, intriguing time for A&J Collision Repair. Things were looking up. Everything was happening so fast—and that’s when the trouble started.
While the first few months of sales were some of the business’s best ever, they started to fluctuate and became unsteady soon after.
Gatchell’s biggest problem stemmed from the very thing he thought would propel his business forward: expansion. With a bigger building came the desire to fill it with new and improved equipment.
His fatal purchases were a pair of paint booths and a four-point lift that added up to about $200,000 in cost. With taxes he owed to vendors, the cost increased an additional $150,000.
“Adding additional equipment right before the move was my biggest mistake,” he says. “There were some things that we could have done without or I could have waited to get later.”
The debt would eventually total almost $250,000, but the problem wasn’t that Gatchell was falling behind on
payments for the new equipment—as the owner puts it, he was “losing control” over his operation. With new
bills coming in for equipment and the new building, Gatchell had no organized system of keeping up with the payments.
In retrospect, he says he should have listened to his consulting firm, which suggested he hire a finance manager. Because the costs were adding up at the new location, he didn’t want to add another position.
“The way that I was recording entries to my profit-and-loss statement didn’t help me,” he says. “I didn’t write a rent check to myself because I couldn’t pay the bill. What I should have done was at least put it in as a bill. Then, that way, it would have been a truer number on my profit-and-loss statement, which would have in turn helped me better with the taxes I owed. So, instead of showing that I made a $10,000 profit, I would have
been $10,000 in the hole.
“There were things I was doing as far as bookkeeping that should have been done. I didn’t ask for guidance, so I wasn’t receiving it.”
That lack of control slowly started seeping into every other aspect that made Gatchell’s first location such a booming success. He not only went into his new building with a poor sense of new policies and procedures, but was also unable to bring in customers from the old location and attract new customers. He had cut down on his direct mail marketing to save on costs—today, he regrets not increasing it instead.
“The one thing that I did not realize right away when we moved was that everything had changed,” he says. “Everything changed, from how we talked to customers on where we are located to where the tools are placed on the shop floor. I did not expect it and I did not plan for it well.”
During the transition, Gatchell had also slowly lost control over his employees, their processes and overall production.
“I had taken my eye off the daily operations, which led to some things not being handled properly,” he says. “I was not continuing to follow up or inspect the areas like I should have.”
Gatchell’s lack of oversight led to various inefficiencies during production. Because of a lack of communication between the front office and shop floor, repairs were constantly being delayed. Because Gatchell was so consumed with debt repayment, he was not reviewing repair orders.
Also, the old standard operating procedures did not automatically translate to the new location and were not being followed properly for each repair. And because Gatchell wasn’t carefully monitoring the front office, simple tasks like properly answering phone calls were indicative of the new shop’s lagging communication skills.
The numbers started to reflect Gatchell’s loosening grip over the shop: After a record $2.1 million year in 2011, sales dipped down to $1.95 million in 2012, and hit rock bottom last year at $1.8 million.
In retrospect, Gatchell knows he should have slowed down and asked for help. Instead, he doubled down, taking work home with him and coming into the office seven days per week. It was a defeating way to run a business, and he could see the stress seeping into day-to-day operations, affecting shop morale.
How bad did it get? Gatchell stopped paying himself for several weeks.
“I let the business start really messing with Jody,” he says. “If you’re taking your job home with you at night and you're not sleeping and you still can’t catch up, it may be time to start researching and asking about Chapter 11.”
Gatchell opened his eyes to Chapter 11 and its real benefits after a conversation with his accountant.
“When he told me, I researched companies and people that have done the same thing,” he says. “There are
many companies that had done the reorganization and when they got done with the process they were in a better position financially.
“I was trying to do everything I could to not do it. I just didn’t understand what Chapter 11 was. It gives a
business the ability to stop, get things together and reorganize.”
At this point, Gatchell’s solution to his problem rested in two areas: on the legal side and on the management side. And as a shop owner who had lost control over almost every aspect of his business, that reorganization was much needed.
As opposed to Chapter 7 bankruptcy—often referred to as liquidation—the goal of Chapter 11 is to make the business profitable once again. Chapter 7 is utilized when a business has no future and lacks substantial
assets—Gatchell, however, had not gone completely off the deep end and could still save his shop. The entire 18-month process allowed him to devise a plan for profitability post-bankruptcy, while renegotiating terms with his creditors.
Once Gatchell filed a Chapter 11 petition with the U.S. Bankruptcy Court, an automatic stay of all collection actions went into effect, meaning creditors could not pursue unpaid debts (unless otherwise modified by the court). This provided Gatchell an opportunity to draft a reorganization plan and negotiate more practical repayment terms.
Once the petition was filed, the business was allowed to function without interruption while Gatchell negotiated
repayment amounts that were much lower than the original debt.
Gatchell had to renegotiate contracts with his vendors and partially repay debts. This payment plan was voted on by creditors and approved by the court. From that point forward, debts that existed before the confirmation date were discharged. He then began to repay his creditors according to the agreements.
But, as Gatchell will tell you, the more important lesson and the real savior of his business came from a renewed, invigorated presence at work. This meant no smoke and mirrors—the final key to Gatchell’s bankruptcy dilemma was letting his team know about his decision.
“The day that I started the Chapter 11, I gathered them to let them know what was going on,” he says. “From the first day of the Chapter 11 process to the last day, I did not have any employee leave or let go. I am really happy and proud of how they handled and helped the business through the process.”
During those 18 months of working through Chapter 11, Gatchell became more interactive with his employees, spent more time hearing their feedback, followed up on repair orders more thoroughly, and developed new standard operating procedures.
“I have put in place the proper procedures for this location,” he says. “Everything is now written out, from
how a call is answered to how to give the proper directions to the shop. Once the customer enters the business, everything is laid out, from estimate, to drop off, to the repair process, to delivery as well as
“When someone new starts or there is a change in position, there is an easy-to-follow check sheet to train them on their new job. This sets the foundation of what is expected.”
Gatchell also restructured his financial process for how bills are entered, tracked and paid. He has split his review of the budget into weekly and monthly reports to keep up with payments.
“I have a financial plan that is completed monthly and then reviewed for anything that was not within the
budget,” he says. “I have also set up sales and production targets, which are based on the monthly financial plan.”
During production, if repair orders were not being met, Gatchell was reviewing any jobs that were being held up. “The delays that I am looking for are anything that stops a vehicle in the production line,” he says. “Once these items are identified, they are reviewed. Then a plan is put in place to ensure that it does not happen again.”
All in all, Gatchell’s changes are working—sales are trending upward in 2015, up 16.5 percent over 2014,
priming his shop for its best year to date.
“Now we are the strongest the company has ever been,” he says. “We are a leaner company than we were before.”
Gatchell’s ability to pocket his pride and seek guidance from other business peers allowed him to overcome his biggest obstacles. That’s why, now, he’s offering his insight to other business owners who might need some help.
“When things get out of hand, you stand up and say, ‘Hey I need help and someone to talk to,’” he says. “That's one of the things I did. I got some good advice from someone, and that person told me a lot of businesses wait too long before they file a Chapter 11 and they don't get through it. It actually forces
them to close down.”
“I have a goal of helping people who think they need to go through that process, or are at least thinking about
it,” he adds. “I will be able to help them through it. And not just body shops—any business.”
It all comes down to the reorganization of your business. And once Gatchell realized that, completing the Chapter 11 process is a small price to pay for the fact that A&J Collision is performing better than ever.
“I've really gotten a whole lot more organized,” he says. “Employees now have clear and precise procedures to follow. It makes it easier to see or visualize when something is not being done right. It’s easier to inspect and fix.
“My job as the owner of the business is to go into the future, and if everything is organized and my staff can do their jobs and I can do my job without outside stress or distraction, I can make sure the vision of the business is going forward.”
IS YOUR BUSINESS READY FOR CHAPTER 11?
Edward Adams, Howard E. Buhse Professor of Finance and Law for the University of Minnesota, says that filing for Chapter 11 bankruptcy is a great way to regain control of your business—but Chapter 11 isn’t for everybody.
“Most companies start in Chapter 11, and a lot of them eventually convert to Chapter 7,” he says. “They realize it’s hopeless. The courts won’t support it, the bankruptcy judge won’t support it, the creditors won’t support it.”
The bottom line? Recognizing when your business heads down the wrong path and knowing when it’s time to seek legal and financial guidance could put you ahead of the curve and help to avoid Chapter 7.
A good candidate for Chapter 11 is somebody who has made a business mistake or two, has a viable business or concept, and needs to streamline the business. They need to get out of contracts that are
unattractive. Virtually all airlines have gone through Chapter 11. They have either too many routes, too many gates, or bad collective bargaining agreements with employees.
Chapter 7 is a completely different scenario. It’s not like you’ve made a misstep—you don’t have a viable business. You’re done. It’s hopeless. It’s not like you can tinker and make the business viable again. For Chapter 11 to work, there has to be a real, viable business.
You should talk to an attorney or a business consultant and try to get to the bottom of whether there really is a business worth saving. One of the things you usually need for Chapter 11 is financing. You need to go get what is called debtor-in-possession financing. And to get good financing, you have to convince a lender that the money will get your business turned around and moving in the right direction. There’s a lot of good financing out there, but the lenders are smart. They’re not just going to throw good money at bad businesses. They’re going to scrutinize the heck out of whether or not they want to loan you money because they care about one thing: getting repaid.