Last issue, the president of a Toronto-based company wrote to ask PROFIT-Xtra readers: “Our corporation has three equal partners. We all signed personally for a business line of credit. I was on a caregiver and bereavement leave from active participation that lasted two years, and when I came back my partners had almost ruined the company, and maxed out the line of credit for personal use that can be tracked. I’m the only one with personal assets. My partners appear contrite, but shrug their shoulders. What’s the next step for me? I don’t want to pay all the debt myself. I believe I can turn the company around within a year, but don’t know if I have that long financially. What repercussions should I be looking at with my partners, one of whom is still active and working with me? Help!”
An anonymous reader:
The founder of Patagonia took a year off and had a similar experience upon returning. [Ventura, Calif.-based Patagonia Inc., founded by Yvon Chouinard, now sells US$240 million per year worth of outdoor clothing and gear.] You might find some guidance in his story.
Kelly J. Ramsay:
I’m sorry to hear about your situation, but right now you need to take decisive and drastic steps to correct it and restore your company’s health.
The first thing I would suggest would be to consult with a good corporate lawyer, specifically to examine the corporate documents and shareholder agreement. The goal would be to force your partners to relinquish some, if not all, of their shares to offset their personal portion of the line of credit, and to resign from the director positions they presumably hold. This would put full control in your hands and enable you to move forward, without a lengthy and costly legal battle.
Then I would fire these two people to get them out of the business.
Next I would contact your creditor and explain the situation with a goal of renegotiating the line of credit into a more manageable form, which could be then serviced out of cash flow from the business.
Finally, I would put in place a new board based on their expertise in assisting with turnaround situations.
This approach, while not “friendly,” would enable you to begin the turnaround process and hire more trustworthy individuals to help you do so.
Alternatively, you could consider placing the company under bankruptcy protection to get some breathing room. However, you would still have to deal with your partners, and that could be difficult at very best.
For his answer, Kelly J. Ramsay will receive a copy of Advantage Play: The manager’s guide to creative problem solving, by David Ben.
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