Key Idea #1: Invent the new products before a competitor can.

By working with the University of Wisconsin, Chris has tapped into the minds of an innovation and manufacturing team that helps business owners streamline the production of new ideas. He has given employees the tools and time to innovate and he himself focuses his own attention on innovation. The day after we were with Chris, he was on a plane to Italy to meet a designer. When Chris and Sara bought Graber, they bought a solid business with a good reputation, but the sales were flat. The employees were dedicated, but the company needed fresh energy to start growing again. The energy has come from Chris and Sara, but also from the thrill of bringing new products to the marketplace. Before your sales go flat, start innovating.

What do you think: Why is working with the University of Wisconsin manufacturing experts such a good idea?

Possible answers: They have access to the latest research on processes. The experts suggested that Chris use a cellular layout for the manufacturing processes. According to the authors of Operations Management published by Prentice Hall, cellular layout was "first proposed in 1925 but did not rise to prominence until the 1980s when the Japanese perfected its application. A cellular layout should improve efficiency while maintaining flexibility." Flexibility is important because Graber is constantly changing.

Chris said, "Cellular manufacturing has improved our efficiency by almost 25 percent. Because we are able to react quickly to changes in production runs, we have less work-in-process inventory and higher quality."

What do you think: What did it teach you about Chris when you learned that he called on the university for help?

Possible answers: Chris doesn't think he knows everything. If you're willing to seek advice, you will grow your business faster than if you learn simply by trial and error. A know-it-all-attitude doesn't take anyone very far in life.

What do you think: Why does innovation improve employee morale?

Possible answers: Coming up with new products and the processes to make them is stimulating. In general, people stay where they are growing and leave where they are not growing. The employees at Graber are asked to contribute their ideas and then can see those ideas being implemented. A new product is like a new baby. Everyone who is involved is proud and that boosts morale.

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Key Idea #2: You can buy and old business but you don't have to be stuck with old images.

Chris bought Graber and then proceeded to put his own personality into it. He bought a brand that represented quality and stability, however, sales were flat. Chris built on the good he bought and threw out the bad.

You think back... What was Graber's biggest problem when Chris took over?

Answer: They were stuck making old products. Chris said, "They were wondering and watching what was going on out there. They had a good nucleus of people and a good reputation in the marketplace as being honest and honorable people. But the image of Graber in the marketplace was more of a nuts and bolt manufacturer, and things from a development and design standpoint had leap-frogged them. And whenever you have your competition 'obsolete' your own product, you're in a big danger zone, and that's what they had happen to them."

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Key Idea #3: Necessity should be the mother of invention.

Chris's father observed that bike riders arrive at their destination and have no safe place to store what they are carrying, so he invented the bike rack combined with a storage unit.

You think back... Where can we find the new bike rack?
Answer: In Paris, probably because there are so many bikers there who do not own automobiles. Here in this country, many people ride bikes for pleasure whereas in many parts of the world, the bike is the only mode of transportation. The racks are also being sold to Universities and colleges in the U.S.

You think back... Is Graber a global business?

Answer: Yes. Not only do they sell products all over the world, but Chris also hires Italian designers because they are the best. Thousands of American companies see the world as one market and as one resource. Biking is international, so Graber has to be international.

Key Idea #4: Limit the number of suppliers to increase your influence.

Your business becomes important to your suppliers because they value your loyalty to them.They know that if they treat you fairly, they can count on your repeat business.

You think back... How does having just one supplier for tubing change the way Chris does business?

Answer: Chris said, "We have one major tubing vendor with whom we have a true partnership. And we're not going back and forth and saying 'Hey, we need a cheaper price here or we need this or that.' We sit down and develop a strategy with them, and we're honorable in the commitments we make to them. We're committed. And they're sharing technology with us, too. We send engineers down there to work with them to try and get a better understanding on how we can perform manufacturing at a higher level."

What do you think: Should Chris be nervous that this supplier would take Graber for granted and gradually hike up the prices?

Possible answer: If he didn't trust these people, he would not have formed such a close relationship. He said this is based upon a "win-win" - not "a winner take all" - philosophy. He wants long-term quality and profits that he believes will be achieved by sticking with people he can not just buy from, but from whom he can learn.Topic for discussion

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Key Idea #5: Bankruptcy can be the easy decision.

Chris and Sara were sued for patent infringements not long after they purchased the company. However, they worked through the problem and now feel they are stronger because they did not take the easy way out.

You think back... Why did Chris and Sara's mentors advise them to review bankruptcy as an option?

Answer: In fighting the lawsuit, they lost $1 million dollars. They could have simply declared bankruptcy and walked away from much of the debt. They would have had to shut down the company, which means the employees would lose their jobs; and, getting the business back on track after such a huge loss would be close to impossible. The mentors wanted Chris and Sara to explore their financial options prior to going forward.

You think back... How were they able to pull themselves out of the $1 million dollar debt?

Answer: First, the bank worked with them, which was critical. The banker believed Chris and Sara could recover from this huge loss and continued to loan them money and keep a line of credit available. Second, once they decided to keep the company going, the employees and board of directors rallied around which gave them great psychological support. Third, Chris and Sara's upbringing taught them they had a responsibility to pay the bills. Their own ethics would not allow them to walk away from debt. This deep belief gave them the strength of will to keep on keeping on.

Notes on Bankruptcy:

Bankruptcy. It's a word that strikes fear in the hearts of all of us. Yet sometimes bankruptcy is the only viable route to ensure a company's long term survival. Consider the following hypothetical situations:

• A barge company has long term fixed price contracts to haul flour from the mills down the Mississippi river. Tugboats are used to haul the barges into and out of the open river. There is a world wide oil shortage and the price of fuel sky rockets. The barge company's contracts do not include fuel escalation clauses.
• A service company operates out of 10,000 square feet of leased office space. The lease is non-cancelable and has 7 years remaining. A number of major tenants in the area move out and there is an excess of commercial space available. The cost per square foot decreases dramatically. The service company finds that it can no longer compete effectively in its market due to its higher occupancy costs.
• The employees of a successful manufacturer are unionized. The union contract is up for renegotiation at the same time that the manufacturer loses 2 of its 3 largest customers. Union negotiators are demanding increased wages and benefits for their membership.

In each of these cases, the bankruptcy is not a "way out" but a "way back", perhaps the only way back to profitable operations and financial stability. What about the vendors or, in bankruptcy language, the unsecured creditors? As difficult as it is to write-off the accounts receivable of a customer, once that hurdle is over, would a creditor be better off with a financially revived customer or no customer at all?

The word bankruptcy comes from the Italian "banca rotta" or "broken bench". According to legend, in medieval times, when a tradesman of Florence's Ponte Vecchio bridge was unable to meet his financial obligations, soldiers would break his bench to prevent him from selling additional wares. Today's creditors sometimes, sadly, take the same view. But most are sophisticated enough to realize that what's lost is lost, and looking forward, perhaps more carefully, is in their best interest.

The Law

Article 1, Section 8, of the U.S. Constitution enumerates the powers of Congress which include establishing "uniform laws on the subject of bankruptcies throughout the United States". Congress met this obligation with the passage of U.S.C. United States Code, Title 11, Bankruptcy. Chapter 7 of the Code, Liquidation, and Chapter 13, Adjustment of Debts of an Individual with Regular Income, provide the governing legislation for the permanent discharge of debt by a corporation and individual, respectively. Chapter 11, Reorganization, provides the opportunity for a restructuring of debt and a fresh start. Although Chapter 11 is the applicable law for both businesses and individuals, in practice it is used almost exclusively by businesses.

Bankruptcy filings and subsequent proceedings are under the jurisdiction of the Federal District courts. Although the law is the law, each District has considerable latitude in establishing rules. The information provided here is general and should not be relied upon as legal advice. Businesses contemplating bankruptcy should seek legal counsel from an attorney experienced in such matters in their respective geographical area before proceeding.

The Process

A business seeks protection under the courts by filing a petition for voluntary bankruptcy. Voluntary bankruptcy is when the debtor seeks the relief of the court. Involuntary bankruptcy is when a group of creditors ask the court to declare the debtor bankrupt. Bankruptcy in general is expensive and time consuming; involuntary bankruptcies are rare. When the petition is filed by the debtor, creditors are prohibited from making collection efforts on amounts owed and are barred from filing litigation against the debtor and from foreclosing on any assets. Leases and contracts are generally voided; and any current litigation is stayed. The debtor has the right to some breathing room, to sort things out, to regroup, and to turn the business around. He may continue to pay the ordinary ongoing expenses of the business, but he may not pay any liabilities incurred as of the date of filing. Sounds great, doesn't it? But the price is high.

As soon as the petition is filed, the debtor assumes a second identity of debtor-in-possession or DIP. The debtor is in possession of his assets, but since his liabilities to 3rd parties exceed his assets, he is assumed to be safeguarding those assets for the creditors benefit during this period of "reorganization". Rarely does the court appoint a trustee in the case of a small business bankruptcy, the trustee's responsibilities rest with the DIP. Bankruptcy has been compared to living in a fishbowl. The reporting and disclosure requirements are onerous as the DIP reviews all creditors' claims, makes monthly operating reports to the court, accounts for all property, and provides whatever information is requested. The real victim in bankruptcy, they say, is trees. Small businesses have 100 days to submit their plan for reorganization to the court. Past that deadline, the creditors may submit a plan. Most often in the case of a small business, the Chapter 11 filing culminates in a Chapter 7 liquidation of the business.

If the business is liquidated and the assets sold, secured creditors, those with liens on company assets, get paid first. Remaining funds are distributed to creditors with a priority claim, such as taxing authorities and employee benefit plans. Unsecured creditors are last in line, and share in any remaining proceeds on a "cents on the dollar" basis. Rarely is there anything remaining for distribution to stockholders.

According to a study performed by Dr. Stuart Gilson of Harvard Business School, 80%-90% of the Chapter 11 filings of companies with assets of $100 million or more result in successful reorganizations. Continental Airlines, which has filed for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code not once but twice, in 1983 and 1990. The vast majority of filings by companies with assets of $20 million or less result in Chapter 7 liquidations. Clearly, the eye of the needle for a successful business restructuring is very small.

How does a small business owner navigate through it?

Staying Alive

A Chapter 11 filing is financially, emotionally, and even physically draining. Before proceeding, the small business owner(s) must ask himself and/or herself the following questions and carefully consider the answers:

• Is my fundamental business plan sound, i.e., are the current difficulties due to nonrecurring events? If I can get through this, do I have a viable company or am I just postponing the inevitable?
• What would a willing buyer pay for my business? How much value lies in the company's reputation, customer lists, trade secrets, and other intangibles? (Although there may be no interest in selling the business, an honest answer to this question will be a strong indication of whether or not it makes sense to proceed with a restructuring.)
• What is my relationship with my bank? This is particularly important if your bank is also a secured creditor. You will most likely be required to maintain a "cash collateral" account where the bank will approve the release of every individual disbursement.
• What is my relationship with my vendors? The largest vendors will form the creditors' committee. Will they want to continue to do business with the debtor after the filing? Am I an important and/or longstanding customer? How important is it to them that I survive? (These questions make it clear why most of the successful Chapter 11 filings are those of the large companies).
• Do I have the right attorney and CPA to advise me through this process? Do I know how much they will charge?
• How much cash can be stockpiled before the filing? How does this compare to the amounts my attorney and my CPA will charge me?
• What will be the effect on my employees? Will they support me through this time or will they immediately start looking for other positions? Will I have to terminate some of them? If so, whom? What will be the effect on the others? Can we take care of our customers if we reduce our workforce?
• How will I communicate the fact that I have filed for bankruptcy to my employees, my customers, and my vendors? How will I continue to communicate with them as I develop my plan for reorganization? What level of support can I expect both initially, and thereafter?
• What are my chances for survival and at what cost? Is it worth it?

These are tough questions and a small business owner's attorney and CPA can be invaluable in providing dispassionate expertise in what is a very emotional time for the decision maker. Few small businesses emerge successfully from a Chapter 11 filing but some do.

A careful consideration of the likelihood of a positive outcome to the challenges of corporate bankruptcy can only enhance the likelihood that a business will emerge healed.