Between “pay everything” and “liquidate everything” sits the option most distressed businesses actually need: the negotiated workout — a private restructuring of debts with creditors who’d rather have a smaller certainty than a larger theory. Here is how the credible version runs.
Step one: the honest thirteen-week model. Every workout starts with a cash flow forecast that would survive a skeptic — because it will have to. Creditors extend concessions to businesses that can show precisely what’s payable, when, and why the proposal beats their liquidation alternative.
Step two: triage the creditor map. Not all debts negotiate alike. Statutory personal-liability items — payroll, trust-fund payroll taxes (26 U.S.C. §6672), sales tax — get paid, not negotiated. Secured lenders get communication and adequate-protection proposals, because their lien is their leverage. Landlords negotiate against their Civil Code §1951.2 mitigation duty — a lease buyout prices off realistic reletting time, not the remaining term. Unsecured trade creditors — the largest bloc — price off the honest alternative: pennies in a liquidation.
Step three: the offer architecture. Composition offers (a pro-rata lump sum, e.g. 30 cents now, funded by an asset sale or owner contribution) or extension offers (100 cents over 24 months) or hybrids. Equal treatment within a class is the credibility rule — creditors compare notes, and side deals detonate workouts. Every acceptance is documented with a written settlement agreement including full release language and, where guarantees exist, release of the guarantors — the owner’s real objective.
The legal guardrails: settlements of disputed or unliquidated claims are enforceable compromises; for undisputed liquidated debts, part payment alone doesn’t discharge the balance without proper release documentation (see Civil Code §1524) — which is why workout settlements are papered as accord and satisfaction with executed releases, not handshakes and memo-line notations.
The backstop that makes it all work: a credible alternative. Creditors negotiate seriously when the debtor’s counsel can accurately describe the ABC or bankruptcy outcome awaiting them if the workout fails. The workout is a negotiation about liquidation value, conducted while the business is still worth more alive.
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The Hedge 