Guest Column By Sean Shepherd
Negotiating with creditors to effect an out-of-court workout is certainly not an easy task. Facing a loss, creditor managers and banks often adopt an adversarial posture that initially may be difficult to overcome.
The goal is to establish a consensual tone and tenor while acting to protect your own interests. Despite what they may say, credit managers and banks will be acting in their best interest and it is important to realize that their goal is to maximize their recovery. Accordingly, here are some tips that will help during negotiations:
1) Liquidity Analysis – Start by performing a comprehensive liquidity and cash flow analysis that uses current operating characteristics as a base line. The goal is to first determine what the business can afford to pay on a periodic basis.
2) Game Plan – Have a game plan BEFORE approaching the creditor and never agree to pay more than what the cash flow analysis suggests is feasible.
3) Understand the Other Side – This is one of the universal keys to negotiating—i.e., understanding your opposition’s needs and objectives. During negotiations, attempt to uncover the creditor’s needs and their bottom line—that is, the absolute minimum that they will or can accept. Depending on individual circumstances, 50% to 70% percent of the current balance of the credit is generally not unreasonable.
4) Stay Calm – Credit managers and banks may use a variety of tactics to coerce the borrower into a revised arrangement that is ultimately unrealistic. Hence, stay calm and never become intimidated by the person that you’re negotiating with, even if they threaten you with lawsuits or other actions. Studies indicate that a calm person thinks more clearly and effectively than one aroused.
5) Timing – Don’t lose sight of the fact that most successful negotiations take place over a matter of days or even weeks, with several rounds of offers and counter-offers. Don’t become discouraged if the process seems to be taking longer than expected.
6) Alternatives – Try to present a couple of different restructuring/repayment alternatives so that you’re presenting a ―choice‖ to select from. This is, again, a key tactic in successful negotiations. If the company can afford, for example, to settle an account by paying a lump sum (as opposed to a payment plan), you’ll have much more negotiating leverage. This is the universal power of cash, and it works in all venues.
7) Opposing Tactics – Remember that the person you’re negotiating with is a trained professional when it comes to debt collections. A common tactic is for them to use complex legal terminology (during conversation or in correspondence) in order to confuse or intimidate the counter-party. Attend very carefully to what’s being said and make sure that you understand exactly what you’re being asked to agree to. If a legal issue arises during negotiations, side-line the topic by simply indicating that you can’t agree or comment until you’ve consulted with the attorney involved in the process.
8) Draft & Execute the Agreement – Once a workout agreement has been reached, make absolutely sure that everything that’s been agreed upon is accurately expressed in writing, and that the agreement is fully executed by all parties—i.e., signed and dated.
9) Know the Law – Never lose sight of the fact that anyone attempting to collect a debt outside of court must conform with the Federal Fair Debt Collection Practices Act—understand what this says and what rights it affords the borrower.
Sean Shepherd is the Director of Business Development for VALCOR Consulting. VALCOR provides a full menu of enterprise valuation services and restructuring support to the middle market. Mr. Shepherd can be reached at: firstname.lastname@example.org or 602.214.4321