RadioShack's Possible Bankruptcy: What Business Owners Can Learn

RadioShack's Possible Bankruptcy: What Business Owners Can Learn

by Kylie Ora Lobell, September 2014

RadioShack used to be the go-to place for consumers’ electronic needs. They were the Mecca for computers, chargers, plugs, cameras, accessories, and, well, radios. These days, the company is struggling to stay afloat.

In March, it was reported by Business Insider that RadioShack was forced to close 1,100 stores. In Q4 of 2013, sales dropped 19%. Warren Shoulberg, an editor for business publications, blames the company’s financial issues on their outdated storefront look, misguided focus on cell phones, subpar employees, and lack of online appeal.

Currently, RadioShack’s stock is hovering around 97 cents a share; Last October, it was valued at $4 a share. After their recent second quarter earnings report showed continued losses, the struggling electronics retailer confirmed its dire circumstances: if it can’t find a buyer or restructure its debt, bankruptcy might be its only option.

Why would RadioShack file for bankruptcy?

According to the Motley Fool’s Timothy Green, RadioShack’s creditors only allow them to close down 200 stores per year. That means that the company is forced to keep open stores that are underperforming. They have to figure out other ways to cut costs.

By 2012’s end, the company had $500 million in cash, and a year later, they only had $180 million, according to Green. Its debt clocked in at $613 million. A lot of the debt won’t mature until 2019, but considering how fast they’re losing money, they won’t be able to pay the interest back. Unless there is a radical shift in the way they do business, and there’s a subsequent increase in sales, there is little hope for the once massive chain.

While RadioShack has been working hard on a turnaround plan over the last year and a half, according to a recent document filed with the SEC, if an acceptable sale or partnership deal can’t be accomplished, they may seek Chapter 11 bankruptcy protection. If, instead, they are forced to file Chapter 7 bankruptcy, the company would be required to liquidate its assets, signaling the end of the once-thriving electronics retail chain.

How would filing for corporate bankruptcy help RadioShack?

Jon C. Ogg of 24 Wall Street points out that bankruptcy could save what small value RadioShack has left. Instead of draining themselves and waiting until their stock share and sales plummet even more, they can make a preemptive move and file.

Ogg says, “If RadioShack waits until it has no cash and runs through its liquidity, then there will be nothing left. If the company moves to file for business bankruptcy protection, there could at least still be something left for equity holders and the creditors alike.”

Is filing bankruptcy for your business a viable option?

If your business is having financial struggles, bankruptcy might be a way to get the maximum amount of return out of it while you still can. The word “bankruptcy” often carries negative connotations, but it can actually be a business’ savior.

Let’s say you owe more money than you’re making. You’re drowning in debt and can’t think of a million dollar idea to get your business back in the black.

Depending upon the structure of your business, you can choose a number of bankruptcy options. According to SBA.gov, a website that offers detailed explanations about the different types of bankruptcy, there are a few options for business owners who are considering bankruptcy, including Chapter 7 bankruptcy, which entails liquidating merchandise to pay back creditors and discharging “debts that can't be satisfied with the available assets.” If you file Chapter 11 bankruptcy, you have to come up with a new business plan, which will be overseen by a court-appointed trustee. Chapter 13 bankruptcy involves filing a repayment plan and showing how you’re going to repay your debts, and Chapter 12 bankruptcy is only for farmers and fishermen who agree to pay debt back within three to five years.

After consulting with a lawyer to figure out the right option for your business, filing for bankruptcy could turn out to be a better plan than you’d expect. You can file, restructure your business, and figure out a payment system with creditors. In the process, you might come up with a brilliant idea and get back to where you once were in no time.

Bankruptcy isn’t an end-all-be-all. In fact, it can usher in the fresh start your business deserves.