Companies often undergo various changes and this explains why some are market leaders at one point and later on find themselves without funds to run their operations. Bankruptcy is one of the common reasons why businesses lose these positions. The events that have unraveled at Sears indicate that a business could face bankruptcy at any given moment if it is not careful with its finances. However, a company could manage its finances better but still find itself in debts. Sears also provides a perfect example of how changes in market conditions can affect the finances of a firm and lead to bankruptcy. The aim of this paper is to explain this concept of bankruptcy by using Sears as the case analysis.
In October of 2018, Sears reported that it was filing for bankruptcy. The news came as a surprise to many people given that this department chain store had at one time dominated shopping malls in the United States. The company could not state this in its report but it is worth mentioning that just as other traditional retailers, Sears’ downfall was hugely influenced by the rising online competitions from organizations such as Amazon. Due to this, the company has been forced to close its stores as well as sell its properties in a bid to deal with debts that had amounted to over $5 billion. The company resorted to filing bankruptcy after news emerged that it could afford to meet repayment worth $134 million. The company filed for Chapter 11 bankruptcy. This kind of bankruptcy is known to postpone the obligation a company has to its creditors. The company did this to give it time to reorganize the debts it had and sell parts of the business to help in settling these arrears (Gittleson, 2018). The aim of the paper is to use the Sears example to explain the concept of bankruptcy in firms and what causes them.
The main objective of this business research issue is to discuss the concept of bankruptcy in organizations and the issues that revolve this phenomenon. Therefore, the research questions for this study will include:
From the above research questions, the objectives of this study will include:
When determining bankruptcy in organizations, scholars have often provided various models that researchers could use. Given that the company in question is a global one, the research will use the global model of bankruptcy prediction in to analyze the situation at Sears. The global model is seen as an objective one for this research because it will help in making a constructive prediction regarding what happened to this company (Alaminos, et al., 2018). Moreover, this global prediction model is seen as vital for this research because other business managers can apply the frameworks to help them in determining the financial safety of their respective companies.
Any research must adopt certain methods to help in collecting valuable data that will help in making a conclusion. For this study, the paper will adopt the case study approach by focusing on Sears and the issues that led to its bankruptcy. Using this approach, the paper will use several different approaches, including observations and interviews. Therefore, the case study itself is not a method. However, the research felt that using the example of Sears would provide an insight into these issues. The case study analysis, in this case, will involve reading and examining the Sears situation and highlighting the relevant facts as well as underlining key problems (Torkin, 2011). After uncovering the problems, the paper will try and offer solutions to this problem.
From the questionnaires administered and interviews undertaken, it was largely noted that any business no matter how huge it is can suffer from this situation. Therefore, it is not just a matter of companies being careful with their finances but also making sure that they indulge in activities that cannot tarnish their names. The analyses of bankruptcies that have occurred in similar businesses have shown that underinvestment played a key part in this. With empty shelves, the company had to raise the prices of its products and this only kept customers away. The fact that the goods it sold were available in other retail stores at a discount only compounded the problems that Sears had. From that analysis, it was deduced that competition can play a big part in making companies go bankrupt (Shuchman, 1977). When a company lacks goods to sell, clients will have no reason to visit such stores.
Another critical element noted from the case study analysis is that a tarnished brand name can play a big part in bankrupting an organization. In the case of Sears, it was noted that its troubles started when it diversified a lot and in the process lost the deftness that once made it the largest and most innovative retailer in the world. It is an indication that as much as the brand name can boost the productivity of a business, a negative one can have a huge effect on sales. The theory of bankruptcy law as a liquidity provider can help in understanding why Sears filed for bankruptcy. According to this model, the liquidity problem is one of the reasons why companies go bankrupt (Delaney, 1992). The dominant normative theory of bankruptcy also known as the creditors’ bargain theory can also help in understanding why Sears and other companies file for bankruptcy. Companies often do this as a way of solving coordination problems brought by numerous creditors.
The creditors’ bargain theory argues that two issues play a big part in bankrupting organizations. The two issues include illiquidity-debt overhand as well as adverse selection. In fact, these issues become more severe when a company has many uncoordinated creditors as Sears did. Therefore, companies have to file for bankruptcy to make sure that they address the problems they have. The theory also indicates that when companies find themselves in these situations. They usually file for Chapter 11 bankruptcy that gives them the time to sell their assets and then repay their creditors (Lubben, 2018). Filing for this kind of bankruptcy is seen as a strategic decision by companies to make sure that they do not go under after the bankruptcy.
The research found that bankruptcy is a common risk that businesses always have to think about to make sure that they do not find themselves in such situations. The Sears situation only provided two reasons why companies go bankrupt. One of them is external business conditions that might include a rise in competition which in turn increases the general costs of operating a company. Apart from that internal business conditions, including weak management, client loss, as well as a credit-related problem could make a business go bankrupt. These two factors played a big part in the downfall of Sears. Apart from that, companies have undergone bankruptcy due to critical monetary problems, including loss of capital and the inability to secure new capital (Alderman, 2006). Such issues have often left companies in debts and this is another problem that Sears encountered.
Other problems that lead to bankruptcy that Sears never experienced include tax problems. When companies fail to file their tax returns, this can bring problems with the tax regulators and companies can face huge fines for this. It is a challenge businesses could avoid by making sure that the taxes are appropriately paid. From the analysis, it was also noted that accidents can play a big part in causing bankruptcy (Alaminos, et al., 2018). Insurance might cover lawsuits, but at times, certain issues might prevent businesses from getting money in time forcing a business to declare bankruptcy.
The main objective of this study was to find out the meaning of Chapter 11 bankruptcy and some of the reasons that force companies to find this kind of liquidation. The paper managed to find the meaning of this kind of bankruptcy and why some companies choose to do so. The paper also aimed at exploring what becomes of companies after filing for bankruptcy. However, the paper did not explore this issue at lengths because the major focus was just on the causes of bankruptcy (Alaminos, et al., 2018). Even though Sears was used as the case study, the paper provided more reasons for causes of bankruptcy other than just the two that forced this company to make this decision.
The research helped in understanding vital issues about Chapter 11 bankruptcy and how it is different from other forms of liquidation. The study helped in understanding that companies are better of filing for this kind of bankruptcy to help in saving themselves from going under. This kind of bankruptcy is important in that it gives businesses time to sell their assets to help them in repaying their creditors (Torkin, 2011). Therefore, it is a way of preventing a company from total liquidation.
Alaminos, D., Castillo, A. d. & Fernández, M. Á., 2018. A Global Model for Bankruptcy Prediction. PLOS ONE, 13(11).
Alderman, M. H., 2006. Chapter 11 Business Reorganizations: For Business Leaders, Accountants and Lawyers. 1st ed. Denver: Outskirts Press, Incorporated.
Delaney, K. J., 1992. Strategic Bankruptcy: How Corporations and Creditors Use Chapter 11 to Their Advantage. 1st ed. Berkeley: University of California Press.
Gittleson, K., 2018. US retail giant Sears files for bankruptcy. [Online]
Available at: https://www.bbc.com/news/business-45859722
[Accessed 16 April 2019].
Lubben, S. J., 2018. A Functional Analysis of SIFI Insolvency. Harvard Law School.
Shuchman, P., 1977. Theory and Reality in Bankruptcy: The Spherical Chicken. Law and Contemporary Problems, 41(4), pp. 66-106.
Torkin, M. H., 2011. Filing for Chapter 11 Bankruptcy: What You Need to Know. 1st ed. Boston, MA: West Group.