Manybusiness, nowadays, have a high likelihood of failing hence, theyare forced to file for different forms of bankruptcy like Chapter 7,13, and 11. Chapter 11 refers to a form of bankruptcy thatincorporates the reorganization of business affairs and assets of adebtor (Hull, 2004). Generally, corporations file for this chapter inorder to have ample time to restructure their debts. This chaptercreates a chance for the debtor to have a fresh start that is subjectto the fulfillment of his or her obligations under its plan ofreorganization, Blockbuster chain is one of the well known companiesthat filed for Chapter 11 bankruptcy.
Blockbusteropened its first store in Dallas in 1985 (Hull, 2004). The storeconsisted of a check out process that was wholly computerized andabout 8,000 VHS tapes. Mr. David Cook was the founder of this wellknow store. The store was successful and this led to the opening ofthree more Blockbuster stores in 1986. The owner of BlockbusterCompany sold a portion of his company to some investors, like WayneHuizenga, in 1987. Mr. Wayne, the founder of Waste Management, Inc,eventually took total control of Blockbuster Company after Mr. Cookleft the business. Following this, Blockbuster’s headquarters weremoved from Dallas (Texas) to Fort Lauderdale in Florida (Hull, 2004).By the year 1988, Blockbuster had over 400 stores and was ranked asthe leading video chain globally. Blockbusters stores had reachedover 1,000 in the early 1990s. The company’s competitors (On DemandMovies, Netflix, and Wal-Mart Stores) first emerged in 1997.
Accordingto Skinner (2012), young adults are the target audience of thiscompany. The company make use of the slogan ‘make it a Blockbusternight’ to attract the young individuals, who are aged between 18and 34 years. Movies and games were the product that was rented outby the company. The product helped the company amass huge amounts ofprofit for quite a long time until various competitors began toemerge.
Thereare several reasons that made the company file for Chapter 11reorganization. Emergence and rise of On-demand and instant streamingmade Blockbuster to take a hit in revenue. The company also facedcompetition from Redbox, Netflix among others. It also had 1 billiondollars debt that it needed to clear. Millions of Blockbuster’sdebts belonged to some of the major studios, like Lions Gate WaltDisney, and Warner Bros, in the world (Skinner, 2012).
Anycompany that file for Chapter 11 reorganization aims at becomingprofitable once again since it give such a company the chance to filebankruptcy hence, maintaining the running and growth of its dailyactivities. Chapter 11 has an advantage over either Chapter 7 or 13since it does not require a company to cease all its operations. Ithelps business have some control over the bankruptcy process (Acland,2013). Chapter 11 bankruptcy requires the appointment of a committeeto develop a plan as the first step. Thereafter, the debtor companyis free to develop a plan together with the committee beforepreparing a disclosure statement and a reorganization plan to filewith the court. Later, the SEC has the chance to review in order toensure completion before creditors are allowed to vote on the plan.The courts confirm the voted plan before giving a company the chanceto carry out it to Chapter 11 reorganization.
Lookingat the financial statements of Blockbuster at the time of filing andafterwards, there is a high likelihood that it will gain tremendoussuccess in its activities in the future. Skinner (2012) findings showthat Blockbuster’s income statement had decreased expenses at theyear of filing (2010) as well as in the subsequent year (2011). Itsbalance sheet further shows an improvement on its liabilities from2010 (1852.60) to 2011 (173.50). Undeniably, evidence from thefinancial statements is a clear indication that Blockbuster made anoutstanding move to file for Chapter 11 reorganization. There is ahigh likelihood that the company would have filed for bankruptcy hadit not taken this move eventually, this would have led to itsdownfall and eventual closure. The improvements indicated on itsfinancial statements, clearly show that the company will be back inthe competition beside Redbox and Netflix. Indeed, Blockbuster willcontinue to see improvement in its finances as long as it follows thereorganization plan in a proper and effective manner.
Formsof debt reorganization
Debtreorganization refers to arrangements that play a key role inaltering the terms established for servicing an existing debt itincorporates both the debtor and creditor. Debt assumption, debtrefinancing or rescheduling, debt forgiveness, and debt prepayment orconversion is the four chief types of debt reorganization. Accordingto Acland (2013), Blockbuster adopted debt forgiveness in itsreorganization. Debt forgiveness refers to a type of debtreorganization that involve voluntary cancellation of all or part ofthe obligation of the debt. The debt must conform to the contractualarrangement between a creditor in a particular company and a debtorin a different company from the creditor.
Themost effective form of debt reorganization for the debtor (but not somuch for creditors) would be debt forgiveness. In adopting debtforgiveness, the creditors have a high likelihood of losing any moneyowed to them. On the other hand, debt refinancing would highlybenefit creditors since they would still have the chance to recovermoney owed to them on different terms. In my opinion, debtrescheduling would be at the top of the list as the most effectiveform of debt reorganization, debt forgiveness would become second,debt assumption third, and debt prepayment would be the last on thelist of effective forms of debt reorganization.
Blockbustershould take some precautions in order to attain success after filingChapter 11 using debt forgiveness. The first precaution that thecompany would take is to ensure that it has cash or capital cushionto help it whenever a crisis arise since investors and banks may notbe in a position to help it. Similarly, I would advise the company torationalize it expenses and costs and eliminate or keep liabilitiesat the lowest amount possible. Again, I would advise the company tomaintain and keep simple procedures and processes of doings its dailyactivities. This is because complicated procedures and processescreate a high likelihood of paving way for mistakes and slipups.Lastly, I would advise the company to keep up with the current trendsas well as satisfy its customers in order to have a continuous boomof its revenue. Undeniably, booming revenue will keep the companyfrom landing back in such a financial dilemma.
Acland,R.C. (2013). Senses of Success and the Rise of Blockbuster. FilmHistory,25 (1), 11-18.
Hull,G.P. (2004). TheRecording Industry.Cambridge: Cambridge University Press.
Skinner,J.S. (2012). Estimatingthe real growth effects of blockbuster art exhibits: A time seriesapproach. Journalof Cultural Economics,30, (2), 109-125.