Business Law

Bad News for Borders

You may have recently shopped at Borders and had no idea that the company is doing badly. Borders is the second-largest bookstore chain the US after Barnes & Noble. Borders sells books, CDs, DVDs and various gifts and stationery. Its first store opened in 1971 in Ann Arbor, Michigan. Now there are more than 500 Borders stores across the US.

In 2008, rumors circulated that Borders was having financial difficulties and perhaps the chain was going to be sold. Currently the store is in heavy debt. It can only survive in the future if somehow it makes a big profit in the upcoming months.

Things look even bleaker. Not only has Borders reported poor holiday earnings this last holiday season, but negative news continues to follow the company. Recent reports accuse the company of "playing favorites" by only paying some of the publishers it does business with. Those not being paid are now suing.

Why Won't Borders Pay All of its Publishers?

Many speculate that because of its lost profits and heavy loans, the company is trying to hold on to as much money as it can. Borders has approached this problem by ensuring its biggest clients get paid first, while delaying paying the smaller publishers. These smaller publishers aren't happy with this practice and are collectively fighting back.

The Difficulties Examined

The company has big financial difficulties which can be summed up as follows:

  • Declining revenue and profit margin¬†- indicate it's been unprofitable in the last years
  • A short-term liquidity crunch - Borders' current business environment is one with little cash and they can't pay their current liabilities as they become due, which resulted in them having to borrow more money at worse interest rates
  • A highly leveraged capital structure - meaning the company has a lot of debt
  • A challenging operating environment - along with the financial crisis that's hit all businesses, the book-selling industry has become increasingly competitive, with rising online book sales, e-books and a growing online user population, creating a bleak environment for the US book retailers

Options for Borders

When companies face these types of financial difficulties, their options are limited. First, they can try to come up with enough cash from various operations to meet their debt obligations. Otherwise, the company will need to come up with a restructuring plan.

Restructuring means to reorganize the legal, ownership, operational or other structure of a company in order to make it more profitable or better organized for its current needs. A company restructures its operations by cutting costs such as payroll, or reducing its size through selling assets. This is often seen as necessary when the current situation at a company is one that may lead to its collapse.

Lastly, if all else fails, the company may have to declare bankruptcy. Bankruptcy is the legal process where a person or a business can't pay its outstanding debts. It gives a business the chance to start fresh by forgiving the debt that can't be paid while offering creditors a chance to get some money back based on available assets. All of the company's assets are measured and evaluated to determine what can be paid.

The clock seems to be ticking on Borders. The company has available credit from a loan scheduled to expire in July 2011. If the company's financial situation doesn't improve, they'll have to deal with penalties, which it's unlikely able to comply with. The smaller publishers have already hired a law firm to represent their interests in case of a bankruptcy.

If you have outstanding gift certificates or outstanding credits at Borders, you may want to use them up relatively soon.

Questions for Your Attorney

  • What can I do if I haven't been paid by Borders?
  • I have creditors that I can't pay. Is bankruptcy my best option?
  • What happens to gift cards when a retailer has financial problems? Do I lose my card's value if the retailer files for bankruptcy?
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