Inventory Mix Adjustments. The
physical inventory count is a major
event in GOB sales, as price adjustments
are made for obsolete and/or defective
goods. A representative from the
debtor and the creditors’ committee
should be on-site during the count
to review any possible adjustments,
verify each for reasonableness and
accuracy, and limit the opportunities for
unnecessary downward adjustments.
For example, in a recent footwear
liquidation, the agency agreement
stipulated that pairs of shoes within one
size range were considered saleable.
By attending the inventory count and
directing every store to line up its
unpaired and mismatched shoes within
the applicable size range, the financial
advisor for the creditors’ committee
was able to limit the adjustment and
save the debtor more than $1 million.
Expense Reimbursements. In many
agreements, GOB proceeds are used
to pay the guarantee amount and sale
expenses before the remaining proceeds
are allocated between the debtor and
the agent. Expenses can be defined to
include store personnel, marketing, rent,
utilities, and inventory fees. Additionally,
Michael Brown is a director with Loughlin
Management Partners + Company, a New
York-based restructuring advisory firm. His
recent experience includes several large
and complex retail engagements.
many of the agent’s fees (such as
legal, personnel, and accounting) and
its cost of capital, which traditionally
were borne by the liquidator, are
increasingly included in this definition.
Such an arrangement decreases the
likelihood that GOB sales proceeds will
be sufficient to generate a return for the
estate under the upside sharing formula.
If possible, estate parties should use
leverage created by the post-petition
process to remove the payment of these
expenses from the agency agreement.
There are many variations of such
clauses that liquidators vigorously defend
in negotiations with estate parties and
before Bankruptcy Courts. Moreover,
agency agreements can include a
number of other provisions that could
cause unforeseen reductions in the
proceeds from a GOB sale delivered to
the estate. As a result, estate parties—and
creditors’ committees, in particular—can
never project the return to creditors from
a GOB sale with absolute confidence.
Nonetheless, a well-informed advisor,
through difficult but meaningful
negotiations with a prospective agent
regarding issues like those raised in this
article, can decrease the uncertainty
inherent in agency agreements and
increase the value to an estate. J
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