Journal of
Corporate
Renewal
Sept
2016
and its CRO developed a turnaround
and capital raising plan, while
bankruptcy counsel stood ready
to file if that became necessary.
The Turnaround Plan
The company had done a terrific job of
keeping its financial problems quiet, so
its reputation had remained strong. Its
operating inefficiencies were relatively
easy to fix. Plant labor was right-sized;
selling, general, and administrative
(SG&A) expenses were reduced; and
inventory policy was tightened. A new
controller, head of quality control,
and head of plant maintenance
were all hired. These operating
improvements, while meaningful, were
insufficient to change the projected
outcome without a balance sheet
fix and an increase in liquidity.
Over the following months four
potential merger or sale partners were
approached, and lengthy discussions
were held with each of them. Projected
operating synergies from combining
similar operations, closing plants,
and reducing expenses suggested
a pathway to profitability that could
have serviced the outstanding debt.
However, as is often the case with a
distressed company, agreement on
a valuation split or sale price could
not be reached, so merger or sale
discussions led to a dead end.
Many alternative lenders, mostly
sub-debt lenders, were also contacted,
but given the overleverage and
profitability levels, none was interested.
Simultaneously the company and its
CRO had been pursuing new capital,
with their efforts concentrated on
high-net-worth individuals with
intimate knowledge of the meat
industry. They believed that such an
individual would best understand
the company’s potential if it were
given a second chance. In mid-2013,
a potential investor was found.
The prospective investor was an
industry veteran who ran a highly
successful company in another sector
of the meat business and knew the
owner of the distressed company from
industry association meetings. After
several meetings with representatives of
the company, along with due diligence,
the investor bought into the company’s
long-term vision and viability. Further,
he believed that the existing owner
and his two sons remained the right
people to operate the company.
The investor was willing to provide
$2 million for the company under
certain conditions, but finalizing a
deal would not be simple. He did not
want the company to file bankruptcy,
because he was not familiar with the
process and was wary of the potential
unknowns, including timing, costs,
vendor issues, and customer loss. He
made it clear that his investment was
contingent on right-sizing the balance
sheet and eliminating the $1.1 million
of unsecured debt as an obligation of
the company and the $1 million of past
due trade debt to the loyal meat vendor
that had provided extended payment
terms. Additionally, he would not
invest unless a new lender was found
to provide the company with liquidity
through a new revolving line of credit.
The company negotiated terms with the
new investor that included 50 percent
ownership of the common stock, along
with subordinated debt that in effect
gave him more than 50 percent of the
economic return in the early years.
Allowing the owner to retain 50 percent
ownership aligned his interests with
those of the new investor while avoiding
triggering the personal guaranty
requirement under SBA guidelines.
Under the Gun
Given the constraints imposed
by the potential new investor,
bankruptcy still seemed like a
likely outcome and, in fact, that
possibility was used as negotiating
leverage to craft the final deal.
Interestingly, the alternative lender could not
get the loan through its credit committee, while
the conservative community bank agreed to a
new $1.7 million revolver at a low interest rate.
