Journal of Corporate Renewal

Sept

2016

Lance Miller is a Certified Turnaround Professional (CTP) who has more than 20 years of experience as financial advisor, CRO, and investment banker.

He heads his own firm, KLB Partners LLC and can be reached at lmiller@klbpartners.com.

The first step to meeting the investor’s contingencies involved a visit to the senior lender, where the company shared its plan to avoid bankruptcy.

The CRO offered the lender $1.5 million as settlement for the $4.1 million the company owed. This was the lower-end estimate for the net proceeds that the lender would receive if the company filed for bankruptcy, based on a liquidation analysis the advisors performed using updated equipment and real estate appraisals. The lender was interested in a non-bankruptcy resolution and ultimately agreed to a settlement of $1.8 million, which amounted to 44 cents on the dollar.

Meanwhile, the second lien lender that had made the SBA 504 loan was left intact and would become advantaged—that lender became a first lienholder on the real estate and stood to be repaid 100 percent if the company’s turnaround was successful.

The deal struck with the senior lender was contingent on the company negotiating a second agreement on the unsecured debt and finding a new revolving lender. The senior lender had agreed to those terms reluctantly and only if the company could complete a deal before the end of 2013, when a bankruptcy filing would be triggered.

Next, the company and its CRO approached the two unsecured lenders and the meat vendor to whom payment was past due. All three had helped the company with liquidity, yet they would have received nothing in a bankruptcy. The advisors explained the situation to them and then outlined a plan that would hopefully repay them 100 percent if the company was given time to execute its turnaround plan. After much back and forth and further threats of a deadline and imminent filing, they all finally agreed.

A new subsidiary of the distressed company was formed as a single-member limited liability company, which was classified as a disregarded entity. It was a separate legal entity from the company but was disregarded as a separate entity for income tax purposes.

The original notes and the meat
vendor’s payables with the company
were then canceled and new notes
from the new limited liability
company were issued in their place,
along with a personal guaranty of
the owner. The new notes required
repayment of all amounts due in five
years, but no interim payments were
required. If the notes were not paid
by maturity, the noteholders could
sue the owner personally. Because
the owner would have been forced
into personal bankruptcy if the
company filed, he was willing to give
the guaranty. Additionally, and most
importantly, because payments on
the new notes were not guaranteed
in any way by the company, the new
investor’s criteria were satisfied.

With time running out, the company looked for a new revolving lender and entered into negotiations with two lenders. One was an alternative lender that was comfortable looking at “hairy” deals and could commit quickly, and the second was a small local community bank that had conservative underwriting standards and was located near the company. 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.

With all of the pieces in place to satisfy the new investor, the deal closed December 31, 2013, just in time to meet the senior lender’s deadline.

New Life

The company was given new life, with a deleveraged balance sheet and new source of liquidity. Its total debt was reduced to $1.8 million, accounts payable was cut by $1 million, and an additional $1.7 million of liquidity was available from the new revolver.

During the two years since the deal
closed, the company has turned
itself completely around. With its
new liquidity, the business was able
to purchase meat advantageously,
as well as gain lower pricing and
renewed terms from its many other
vendors. Customers, who had
little knowledge of the company’s
previous troubles, remained loyal,
and over time, the company was able
to raise prices. Significant numbers
of new customers were added.

By March 2016 profitability had soared, with EBITDA reaching $3.5 million, a fivefold increase from the time the company entered workout. In early 2016 the owner was able to buy out the new investor and reacquire 100 percent of the company’s common stock. The new investor more than doubled his money in two years.

Once again with 100 percent of the stock owned, the company began making payments to the new subsidiary’s debtholders. A significant payment was made on the debt in early 2016, with the balance expected to be paid in full in 2017, two years ahead of when the owner’s personal guaranty would have been triggered.

The small community bank was happy with the company’s performance and refinanced the SBA and local development loans, which were repaid at 100 percent.

Bankruptcy is usually a death sentence for most small companies. With help from its advisors, this family-owned meat processing company found a different way. Sometimes all a small business really needs is more time. In this case, that and a bit of creativity paid off handsomely. J