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 email@example.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.
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
1 The company hired the author as its
chief restructuring officer (CRO).