A Restaurant Chain Went Looking for Fast Service

With the spurt in the number of distressed companies, it follows that many turnaround and merger and acquisition professionals are spending more time trying to sell underperforming and troubled companies.  Because today’s market clearly favors buyers, the real challenge of course, given the typical seller viability and liquidity issues, is to maximize value.  Morris·Anderson faced such a daunting task recently, and in a 60-day period honed its Quick Sale skills and achieved a very satisfactory result to boot.

Background

On September 18, 2001, M·A&A was asked to market a $20 million theme restaurant chain that included 3 big restaurants in 3 different states.  One restaurant was still in startup mode, one was in early turnaround mode and one was very profitable.  The company had gone through almost $40 million of capital in its 3½-year life and had yet to generate any profits in the aggregate.  Furthermore, the recession and the events of September 11th had hurt sales volume and cash flow significantly.

The request to sell the chain followed on the heels of an M·A&A viability and situational analysis which showed the chain to be insolvent and running out of cash within 60 days.  Not surprisingly, management was receiving loan payoff and other demands from its senior lender.

What follows are the steps taken by Morris·Anderson and the time frames in which the steps were completed.

Step 1Determine the Likely Buyers

Prospective buyer names came from multiple sources:  the officers and directors, companies or individuals known to M·A&A as buyers of distressed companies, and industry listings of chain restaurant owners that were stratified by size and geography.  Simultaneously, M·A&A put together a two-page “blind summary” describing the company in general terms and providing basic financial information.  At the end of day 2, M·A&A had e-mailed or faxed over 300 blind summaries with a simple Confidentiality Agreement attached.  Over the next three weeks, M·A&A received back ten executed confidentiality agreements.

Certain officers and directors were determined to be potential buyers themselves.  M·A&A segregated the sale process as between insiders and outsiders.  This was done by assigning a separate M·A&A point person for the outsiders versus the insiders.  This helped preserve the integrity of the “arms-length” sale process.

Step 2 –  Assemble and Distribute a Data Book

M·A&A assembled and reproduced the Data Book within 2 days.  The book utilized the narrative and the financial projections already available that M·A&A had reviewed, modified and confirmed as part of the initial analysis.  Additionally, typical due diligence material was included such as asset lists, tax returns, etc.  When books were distributed, a “drop dead” bid date was communicated.

Step 3 – Proactively Contact Prospective Buyers

A prospective buyer was defined as anyone who had signed the Confidentiality Agreement and received the Data Book, or who M·A&A nevertheless believed to be a highly likely bidder.  Face-to-face meetings were arranged.  It is a very busy world and M·A&A has found that you need to “help” prospective buyers invest the time necessary to evaluate the purchase of the seller, especially in the Quick Sale mode that M·A&A had established.

The objective of the close personal attention, in addition to expediting and fostering the process, was to find and encourage a “stalking horse” bidder who was willing to bid at an amount in excess of the chain’s orderly liquidation value. 

Step 4 – Negotiate a Term Sheet

A “stalking horse” bid from an officer was received within 2 weeks at a value of $8.3 million, which was enough to pay the senior secured lender in full, pay one-third of the junior secured lender and cover employee payroll and most benefit liabilities. 

In addition to the traditional terms of sale found in a term sheet, M·A&A and counsel, with the agreement of the Board, had considered the appropriate means of selling the business.  It was decided that among the options, a §363 bankruptcy sale made the most sense.  A deal was negotiated with the “stalking horse” bidder which was subject to a §363 auction procedure.  With the stalking horse bidder, the auction procedure was set up with a very short, under 30 days, time line as cash and hence viability continued to be near-term concerns.

The approved auction process required that each bidder submit bids in conformity with an agreed format.  This process minimized apples versus oranges bids that would have been difficult to compare as to value.

Step 5 – Execute the Sale Plan

An Asset Purchase Agreement was negotiated, as well as a §363 bankruptcy sale bid procedure and a small DIP loan facility with the stalking horse bidder.  The company filed for Chapter 11 protection on October 4.  At the October 5 first day hearing, less than 3 weeks after September 18, the day the marketing and sale engagement started, the judge agreed to an auction date of October 30 due to the emergency nature of the case (the company would have been out of cash but for a M·A&A negotiated short-term DIP loan intended to “bridge” the company to a Quick Sale).

Over the next 3 weeks, in addition to facilitating work on pre-closing tasks with the stalking horse bidder, M·A&A focused primarily on three additional buyer groups in hopes of getting a higher and better offer.  All of these buyer groups entered into the ultimate dynamics of the auction.  At the actual auction, the company’s major unsecured creditor who has a unique dining promotion and restaurant financing business, put in a whopping $3 million overbid and raised the bar to $11.4 million.  This prompted the stalking horse to raise his bid by nearly $2 million.  Ultimately, the company accepted the unsecured creditor’s bid and closed the sale on November 19th, just 61 days after the M·A&A sale process started.  The results:

  1. Senior secured creditor paid in full
  2. Junior secured creditor paid in full
  3. Employee claims and most benefit claims paid in full
  4. Customer claims paid in full
  5. Administratively solvent estate
  6. Likely double digit dividend to unsecured creditors

The orderly liquidation value of this restaurant chain’s hard assets was estimated to be under $1 million.  The stand-alone going concern value of the one very profitable restaurant was estimated to be $4 or $5 million.  This compared to the actual value of the final asset sale at $11.4 million, which represented almost a 40% improvement to the stalking horse bid.

Step 6 – Maintain Detailed Records

Detailed records of all prospects contacted, responses to those contacts, additional information requested and provided, meetings, etc. were maintained.  Those records were made available to all parties having sale approval rights and fiduciary responsibilities in allowing a sale to go through.  Additionally, a summary of that information was provided periodically to those parties as well as the Court throughout the process.  M·A&A’s experience is that a properly documented marketing and sale process is critical toward ensuring that any possible objections to a proposed sale, especially in a court supervised §363 bankruptcy sale, can be handled with strong evidence of a thorough marketing process combined with an arms-length sale process having the clear objective of achieving the “highest and best offer.”

It is Morris·Anderson’s view that many more distressed companies can be sold at much higher values if a hands-on turnaround consultant or other professional using a Quick Sale Process were engaged.  M·A&A is fortunate to have been able to refine its Quick Sale Process, which means one stop shopping (i.e., workout services and quick sales) for our clients and referral sources.

Tales from the Trenches

M·A&A was recently referred to an automation equipment manufacturer in the Midwest by a major middle-market lender.  The Company had a small $2 million Line and we were the second turnaround firm who had been retained to help.  The first firm was a big name who had charged $75,000 for a very nice “accounting type” report on the situation.  Unfortunately, a small over-advance had mushroomed to nearly $1 million, 50% over-line, during their one-month study.  No one was happy!

My new Client and his management team were skeptical that M·A&A could help any more than the previous consultants.  However, he had to do something as the Bank was understandably becoming quite aggressive.  Of course, the owner had personal guarantees on the Line and several leases.  As most of his wealth was tied to the Company, he was looking at both a business and a personal bankruptcy straight in the eyes.

I went to the Company the first day with my financial modeling associate in tow and explained my “4C” approach to turnarounds.

  1. Cash – Immediately, we must understand, forecast, manage and control sources and uses of cash.  We use a 13 week detailed forecast.
  2. Costs – Secondarily, we must understand and agree on the monthly revenue size of the business.  Then we can calculate the monthly costs and/or uses of cash which we must cut from the business to get back to cash breakeven.  Obviously, we must push to do this exercise quickly.
  3. Control – Next, we want to have cash disbursements tightly controlled, preferably by M·A&A, weekly metrics created to measure performance and action items with management accountability assigned and tracked.
  4. Communications – Finally, we want to make sure that our Client and senior management agrees with our findings of fact and recommended actions, so we meet regularly to share information.  We asked to have direct communications with both the Lender and middle-management employees, so we can bring them into the process as well.  Obviously, we typically will meet with vendors to discuss credit and payments as well.

After one week, the owner and his senior managers asked to have a dinner meeting to review M·A&A’s progress.  In reality, this was a “test by fire” to see if I was just another blood-sucking fee monger.  I summarized my findings into four buckets that night and spoke from my handwritten notes on the problem areas.

Cash – Unreconciled bank accounts, held checks in drawers, unnecessary delayed billings, poor collections follow-up.  Recommendation – centralize all cash responsibilities with M·A&A.

Costs and Control – No budgets, poor pre-approval of expenditures, unexplained use of outside contractors, heavy overtime, and unneeded open personnel requisitions.  Recommendation – hiring freeze, elimination of unauthorized overtime, and tight control over new spending all under M·A&A control.  Also immediate need to cut approximately $100,000 of monthly costs to get to breakeven.  Recommendation – M·A&A to convene team to develop action plan and implement plan within two weeks.

Management – Current management structure was ineffective and nothing was being done to address current problems.  Recommendation – put M·A&A in Crisis Manager role to be a “Catalyst for Change.”

Manufacturing – Vice President of Manufacturing was incompetent and Plant Manager was worse.  Recommendation – terminate both immediately and recruit a strong Vice President of Manufacturing.  Additionally, work-in-process inventory was ridiculously high and scrap, rework and quality were huge problems.  Recommendation – work down WIP as a source of cash and focus on root causes of scrap, rework and quality problems.

They were stunned by this comprehensive analysis of their situation and how to fix it.  They agreed to terminate the manufacturing leaders and I personally recruited the new Vice President of Manufacturing from my network.  They gave M·A&A control of the checkbook and all processes affecting cash.  They gave M·A&A control over new expenditure approval.  We re-sized the business two weeks later and laid off 20% of our work force.  My financial modeling assistant developed a great project model to forecast billing and collection trigger points which were key to managing cash in this type of project.

Within one month, the nearly 50% or $1 million over-advance had been totally eliminated.  I met personally with every major vendor and asked to be put on COD for 60 days to give us time to develop a recovery plan which would include how we would pay down their old debt.  They all agreed and continued to work with us.

M·A&A worked with management to put a plan together to guide the turnaround.  Approximately six weeks into the assignment, we presented the plan to the Bank who was very happy with their much improved risk exposure.  However, they had become credit weary and asked our Client to find another lender.  Of course, M·A&A was most happy to assist the Client in this regard and we moved the loan three months later to an Asset-Based Lender in our network.

I spent six months on this project and my associate modeler spent two months.  The results are noted below.

Client – facing the real possibility of melt down of Company and personal bankruptcy, sold his company two years later at a fair multiple on approximately $1 million of EBITDA.

Secured Lender – facing real possibility of $1 million loss due to over-advance was 100% paid out.

Asset-Based Lender – new customer with $2.5 million line.

Suppliers – 100% paid out.

M·A&A – received fair project fees and developed more positive referral sources.

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