The company was an inland deep-river barge operator, (pseudo-name: AAA), founded 3 years prior by a well-connected and well-respected executive of a much larger logistics company.
BACKGROUND: Year 1-fabulous success. Year 2 was good but declining, ending with a facility blowup of its major customer from which there was a very large account receivable that greatly impairing AAA’s working capital to remain current with its tug and barge subcontractors. In year 3, several towing and barge subcontractors began discontinuing services to AAA and several threatening lawsuits.
However, during that year, despite these challenges, AAA was successful in gaining a new and potentially huge customer, (pseudo-name: HUGE), with signed Letter of Intent contracts conditioned upon AAA securing tow & barge suppliers as subcontractors. Therefore, if consummated, there would be new business for all parties concerned, including the subcontractors. However, the subcontractors, already carrying large AAA account receivables, demanded substantial payment on the existing receivables prior to agreeing to do the new HUGE business.
The AAA owner had been negotiating working capital financing through loans or selling equity to cover this. Should AAA achieve this financing, it would enable all involved parties to recover and benefit from the HUGH business. All parties were hoping.
But that working capital financing remained uncertain. And time was running out for AAA, and creditor lawsuits and bankruptcy threats were occurring. AAA needed solutions fast. AAA sought out Liuzza Management Consulting (LMC) to hopefully help create solutions to these challenges.
LMC’s most immediate task was to convince all creditors to withhold legal action in order to buy time for AAA to acquire working capital or find other solutions. Liuzza met with each creditor individually. They all appreciated the fact that AAA had brought in appropriate help and expertise. To maintain that confidence, these visits needed to be promptly followed up with a plausible written Plan with at least some chance of success of providing the working capital or some other methodology to bring together sufficient resources to make this HUGE contract a reality. Of course, LMC could not assume that timely working capital financing would occur. Therefore, alternative approaches had to be developed, negotiated, and a written Plan presented to these creditors to avoid pending suits.
LMC’s summary Plan recommendations were three different alternatives, all to be perused concurrently:
Plan A. Find a way for the tugboat subcontractors, that could be involved and directly profit from the HUGH contract, to consider providing services for HUGH on regular credit (30 day) terms. This was LMC’s best but “longshot” proposal to, “somehow,” get them to pool their efforts to fund the deal, effectively providing AAA its needed working capital while making no demands on their past-due receivables until a later date after the HUGH shipments have begun. They would, therefore, gain considerable new business and be paid DIRECTLY by HUGH—not by AAA. They would deal with the AAA past-due amounts later. Thus enabling everyone involved, the debtor and creditors, to be considerably better off.
This approach to gain their agreement would be to convince HUGH that once shipments began, instead of making all payments directly to AAA, HUGE would pay the tug and barge providers their portion of the fees directly, with the balance being paid directly to AAA, who would pay the other support providers their fees. The owner convinced HUGE to add this subcontractor payment term the contract.
This method of avoiding a Chapter 11 bankruptcy, that defers all current debt to buy time to somehow find an interim source of working capital (in this case by commencing the HUGH deliveries, enabled by the subcontractors awaiting payment for the 30-day terms on the new business, thereby funding the working capital to generate new profits, thus saving the company. AAA could then begin retiring all the prior deferred past-due debt payments. This is generally referred to as an “Out-of-Court Settlement.”
Plan B. Bring in a certain large industry partner to provide all the tugs and barges as a partner or provider of tug and barge components.
Plan C. AAA-owned barges were in storage upriver and the storage fees were also past due. AAA owner felt strongly that, once A. or B. above were agreed upon, the storage company owner would have no problem releasing his barges for immediate use because the outlook for collecting their AAA account receivable would be greatly improved. This funding, or some alternative funding, is necessary to supply the needed barges for execution of alternative A above.
LMC was responsible for negotiating A and B concurrently, implementing whichever one could be signed and implemented first. The owner continued working on C.
Those providers, who participated in the Plan A for HUGE deliveries, would be paid timely on the new business (30 days), and they would delay requiring any payments on their past-due receivables for six months after commencement of the new contract. The remaining of the ten creditors not participating in Plan A would receive payments directly from AAA after the same six months.
In essence, the participating Plan A providers would be the source of the critically-needed initial working capital to fund execution of the HUGE contract by extending additional credit, based upon HUGE’s commitment to pay them directly. This would be a win/win for them because their new income would be secured by HUGE, and, without this new contract for AAA, many feared they might never be paid their old receivables. The same would be the case should Plan B be executed, of which Plan A participants were not aware.
AAA’s largest subcontractor, (pseudo-name: PPP), which was holding AAA’s largest accounts payable, and with whom LMC was negotiating payment, was also a direct competitor and an unsuccessful bidder on the HUGE contract. After a few phone calls in which Liuzza conveyed his Plan A and Plan B ideas, he met with the senior executives at their home office in the Midwest and suggested that they consider being a participant in Plan A, or in Plan B as a major operating partner.
A letter of Intent was negotiated and signed by the Executive V.P. of PPP by the end of the second day of that meeting.
The agreement provided for the two companies to share the HUGE profits at 50% each, PPP would provide all the tugs and barges necessary for the contract and would receive market rentals on the those tugs and barges, and AAA would handle the administration and coordination of the deliveries.
The next day when, Liuzza presented the signed PPP Letter of Intent to the owner, even though the owner previously supported this deal, he declined to agree to PPP as a partner due to his fear that PPP would use this opportunity to effectively take over AAA.
Sad ending: Two weeks later the company storing AAA’s barges upriver refused to honor its oral agreement to release the barges, demanding full immediate payment of overdue receivables first. HUGE then lost patience, and the Letter of Intent expired, and HUGE selected an alternative supplier.
In Plan A, had the owner gotten his expected release of his barges from upriver, Plan A could have been activated.
N.B.: The consultant delivered on Plan B, a transformational deal with PPP. But the client then refused to consider it, or even to consider negotiating certain changes or additions to give him comfort on his concerns.
Thus, the Deep-River Logistics Company effectively went out of business.
