The company was organized into three separate wholly-owned subsidiaries. HHH (a pseudo-name) was a formally successful business in three related areas of logistics:
- Warehousing storage services (pseudo-name: AAA)
- Less-than-full-load trucking, (LTL)(pseudo-name: BBB)
- Finding and brokering full-truckload (FTL) trucking for shippers— pseudo-name: CCC)
SITUATION: The business had been in decline for several years resulting in large losses, past due accounts payable, and loss of several key accounts. HHHwas about to be sued and evicted on its leased 100,000 ft. warehouse by the landlordon what was then almost one year of past due rent.
The warehousing business, AAA, was unprofitable with no hope of improvement, and the landlord had to be dealt with. The FTL business, BBB, was also unprofitable, and its truck leases were in default. The only profits were coming from the very successful long-haul brokerage business, CCC, which benefited from its several loyal, capable, and dedicated team members.
Liuzza Management Consulting (LMC) was engaged to help find a way to save the business and/or wind it down with the least possible financial and legal damage to the owner.
LMC’s first activities were to communicate with all creditors to seek their restraint from further collection actions until it possibly could create a plan to minimize damage to all parties. Then HHH balance sheets were sent to all interested parties. Therefore, they would see that if HHH were forced into a Chapter 7 or 11 bankruptcy, all parties, except the lawyers, would lose any chance of receiving anything.
LMC recommendations then were:
- AAA and BBB operations needed to be terminated ASAP.
- CCC could be salvaged if bankruptcy could be avoided. (In a Chapter 11 or a Chapter 7, any profits it would continue to earn would have to be dedicated to the overall HHH creditors or auctioned as a profit-making entity to the highest bidder, with the proceeds going to the creditors of all three entities. And that entity could only have any value if the current employees remained.)
- That the owner consider buying CCC from HHH, but only if that could be done in a manner consistent with bankruptcy law and accomplished prior to any bankruptcy being filed.
Bankruptcy law prohibits any “insider-type” transaction of a sale of anything at a below-true value to an insider within the prior two years. Therefore, the owner’s only option was to purchase for cash and at fair market value. LMC produced a valuation for CCC, which was affordable to the existing owner. Although its going-concern value was higher than the owner could afford to pay based on a multiple of earnings, should the key employees depart, that value would decline significantly if they departed. That justified a lower valuation. The sale plan to the owner was structured so that the key employees would be granted minority equity interests should the bankruptcy lawyers approve the lower valuation and sale documents.
Upon their approval, the deal was successfully consummated.
OUTCOME: No creditors filed any suits, and ßAAA and BBB closed down, paying creditors whatever was possible with their remaining cash. LMC negotiated total rent forgiveness from the landlord. The HHH owner fortunately salvaged the best part of his company, CCC, becausethe bankruptcy that was threatened by some creditors was avoided by LMC’s strategies and actions.The owner of CCC was to pay fair market value in cash with the proceeds going into the company and being available to pay the then-existing creditors. A valuation was done by LMC, bankruptcy lawyers drafted the related documents, approved the lower valuation, and the deal was completed, and the key employees were retained.
