In 2009, Piccadilly Cafeterias, the nation’s largest cafeteria chain with over 100 units, owned by a large California private equity firm (pseudo-name: AAA), was floundering. The Chief Financial Officer (CFO) engaged Liuzza Management Consulting (LMC) to attempt to negotiate settlements with several landlords in three states on closed or underperforming restaurants. LMC achieved those objectives within three months.
In 2011 LMC was then asked to advise and help implement food cost reductions across the system of fifteen states. This was achieved over a two-year period with spectacular results. LMC principal Vincent Liuzza began that effort by his chairing a private off-site full-day meeting of a majority of the unit’s long-term General Managers—with no corporate executives being allowed—except the Vice President of Operations, who was not allowed to speak—but only to take notes!
The GMs were extremely vocal, venting years of frustrations on operations, marketing,maintenance, staffing, communications, etc. This flow of information was used to structure LMC’s Food Cost Control Plan. However, the CFO was realistic and very much aware of the fact that, even though a consultant analyses the company and makes appropriate recommendations, the incumbent personnel must deal with and make some necessary changes to their past habits, culture, policies, modus operandi, etc., in order to implement there commended changes to properly implement the Plan.
Therefore, throughout the ensuing two years, the CFO had Liuzza representing him in the weekly operations meetings amongst the VPs and department heads. Liuzza was described as an “embedded” consultant as opposed to one who merely analyses, makes recommendations, and then departs. This turned out to be very helpful, and the results were incredibly successful over a three-year time frame.
The CFO then declared that Piccadilly’s food costs in fiscal 2013 were the lowest in its history. See Piccadilly’s “Example of a Completed Engagement” elsewhere on this website.
Next, LMC was asked to advise on dealing with its two primary lenders. The company was in default to its largest, but only partially secured, New York investment bank lender, pseudo-name BBB. And its primary, but fully secured, West Coast banker, pseudo-name CCC, was expressing serious concerns. At that time, almost one-third of the company’s locations, spread over 15 states, were operating unprofitably.
Therefore, LMC’s recommendation was that the high interest and debt service in its loan agreement with BBB, Piccadilly, without serious debt restructuring and ability to exit the underperforming locations, would be forced into either a Chapter 11 reorganization or Chapter 7 liquidation.
LMC’s recommended solution was immediate drafting a plan for a “Pre-Packaged” Chapter 11. Its detailed and comprehensive drafting of that Plan could likely be completed within 90 days. In the meantime, the pressures from secured and unsecured creditors would be increasing. The Plan would call for legally canceling the leases on and closing all the unprofitable units, which would make the company immediately profitable and enable the company to retire the balance of the unsecured deferred debt to be deferred over an affordable term. And AAA would retain full ownership!
Once exiting Bankruptcy and having disposed of all the non-productive locations, the company’s annual cash flow (EBITDA) was estimated to be immediately above $4,000,000, resulting in an Enterprise Valuation of $20,000,000 to $30,000,000.
Explanation of the Benefits & Mechanics of the Proposed Pre-Packaged Chapter 11 Plan.
In an ordinary Chapter 11 proceeding, the company files a Petition to enter a Chapter 11, which puts a hold on all pre-existing financial obligations. Then it must design and file its proposed Plan of Reorganization, which usually takes many months. That Plan must ultimately be approved by all its secured creditors and a majority of its unsecured creditors. These numerous negotiations usually also take months of time and consume very large legal fees. Eventually, if the Plan is successfully approved, certain debts are restructured or eliminated, and the restructured company returns to normal business. But if the Plan is not successfully negotiated with creditors and approved by the court, the company’s assets are auctioned to the highest bidder.
The beauty of the Pre-Packaged Plan is that the Chapter 11 petition is not even filed with the court until it is presented to and accepted by the, usually few, major secured creditors, whom, because the Plan provides will be paid in full, all officially agree to and sign the Plan before the Chapter 11 petition is filed with the court. Therefore, the Plan is almost automatically approved by the court in an extremely short period of time. To the degree that unsecured creditors are to be paid in full, even if on longer terms, their approval is automatic, and the Plan is approved. Therefore, enormous legal and other fees are greatly reduced, and the stress on the company, its employees, and its customers is minimized.
As in all Chapter 11 bankruptcies, the Pre-Packaged Plan would call for legally cancelling the leases on and closing all the unprofitable units, making the company immediately profitable, retiring the balance of the deferred debt over an affordable term, and AAA retaining full ownership. Once exiting Bankruptcy and having disposed of all the non-productive locations, the new Piccadilly’s cash flow (EBITDA) was estimated to be immediately above $4,000,000, resulting in a valuation of $20,000,000 to $30,000,000.
LMC strongly emphasized the urgency of developing and filing such a Plan, thereby retaining control of the future course of the company as opposed to delaying action and “hoping” that neither major creditor will act first, thereby AAA risking everything.
The CFO sent the LMC Pre-Packaged Plan to the company’s lawyer, who was a former bankruptcy judge, who agreed with its feasibility and agreed to draft and file the Plan as proposed. His firm agreed, in writing, to the exact fee that LMC estimated, $500,000, covering all pre-and post-filing legal fees. His law firm did exactly that and presented its detailed written document to the company.
This Plan, approved by the former bankruptcy judge’s firm, likely would have produced a transformational result for the Piccadilly owner, AAA.
However, one year later, after engaging other financial consultants and relying on “hope to get lucky,” AAA declined to engage the CFO and LMC-recommended attorney and hired a different firm to file an ordinary Chapter 11 without a pre-agreed-upon total fee. Their ultimate legal fee was in excess of $3,000,000, with the company remaining in Chapter 11 for over two years.
As LMC predicted, by not following the Pre-Packaged Plan, and doing it sooner rather than later, the bankruptcy process devolved to the BBB creditor becoming the 100% owner of the company in payment of its loan to Piccadilly.
As LMC cautioned, AAA, there by lost all its equity, estimated at twenty to thirty million dollars.
