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Value Preservation of a Retailer in a Distressed Sale Process

When turnaround professionals represent retail organizations that are in a state of transition and require new ownership, they are managing a multifaceted situation. The sale of goods and/or services to customers through multiple distribution channels can be challenging to begin with; adding financial stress or distress, as well as a sale process to the scenario, makes ongoing operations even more trying for the company and its management.

Turnaround and distressed banking professionals who understand the nuances of retail turnarounds conduct sale processes with a goal of using specific tools to achieve the best possible outcomes for their clients. These professionals first focus on operations and financial metrics to bring the underperforming or distressed company to some level of profitability, and they begin to establish a trend line that can be supported and is sustainable at a certain level, thus establishing a higher valuation.

Second, the sale process itself stimulates interest in the marketplace and may also drive the value of the company upward during an aggressive auction process, resulting in an optimal sale price. The strategies used by turnaround professionals are designed to prepare the company for the market and ultimately derive the greatest possible value for the stakeholders and/or constituents. The following example of a regional furniture retailer demonstrates some basics of the process.

Furniture retailers that are organized regionally, spanning three, seven, or even more states, sell more than chairs, couches, and other home furnishings. They sell larger goods that need to be “tried on,” such as mattresses, home décor, and other goods that people want to touch and feel before they make a purchase. They also offer servicing, repairs, and a crucial element: credit.

Given this mix of products and services, it can be difficult to determine which is more important to such a retailer—credit or the sale of goods. The furniture company in question was focused on providing credit as much as it was on selling merchandise. Obviously, both components are required, but for the organization to flourish, experienced merchandising, robust advertising, a trained sales staff, and capital to support IT and other operating initiatives are also essential. The retailer’s e-commerce or online presence is also important, as it offers customers the support and financing required to complete an immediate sale or entices them into the store for opportunities to upsell additional merchandise or schedule customer care services.

When turnaround professionals are first introduced to a client company, the organization is experiencing varying degrees of financial distress. In the case of the regional furniture retailer, after managing its way through a successful rebranding, an economic recession, and the installation of an expensive new IT infrastructure, the company incurred losses and was in danger of failure. The company had been purchased in 2005 by a private equity firm, which operated the business profitably for a period of years. However, the investment firm was incapable of providing additional capital and, in 2010, needed to consider other options for the company.

Additionally, upgrading to a more sophisticated operating platform, including associated point-of-sale (POS) software, had proved more challenging than envisioned. Integration had been only marginally successful. The new infrastructure required significant maintenance and revenue to generate the margin and profit needed to support the added overhead. Management’s bandwidth was also challenged during the implementation and, as expected, this wore on the company’s ability to succeed in what had become a more competitive and crowded space.

Loss of Focus

In mid-2005, the new owners, who were professional private equity managers, had decided to place the former owner of the business on the new board, where his expertise and vision could be called upon by the new ownership. Over time, the equity group developed a strategic plan that called for significant expenditures for the new infrastructure previously mentioned, a name rebranding, store expansions, and significant revenue growth. Within a few years the company began to implement the plans, only to experience the effects of the global recession that began in 2008. These particular discretionary expenditures became nonessential to maintaining the customer base. Sale contracts for customers with less than perfect credit became more difficult to finance, and sales declined.

Other operating parameters also became problematic. For example, the company’s new brand, including its new name, reflected the new operating strategy: to sell a roomful of furniture to all customers who walked through the doors. Working with credit aggregators, longtime credit partners and sources, and lease-to-own partners, the company’s goal was that no consumer should leave any store without purchasing or leasing a new roomful or two of household furnishings. Additional new management was retained as part of the process aligned with the new thinking—that is, a full room purchase equaled a higher dollar invoice and therefore more profit associated with these larger tickets.

Though intended to improve financial performance, the seemingly sound strategy had the opposite effect on the company—the higher dollar amount of the average invoice made financial results worse.


This practice works well in retail operations in which margins are consistent across all or most product categories or assortments. However, when grabbing the brass ring of higher dollar invoices that include varying margins on case goods, accessories, and other items, the results may differ greatly. In this case, the primary customer base had been battered financially until 2009-2010. Once the market returned to greater sales levels than pre-recession activity, the previous softer revenue plus poor sales and product mix provided less margin and proved too costly for the company.

Though intended to improve financial performance, the seemingly sound strategy had the opposite effect on the company—the higher dollar amount of the average invoice made financial results worse. Talent retention also became difficult as sales professionals who relied on new traffic, higher margin sales, and commissions commensurate with results became frustrated and began to look for employment elsewhere.

Preparing for a Sale

To resolve this type of situation, specific immediate steps are taken. First, turnaround operators, CROs, and bankers assemble and assess the talent on hand, including each individual’s strengths and weaknesses. Creating a crisis communication plan is key. Understanding that, these professionals devise both internal and external communication programs to keep all stakeholders apprised of developments. Keeping employees focused on their tasks at hand for all departments within the organization is also key for success. Operations and other support must be aligned with the process of stabilization.

Without sufficient sales and gross margin, however, even the most skillful turnaround professionals can only do so much. Therefore, motivating sales managers and staff at each store location by providing incremental compensation for goods sold at higher margins is important. This particular situation required:

  • Assessing the performance of each location and state

  • Understanding the reasons for underperforming locations

  • Determining a “fix” for detrimental issues

Establishing what worked before and what small tweaks were now needed was also considered in preparation for presentations to potential buyers. Demonstrating that profitability associated with sales was returning became one of the focal points for those pitches.

Simultaneously, turnaround professionals contacted a weary supply chain. A key factor is maintaining liquidity for payment. In this case, communicating that a robust sale process would lead to an industry buyer that would satisfy all amounts due the suppliers helped to maintain sales levels and ongoing relationships. Effectively retaining foreign vendors with goods on the water is especially challenging. Persuading them to continue their journey and support the process with few or no letters of credit to support the delivery upon landing is difficult but not impossible if the expected outcome of the sale process is communicated effectively.

The Sale Process

During the sales process, an electronic data room is populated with all forms of material, including information pertaining to finances, operations, leases, intellectual property (IP), legal structure, and any litigation of disputes. Usually, bid procedures are established and included in the data room as well, including establishing a stalking horse bidder.

The stalking horse bidder sets a floor for the sale price, which ensures a minimum dollar amount that constituents of the company can rely on. The stalking horse is an important part of the sale process and, if outbid at a certain level, may be entitled to a fee or breakup fee for its time and expense in preparing its offer. There are pros and cons to a stalking horse arrangement, and it is best to have highly specialized legal counsel assist with structuring the sale process.

Also, in a typical sale process, the turnaround professional institutes a management incentive program (MIP) for some or all key employees. Incentive payments are made only to eligible employees who stay to the end of the process and reach agreed upon milestones or benchmarks contained in a formal MIP agreement drafted by legal counsel. Sometimes cash is held in an escrow or trust account for the benefit of the employees covered by the MIP.

Public outreach to potential buyers is conducted using industry knowledge and proprietary data. These include:

  • Strategic purchasers

  • Private equity firms owning competitor companies

  • Qualified financial purchasers that may have an interest or investable executive with industry experience within their team

All information is shared with potential buyers under a nondisclosure agreement (NDA). In addition, tours of store locations and distribution centers are conducted, and management members are introduced to potential purchasers. Lastly, as outlined in the published bid procedures, all potential purchasers of the business must prove their financial worthiness to complete the transaction. This diligence process leads to a binding letter of intent with real dollars at risk if the potential buyer is unable to consummate the transaction. A bidder who is outbid bears no financial exposure.

During the auction, tensions run high. The process can vary depending on its size, complexity, and associated bid procedures. The end result is the transfer of the operation to new ownership that is willing to reinvest in the brand and its people going forward. The quality practitioner truly makes a positive impact on an organization that has been preserved, along with hundreds or thousands of jobs.

A Realistic Goal

Turnaround professionals guiding a retail company through a distressed or stressed situation that includes a sale process employ a variety of strategies to attain a positive outcome. In the case of the furniture retailer, a successful repositioning and sale was achieved through an approach that was methodical and analytical with regard to financial and operational planning, yet also gave due importance to the human element of communication that must be maintained in a retail setting where customer, employee, and vendor relationships are key.

Value preservation and enhancement in these scenarios is a realistic goal when the appropriate methods are quickly identified and skillfully implemented in combination with sensitivity to corporate culture.

Brent Kugman

Brent Kugman

Kugman Partners

Brent Kugman is president and CEO of Kugman Partners. He is a financial/operational advisor with expertise in transactional matters, governance services, and complex informal and formal financial restructurings/proceedings. Kugman has been appointed to C-suite positions, including CEO, president, and CRO, and board member in matters within banking, commercial finance, medical device/home healthcare, food processing, commodity trading, manufacturing, retail, specialty finance/fintech, technology, and warehousing/distribution. His experience includes principal positions at Blackman Kallick (Plante Moran) and First Chicago Corporation. Kugman can be reached at bkugman@kugman.com.

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