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BANKRUPTCY AND RESTRUCTURING STRATEGIES FOR STRUGGLING BUSINESSES

As the country returns to early-pandemic lockdowns, PPP funds are dwindling with no additional relief in sight. Meanwhile, the number of Chapter 11 bankruptcy filings in the third quarter hit its highest level since 2010—a trend expected to continue into 2021. Three Chicago-area advisors who work with struggling businesses shared their insights with Crain’s Content Studio.

What role does your organization play in bankruptcy and restructurings, and what types of clients do you work with?

Steven Nerger: In a bankruptcy, Silverman Consulting typically serves as the financial advisor, helping clients put together their reorganization plans and the supporting financial projections.

With the company’s bankruptcy counsel, we help present the plan to key stakeholders to obtain their support. If the purpose of the bankruptcy is to sell the business, we manage or conduct the process to identify the best candidate and maximize the value of the assets being sold. Outside of bankruptcy, we help our clients identify and implement any changes necessary to stabilize the business. We focus on being an agent of change and a client advocate. Our clients are typically family-owned businesses in many diverse industries with revenues ranging from $10 million to more than $250 million.

Chris Cerimele: Balmoral Advisors helps clients sell their businesses, find and complete acquisitions, and raise or refinance capital. We work with business owners, corporations and financial investors worldwide involved with early-stage growth companies, successful mature businesses, corporate divestitures, distressed and

11 case, I’ve been representing a number of secured lenders on stay relief motions in single-asset real estate cases. In other words, although we represent debtors in complex Chapter 11 cases, we also help banks and other secured lenders protect and take back their collateral once a case is filed.

What are some signs that a business is struggling?

Nerger: Typically, a struggling business experiences a decline in profitability over an extended period of time. Margins decrease while costs increase, resulting in operating losses.

There’s less liquidity and payables are increasingly stretched as the business becomes less capable of paying its suppliers on a timely basis. Credit lines may be reduced or exhausted, requiring the business to pay for goods or services on a cash-on-delivery or cash-in-advance basis. Revolving lines of credit may be increasingly drawn on, resulting in the business becoming more leveraged and under increased scrutiny from its lenders. Financial reporting may become increasingly delayed while lenders express concerns about the negative performance trends.

— CHRIS CERIMELE, BALMORAL ADVISORS, LLC

Trinitee Green: Polsinelli represents all parties—across various industries— in bankruptcy and restructuring proceedings. I’ve represented Chapter 11 debtors, trustees, committees, secured lenders and unsecured creditors in bankruptcy cases and related litigation.

Currently, in addition to representing a retail grocery store chain in its Chapter

Managing Partner Balmoral Advisors, LLC ccerimele@balmoraladvisors.com 312-872-4740

and we’re happy to talk even if it turns out that we aren’t needed.

Green: As soon as management sees the first warning sign that it could be headed toward insolvency it would benefit from consulting with a legal or a financial team. And the sooner the better, since waiting can limit

TRINITEE GREEN

STEVEN NERGER

Associate Polsinelli tggreen@polsinelli.com 312-463-6201

Partner Silverman Consulting snerger@silvermanconsulting.net 847- 410-3870

the number of options available. For example, if a company gets ahead of the curve, it could reorganize under Chapter 11 and continue to operate.

been possible earlier get eliminated.

The reality is that we’re usually not contacted by companies until they’re essentially forced to by their lenders. While this may still allow us sufficient time to address a client’s financial troubles, it usually requires a significantly more intense approach and time becomes more of an issue.

Nerger: The longer a company waits, the deeper the hole becomes and solutions become more painful.

Opportunities that would have

Green: A shortage of cash flow is one of the biggest indicators that a company would benefit from a potential workout or insolvency proceeding, or at a

“IF A COMPANY GOES TO ITS LENDERS WITH A STRATEGY OR ACTION PLAN, IT CAN OFTEN DELAY OR AVOID A BANKRUPTCY FILING.” special situations. In bankruptcy and restructuring situations, we help clients plan, pursue and complete one or more M&A or financing transactions. For example, we can help market all or part of a company for sale, either before or during a bankruptcy process. We can also help a company raise or refinance debt or equity to restructure their balance sheet, avoid bankruptcy or to help finance a bankruptcy process. We don’t invest our own capital or provide operational consulting, but often work alongside restructuring consultants to help solve difficult situations.

CHRIS CERIMELE

minimum, a discussion with its lenders.

Other warning signs could be pressure from creditors, including the threat of litigation or the actual commencement of a lawsuit, risk of future breaches of loan covenants, and the departure of key management and employees.

When should a business consider hiring a bankruptcy or restructuring professional?

Cerimele: We encourage businesses to begin a conversation with us as soon as they suspect a problem. If we get involved early enough, we can, for example, help them evaluate the feasibility of a transaction, think through various “what if” scenarios, or help them act on transactions or with discussions with lenders. If a company goes to its lenders with a strategy or action plan, it can often delay or avoid a bankruptcy filing. Consulting with us early on can help improve outcomes,

Trusted Advice During Difficult Times When a company is facing liquidity challenges or the possibility of bankruptcy, it is critical to have an advisor who can help develop and execute a strategy to preserve flexibility and safeguard value.

Balmoral Advisors has the skillset to support companies, shareholders, creditors and management, with significant experience advising on §363 Bankruptcy sales, distressed M&A transactions and capital raises for companies in need of help.

Call Us Today for a Discreet Consultation 312.766.9890 |

info@balmoraladvisors.com

|

balmoraladvisors.com

Securities Offered Through Bridge Capital Associates, Inc. member FINRA/SIPC.

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BANKRUPTCY AND RESTRUCTURING STRATEGIES FOR STRUGGLING BUSINESSES Depending on how far things have deteriorated, liquidity becomes critical and the ability to garner the necessary support from lenders and key suppliers becomes increasingly difficult. The sooner a company seeks help, the sooner its issues can be addressed and the sooner it can begin to regain its health.

Amidst today’s COVID-19 pandemic, what are some critical factors for managing a turnaround or restructuring?

Green: Communication is key.

Lenders are much more likely to work with borrowers when they’re informed and fully aware of the circumstances, and have ample time to come up with an alternative plan or solution. Conversely, a lender that’s surprised by an extension request, especially if the request is made shortly before the loan matures, may be hesitant to enter into a loan extension agreement without significant paydown of principal and other charges. In the

case of smaller businesses, certain temporary protections are available under the Bankruptcy Code as a result of the COVID-19 pandemic. At least until March 27, 2021, certain smaller businesses with total debt not exceeding $7.5 million may be eligible for a much quicker and more affordable chapter 11 process than ever before. This would be a Subchapter V, or SBRA, filing.

Nerger: Managing and preserving liquidity is of paramount importance.

The mantra should be “cash is king.”

Unnecessary expenses should be eliminated, and non-core assets should be turned into cash. The more liquidity a business has, the more “runway” it creates to address its challenges. Tough decisions addressing the causes for the business’s underlying issues needs to happen quickly and decisively.

Sometimes it’s difficult for a business owner to be truly objective in situations like this, which is why having the assistance of a turnaround professional

“. . . SMALLER COMPANIES SHOULD BE MINDFUL THAT THERE MAY BE UNIQUE PROTECTIONS UNDER THE BANKRUPTCY CODE TO HELP COMBAT THE COVID-19 PANDEMIC.” — TRINITEE GREEN, POLSINELLI

can be of great benefit. The turnaround professional can look at issues more objectively and with less emotion than an owner. The goal is to get the business to where it can navigate its way through the pandemic so that when it emerges, it can flourish once again.

What’s the best way for a distressed company to find a qualified buyer or financing in today’s market?

Green: Seek out and engage with professionals who specialize in this area. The market appears vast, but it’s really a family of people where everyone knows everyone. If there’s a market, a professional can make the preliminary introductions.

Cerimele: On the M&A side, it’s important to remember that buyers are well aware that the pandemic has wreaked havoc on many businesses, and are putting greater scrutiny on a company’s performance, competitive positioning and business model. Others are simply looking to take advantage of companies in distress.

It’s more important than ever to establish a competitive process involving multiple buyers—this not only ensures that a deal has the best chance of being completed, but also that a company is sold at the best possible price and terms. On the financing side, many lenders remain skittish and are much less likely to extend new loans.

Finding a good lender currently is a little bit like finding a needle in a haystack; it’s

getting beyond big challenges As a strategic partner that understands the complexities of the bankruptcy, insolvency, out-of-court workouts and litigation, our Polsinelli Bankruptcy and Restructuring attorneys offer legal guidance to help you make informed business decisions.

Nationally Ranked for Bankruptcy and Creditor Debtor Rights / Insolvency and Reorganization, by U.S. News & World Report’s 2021 “Best Law Firms” (2020) Nationally Ranked as a “Most Recommended” Law Firm for Financial Services

by BTI’s Industry Power Rankings (2017)

real challenges. real answers.SM Am Law 100 firm with 900 attorneys nationwide 21 offices from LA to NY 170+ services/industries polsinelli.com

The choice of a lawyer is an important decision that should not be based solely upon advertisements.

Polsinelli PC, Polsinelli LLP in California.

important to contact a larger number of potential lenders.

Nerger: One of the keys to maximizing value is to reach out to as many prospective buyers as possible, including both strategic as well as financial buyers. A professional experienced in selling distressed businesses should be well-versed in how to conduct the search for the best qualified candidate; they also know what information a prospective buyer will need to perform their due diligence.

To find financing, a distressed business will need to show a prospective lender a credible plan for how—and when—the business will return to profitability. In effect, they need to provide a lender with a complete picture of where the company has been, where it stands today and where it’s going. We’ve assisted many clients in refinancing their businesses by working together collaboratively to develop a viable business plan which was then used to demonstrate why the business is a good credit risk.

What impact has the pandemic had on the M&A market?

Cerimele: The pandemic initially sent a shock through the M&A market, but activity has since stabilized and begun to improve, though at a lower level than previously. Valuation multiples have trended down but remain relatively strong for companies less affected by COVID. With fewer companies for sale, buyers are competing over a smaller number of opportunities. In addition, the market has adjusted to pandemicera deal making. With the advent of travel restrictions, more work than ever is being done remotely. Meetings and negotiations are regularly occurring over video conference. While most buyers require some kind of in-person meeting or facility tour before closing, that activity is now being pushed to later in discussions.

Green: The most obvious impact has been the rapid contraction of deal value and volume. Global M&A completely plummeted. Many deals involving companies that were directly affected

by COVID-19 were immediately put on hold, and even those deals with minimal industry impact were paused. Though deal activity is coming back, the M&A market remains cautious as all parties adjust to the changed environment.

Nerger: Concerns are growing again as numbers trend in the wrong direction throughout the country. Valuations are also being affected, depending on what industry a company is in. There’s also a greater level of scrutiny on the financial projections and their underlying assumptions. Liquidity and working capital needs are being closely assessed.

If a transaction requires bank financing, lenders are being more cautious.

What bankruptcy pitfalls should businesses try to avoid?

Cerimele: We advise our clients, when possible, to have a plan before

filing for bankruptcy, since it will give them much more control over the process. Once bankruptcy is filed, a whole set of court oversight and regulations are introduced, along with timing pressures, which can further complicate the already difficult situation and impact the result of any sale transaction. That’s why we always advise clients to consult with us early on, even if it turns out that we don’t need to be hired.

Green: I can’t overemphasize the importance of being proactive. Consult with professionals at the first sign of potential trouble ahead. Don’t wait until you can’t make payroll because by then, options are limited. It’s much better to consider potential alternatives with your lender versus deciding that bankruptcy is your only option. Restructuring professionals can provide alternative strategies to bankruptcy. Of course, there are occasions when bankruptcy is the best—or only—option. Also, smaller companies should be mindful that there may be unique protections to help combat the COVID-19 pandemic.

Nerger: Filing for bankruptcy should not be taken lightly. Having competent professional advisors, both legal and financial, to properly develop and negotiate the plan is crucial for a successful outcome. Bankruptcy is not a magical pill that after swallowing it automatically turns an unprofitable business into a profitable one. The bankruptcy process can be very complex and time-consuming; consequently, it can be very costly.

How does filing for bankruptcy impact the sale process?

Green: Purchasers tend to be more comfortable with a sale that’s supervised and blessed by a bankruptcy court than one that takes place through an alternative proceeding. Bankruptcy courts have the authority to approve sales of assets free and clear of liens, encumbrances or interests in those assets. They also expressly provide purchasers with certain protections that ensure sales are final and unlikely to be unraveled in the future. Of course, this means there’s more oversight and the process may take more time.

Nerger: Bankruptcy helps keep creditors at bay while the search for possible buyers takes place.

In bankruptcy, the sale process is straightforward and efficient, but it requires that the process be conducted in a good faith manner. If multiple prospective buyers express interest in acquiring the assets, a competitive bidding process takes place, typically in an auction-like manner, to maximize the value of the assets. As a result, buyers run the risk of being outbid.

In addition, affected parties like the lender or unsecured creditors will likely have a say in negotiations of a stalking horse bid—which sets the low-end bidding bar—as well as the bid procedures. Despite these possible risks, many buyers like the bankruptcy sale process because it allows them to acquire the assets free and clear of liens

“IF MANAGEMENT IS NOT SEEING THE DISTRESSED SITUATION IMPROVING, IT SHOULDN’T WAIT TO SEEK HELP, AS PROBLEMS TEND TO ONLY GET WORSE.” — STEVEN NERGER, SILVERMAN CONSULTING or other claims and obtain a court order approving the sale.

Cerimele: Any sale process during bankruptcy will be subject to court approval and supervision. Stakeholders in the company will have the opportunity to object at various stages, and advisors will often have to testify at the end of the process. It’s much more structured and transparent than a sale outside of bankruptcy. Because of the cost and other pressures associated with bankruptcy, a sale process during bankruptcy will also often have a more compressed timeframe. This is why we often advise companies to begin the sale process before filing for bankruptcy—to allow for greater flexibility and control. If the company is marketed outside bankruptcy and a buyer is identified, the transaction can still be completed in bankruptcy but on a more accelerated timeline. This is often a preferred approach.

What are some alternatives to bankruptcy?

Nerger: The Small Business Reorganization Act, which became effective in February, created a new subchapter to help companies with total debt not exceeding $2.725 million reorganize through Chapter 11. The Cares Act increased the debt ceiling to $7.5 million; however, this increased ceiling is scheduled to expire next March unless Congress extends the expiration date. Reorganization under the new subchapter is more efficient and therefore much less costly than a typical Chapter 11.

Green: Assignment for the Benefit of Creditors, or ABCs, receiverships and Article 9 sales are common alternatives to a bankruptcy filing. Depending on the circumstances, a restructuring outside of the bankruptcy process may be the best approach. Alternative sales are typically less publicized and much more affordable.

What’s your best advice for today’s financially distressed businesses?

Nerger: Managing through a distressed situation requires perseverance and tough decision making. Problems must be confronted and sufficient action taken, and quickly. A CEO or other top executive should avoid falling into the trap of thinking that everything must be done by them alone; they should lean on their key employees and empower them to be a part of the solution. Smoldering fires have a nasty habit of turning into raging infernos. If management is not seeing

the distressed situation improving, it shouldn’t wait to seek help, as problems tend to only get worse. An experienced restructuring consultant can help navigate through turbulent waters.

Green: No one has weathered a storm quite like this before, so management should be patient and engage professionals early on. Having an experienced professional as a guide will allow a distressed company to make it out of this pandemic in the best shape possible.

Cerimele: Don’t let worries about what your employees, customers, suppliers and others say or think stop you from seeking advice sooner rather than later. Good advisors will consult with you discreetly under a nondisclosure agreement and evaluate your situation and options before taking on projects. The time you spend early on can give you peace of mind, help you get to know potential advisors and help improve the ultimate outcome. So, when in doubt, call us.

How should a business go about finding a bankruptcy or restructuring advisor?

ABOUT THE PANELISTS CHRIS CERIMELE is the founder and managing partner of Balmoral Advisors, LLC, a Chicago-based investment bank dedicated to providing M&A, corporate finance and financial restructuring advisory services involving mid-sized transactions. He has more than 25 years of industry experience, including a personal practice focused on transactions for chemicals, materials, plastics and specialty industrial companies. He is a frequent speaker at industry conferences and is often quoted in ICIS Chemical Business magazine. In 2010, he received a “40 Under 40” award from The M&A Advisor.

TRINITEE GREEN is an associate at the Chicago office of Polsinelli, an Am Law 100 firm with 900 attorneys in 21 offices nationwide. She focuses her practice on complex restructuring matters, and has represented debtors, creditors, committees, post-confirmation trustees and bankruptcy trustees in bankruptcy cases and adversary proceedings throughout the United States. As a member of the firm’s bankruptcy and restructuring team, she works closely with its other attorneys to protect and advance clients’ interests. Since March, she has become the firm’s “go-to” for all Small Business Reorganization Act/Subchapter V needs.

STEVEN NERGER is a partner at Silverman Consulting, a Skokie-based firm that specializes in management advisory and restructuring, serving both financially troubled and profitable companies nationwide. Over the past 32 years, he has consulted on turnarounds ranging from $2 million to over $1.5 billion across many industries. He has also managed numerous business sales and liquidations, serving as the assignee for the benefit of creditors and chief restructuring officer. He has also served as a Chapter 11 trustee and as the receiver for a number of businesses.

Management Advisory & Restructuring Services

Cerimele: The two critical factors when hiring any kind of bankruptcy or restructuring advisor is that they know what they’re doing, and that ownership and management are comfortable with them. Make sure that they provide evidence of their experience—even examples of similar types of work they’ve done—and referrals. The second factor is more subjective; keep in mind that you’ll be spending a lot of time with your advisors. There needs to be a good working relationship and trust.

Engaging in conversations with potential advisors early on will give you time to evaluate expertise and fit.

Nerger: A good place to start is by asking your lender to provide names of restructuring advisors they’ve worked with in other troubled situations. Also reach out to corporate attorneys or other trusted business confidants for recommendations. Once you have a short list of names, arrange for interviews. The prospective advisor will need to learn what issues a company is facing, and they should be able to provide ideas about how they would approach the situation.

Green: Find a firm that not only understands your business but who has a team of professionals with experience in alternatives. There’s no one-sizefits-all when it comes to solving restructuring and involvency problems.

A Chicago-based consulting firm with a proud history of serving both financially troubled and profitable companies nationwide, Silverman Consulting professionals bring a unique combination of managerial and financial experience along with strong interpersonal skills to each engagement. Without question, it is our over 200 years of combined industry experience that allows us to quickly understand our clients’ facts and identify their underlying issues. It is our emphasis on communication that enables us to effectively work with our clients’ management teams to help them look at their business in a different light and make the needed changes to return to profitability.