I've been made the CEO of an 8-figure company that just filed for bankruptcy, now what?
The story of how we got to this point & the opportunities that bankruptcy presents
News hit the wires on Thursday March 4th, 2021 that, Peeled Snacks, founded in 2006 has filed for bankruptcy protection, using a new sub-code, under the familiar Chapter 11. That new code is called subchapter V & if you are ever dealing with SMB’s, in any fashion, it’s a new law that you should make yourself familiar with…
As a Managing Partner at a turnaround & restructuring firm, we are the fix it masters who look at distressed firms, such as Peeled and try to craft a new path for the company that will make it’s balance sheet stronger and it’s customers happier at the end of our engagement. Sometimes that path, through the bankruptcy court system, is just a necessary step on that journey.
So what happened to Peeled?
If you are not familiar with Peeled, they are a dried fruit packaged goods brand, distributed at Target, Walmart, Amazon, Wawa and other fine retailers. The power products consisted of a 2.8oz Mango, Apple and Banana pouch, that is not only healthy for you but could be eaten anywhere, as a portable snack. The inventory turns were excellent & the product was on trend, however it faced 2 major problems during 2020.
Several sales channels; Hotels, Airports, Schools and other Foodservice ground to a halt, representing 50% of sales that just fell off the map. Several of these channels are still at very low capacity & are expected to remain so well into Q2 of 2021.
An expensive supply chain with a cost structure that was designed to push the brand’s revenue to the next level. Back in 2018, Circle Up named Peeled Snacks as one of the hottest brands to have a breakthrough - everyone in the industry was expecting big things from Peeled and management had set the business up to capitalize on this news.
https://www.businessinsider.com/jet-circleup-new-interesting-brands-2018-5
However, here in lies the danger - what happens if you load up your P&L with a lot of fixed costs, a big staff, the feel of a tech firm, then an externality comes along & turns your plan upside down? The answer; if you don’t reset fast enough, you’ll run out of cash and then your creditors start to call.
The Aftermath
Once your business bank account is overdrawn, you have a couple of options; 1) borrow more 2) find new investors 3) internally generate more working capital by cutting costs, raising prices, stretching suppliers out, etc…
But what if you aren’t able to pull any of those levers? The downwards spiral begins - your suppliers won’t ship new product, production lines stop, customers don’t have product & no new A/R is generated. This is what happened to Peeled and the problems only started there.
In my experience, suppliers like being paid after they deliver a product or service (a big insight, I know!) and if you aren’t able to make good on payment, then off to collections you go. The pressure levels are only going to get higher from here.
This is where a restructuring firm like mine enters the equation; when you are starting to feel the pressure. Unfortunately changes had to be made to the top of the organization so not only did our firm take a CRO role (which we often do) but also the CEO role (that’s me) to run the company through a well crafted turnaround plan that would relieve the pressure but also set the company up for future growth.
Why was subchapter V bankruptcy Peeled’s best option? Why not an out of court workout?
Our assessment showed that we could not get the production engines turned back on given the current debt levels vs. ability to payback in a reasonable amount of time that could be negotiated between 2 companies. (think the potential of a lawsuit)
If your secured + unsecured credits are below $7.5M, then subchapter V is a viable option that steps in between the 2 companies & mandates a payment plan that would keep Peeled as a going concern
A turnaround plan is developed showing that if post bankruptcy financing is raised (that is senior & protected) we could fire up those engines and make enough profit to reasonably pay back what is owed to the creditors over a 3-5 year period. The turnaround plan consists of several pivots the business would need to make to turn 2020 losses into 2021 profits
Those pivots for Peeled include —> create efficiencies in the supply chain, automate as much as we can, emphasize order fulfillment over growth, reduce marketing to what moves product only (no more brand awareness builds), new pricing structure to increase ROI on trade spend and rationalize underperforming products. These are many but not all of the pivots that we can do to drive 2021 profits, however all of these pivots REQUIRE NO CASH. This is the key to a fast and successful turnaround. As long as the court agrees, we will leave the bankruptcy system with a payment plan & a bright future ahead.
Another pivot we had to deal with was that no staff stayed on after Newpoint took the reigns. Many chose to avoid the uncertainties of a turnaround for more stable employment. I don’t blame them - this isn’t for everyone. Ok, so what now?
This is where your ability to build internal processes is going to be leveraged. Every day had to accomplish some operational task with a checklist system that would keep you honest & near your computer until they were done. Since we are just in order fulfillment mode; processes consisted of…
Generate PO’s
Create & fulfill WO’s
Shipments & warehousing
Generate SO’s
Pay bills and deposit checks
Demand planning
Keep the internal books up to date
All 7 of these processes were put into an SOP and automated as much as possible. This was the only way we can keep what little inventory we had left flowing to customers as the restructuring process moved through the courts. It’s all about time management, structure of internal process and adherence.
What are the profit opportunities to an investor?
Subchapter V is exciting in that it allows current equity holders to stay in control, post-bankruptcy filings. Compare that to 11, where equity often loses control & won’t see a dime until all creditors are paid in full.
The opportunity for an investor to profit from companies entering sub-chapter V are this…
Injecting financing (either via DIP or equity convertible) into the company after the filing, as working capital
Agree on % ownership from the conversion before lending
Execute on the turnaround plan with the goal of generating excess profits above the court approved payment plan
Once stabilized, covert financing into equity
Collect excess profits as return on initial investment
Since subchapter V allows current equity holders to keep control, you can negotiate such a deal with them and reap the huge upside should the turnaround plan materialize. While I’m being vague on the numbers for Peeled, as it still is a private company, the above structure will allow the new convertible equity to earn rates of return well in excess of many other investment opportunities.
We look forward to executing on the turnaround for Peeled & get the shelves full stocked again in the near future. Be sure to pick up a couple of bags when we see us at one of your favorite retailers.