On April 23, 2020, Hair Cuttery (corporate names Creative Hairdressers, Inc. and Ratner Companies) filed Chapter 11 bankruptcies. CHI has over 800 salons nationwide, with over 10,000 employees. Last year, even though it had over $440,000,000 in revenues, CHI was having difficulties (such as being in covenant (nonpayment) default with it primary secured lender). So, last year, it was working on ways to raise capital or refinance its debt. CHI was actively looking for a buyer, but was unsuccessful.
Starting in March, due to the coronavirus, CHI had to start closing its salons. By the third week of March, all of the salons were forced to be closed, with most of its employees furloughed. Due to lack of revenues, CHI was unable to pay all of its employees. CHI continued to search of investors, so that once the salons could reopen, there would be an operating company. Prior to the bankruptcy filing, CHI had entered into an asset purchase agreement where CHI will sell the majority of its assets. CHI will now seek approval of an expedited sale process to keep the business as viable as possible.
The primary lessons to be learned is the work done before CHI filed: (1) having the buyer in place (with the asset purchase agreement) and (2) having an agreement for the buyer to provide financing (called debtor-in-possession financing) during the bankruptcy.
Since these cases were just filed, it is unknown how the Court will rule. However, CHI can be viewed as a template for both companies in financial distress and companies that may be interested in purchasing otherwise viable businesses.
For companies in financial distress, it is important to be proactive. If you think selling the assets of the company makes sense, now is the time to speak with professionals in that area (whether it is M&A people, business brokers, attorneys, financial consultants, etc.). You may decide to look for a buyer and then file, or you may decide to file, then look for a buyer. Regardless, now is the time to be having those conversations.
If you are a company with cash, now is a good time to look at purchasing companies at a greater discount that would have existed a year ago. However, keep in mind that, just like to purchaser of CHI, a purchaser will need to be prepared to provide short term funding that may include paying compensation to employees and other important debts. Then, it makes sense to have the seller file a chapter 11, with an immediate sale under Section 363 of the Bankruptcy Code.
This week I will be writing an article on Section 363 of the Bankruptcy Code. Keep watching this space, or send me an email (address below) and I will make sure to send it to you.
Robert M. Bovarnick, Esquire
Bovarnick and Associates, LLC
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