Fashion World Slammed By Retail Bankruptcies – MMG Explains The Process – Forbes

The coach said no-pain no-gain, which aligns with the current thinking on Fashion Avenue these days. Announcements of retail bankruptcies pop up daily – there is little explanation, and no end in sight.

To experience financial pain without a proper coach is not advisable. Solid planning and strategy help navigate the issues of the moment and they also align your business to a better path. Enter New York’s prestigious consulting firm MMG Advisors, one of the industry’s premier sources for intelligent financial information during these difficult times for fashion brands and retailers.

Truth be told, when discussing the word “uncomfortable,” dental chairs in Manhattan’s garment district know the secrets. Perhaps it is the threat of pain that encourages patients to spill proprietary beans, when the dentist says: “How’s your retail business – are you safe from bankruptcy?”

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Hoping that you have chosen the right path for your issue of the moment; attention turns to the dentist. “I understand that you are here for a routine exam, but there is a problem. Your tooth is cracked.” We should yank that tooth. You will wait a few weeks, there will probably be a bone graft, and then an implant. “Are you ready?”

As the words spill from the dentist’s lips, fear turns to horror. Your stomach churns, you are immediately spun into a new and confusing web when – ironic as it may seem, all you wanted was an dental exam and a cleaning. Strange thoughts circulate. A vision of Dustin Hoffman suddenly appears in the dental chair (Marathon Man?) How will this end? Can the dentist be trusted? How did I get in this situation in the first place?

Eventually, the vision clears, fear subsides, and the conversation turns back to getting proper advice. The dental experience parallels the complex web of bankruptcy. To avoid unnecessary pain, it is best to work with experts like the fashion industry’s 30-year old investment bank, MMG Advisors. Truth be told, MMG knows, understands, and has experienced all types of financial issues, and they work with clients to anticipate appropriate steps – so that all the parties can navigate this difficult terrain. MMG, like the dental chair, hears the industry secrets.

Led by former retail executives with decades of combined operational experience, MMG Advisors understands how to leverage consolidation opportunities. The team finds solutions for companies requiring either an in-court or out-of-court process – whether for M&A or for raising capital. Bankruptcy for any retailer may not be the only solution in today’s complex world, but in our COVID-19 environment, it has become the fashionable way to ease the pain.

MMG Managing Director Mary Ann Domuracki indicates that (as a process) “developing a restructuring plan requires careful up-front consideration from experienced people who understand the wide spectrum of potential business solutions. Not everyone needs to file for bankruptcy.” When advisers are allowed into the picture, they challenge the viewpoints of the client and work to build consensus. Companies experience a full range of available options even before a bankruptcy filing is put on the table.

From a retail perspective, in COVID-19 world, the cash crunch has become overwhelming. There are several reasons that a retailer (or a brand) feels the summer heat, and bankruptcy is looking (more and more) like a viable option. Perhaps there is too much debt, or too many store leases, or vendors are not being paid. Perhaps consumer habits have changed, or maybe there is litigation that didn’t transact as planned. Whatever the case, at some point it’s time to call in industry experts for technical advice and for problem solving.

For any remaining retail doubters (that are just tuning in to the crisis), the bankruptcy list keeps getting longer and longer. Some of the notables are: Brooks Brothers, Lord & Taylor, Men’s Warehouse, Jos. A. Banks (Tailored Brands), Lucky Brand, Neiman Marcus. J.Crew, J.C. Penney, Stage Stores SSI , Modell’s, Ann Taylor (Ascena), Sur La Table, J.Hilburn, GNC, True Religion, John Varvatos, and Chuck E. Cheese.

MMG explains that while Chapter 11 is not the only solution, it’s utilization potentially ensures that a company’s creditors and stakeholders will recover their maximum value (whatever that might be). The filing is very public – as it runs through the bankruptcy court docket system. Information is exposed to scrutiny, and company secrets are laid bare for all to see. MMG’s Mary Ann Domuracki also explains that, if the process is not handled properly, “bankruptcy can result in owners losing control of their company, or losing control of the very outcome they seek.”

The first question MMG Advisors will ask is: “What solutions exist for the business?” The next step is to identify what the core business would look like after the process completes. A retailer may want to cut stores, or a brand may want to discontinue some fashion lines. Whatever the change, the process starts with a plan. The team then works towards achieving consensus among the parties, since everyone involved loses some value from the original company.

If the business decides to file, they will approach the court with a plan detailing how they plan to operate, whether they need to liquidate assets or, (sadly) whether they can exist at all. The earlier that a plan is filed, the less costly for all concerned. The longer it takes, the harder it is to finish the deal. In the case of J.Hilburn (which was advised by MMG), they filed a reorganization plan on the first day in court. Their plan included their lenders, vendors, unsecured creditors, and equity holders and it allowed J.Hilburn to exit Chapter 11 in only 60 days.

When contemplating a Chapter 11, the choice exists to utilize section 363 of the bankruptcy code – which is a more common and faster method, allowing the company to sell assets in Chapter 11 with notice to potential buyers. There is a timeline, and the process could complete within 60 days (like J.Hilburn). In the absence of an upfront agreement, the bankruptcy could take 12 months to resolve.

Chapter 11 is generally referred to as reorganization bankruptcy. The company will be restructured, and it gets to live another day. Chapter 7 of the code is liquidation bankruptcy, and assets are sold to satisfy as many creditors as possible. The company name could potentially live past the bankruptcy – simply as an asset that has been transferred, but the core business is completely dissolved.

The speed of the bankruptcy is accelerated when there is a likely buyer or “stalking horse” engaged in the process. The potential buyer prepares an Asset Purchasing Agreement (APA) that is given to the court at the beginning of the proceedings. The bid from the stalking horse sets the floor for the asset bidding. An auction is held, others can bid against the stalking horse, and the court generally approves the outcome of that auction.

Allan Ellinger, co-founder and Senior Managing Partner of MMG Advisors, indicated: “One of the benefits of Chapter 11 bankruptcy is that it draws a line in the sand, a line that insulates the new owners from any pre-bankruptcy liabilities that the new owner does not want to assume.” This is a key component of the procedure, and one of the reasons that bankruptcy is becoming such a powerful resolution tool in this difficult retail environment.

During bankruptcy, the Company directors and officers maintain a fiduciary responsibility to protect the creditors and shareholders. Typically, the creditors will form an unsecured committee of volunteers who then approve (or disapprove) all the key steps. The committee is public, has an attorney, an accountant, and sometimes even a financial advisor. When Chapter 11 is filed, the company is finally free of liens and will exist as an ongoing operation.

In America’s COVID-19 economy, the restructuring process has become a bit more complex. Companies planning to file now have to deal with stores and offices that may not be open, find records that may not be available, and deal with people who may not be working. All this complicates an already difficult situation.

Eventually, the fashion industry will look back on these strange times and wonder how everything finally got resolved. While the federal government has helped employees during the COVID-19 crisis, they have left most employers to fend for themselves. With federal aid lacking, many credit markets have run completely dry, and several of today’s prominent retailers have been forced to take matters into their own hands. Some have chosen to sell assets, some have pared back staff, and others hold open the option of bankruptcy – which would (in most cases) allow them to start over with a clean slate.

The fashion industry is working really hard to survive these difficult times. COVID-19 is challenging the industry, and forcing retailers to face situations that they have never experienced before. Proper guidance is welcome, and looking at next steps, it is helpful to summon the sage wisdom of Warren Buffet who said:

“In a chronically leaking boat, energy devoted to changing vessels is more productive than energy devoted to patching leaks.”

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