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LONGTIME FAMILY-OWNED TIRE COMPANY RUNS INTO DECLINING PROFITS — CMAG Advisors Steer Business in the Right Direction with Short-Term Revitalization Strategy for Long-Term Profitability
Problem
Since 1959, a Florida family-run tire company sold tires to the wholesale and retail markets. Wholesale distribution covered the entire southern state, excluding the panhandle, through a network of five distribution centers and one satellite warehouse. The company’s retail division consisted of 28 stores and two commercial truck centers along the state’s east coast, from Jacksonville to Miami.
Profitability problems began to surface in 2004 when the retail division started running losses. At that point, the wholesale division remained profitable. In the intervening two years, things changed. The retail business turned around. The wholesale business plummeted.
In 2005, remaining family members running the business left, although the business continued to carry certain benefit expenses for them. In total, the family received compensation, including salaries and benefits, in the range of $1.5 million in 2006.
Annual sales and revenue for the 2006 calendar year totaled $100 million, trending toward $75 million for 2007. The wholesale division reported losses of approximately $3.6 million in 2006, while retail and commercial divisions reported total profits of approximately $407,000.
A major tire manufacturer’s strike in the fourth quarter of 2006 worsened the company’s returns, while a lack of working capital reduced wholesale inventories to inadequate levels, causing wholesale sales to continue to drop at the end of 2006 into the first quarter of 2007. By February 2007, the company found itself with steep liabilities. It was meeting its debt service obligations but was in violation of its loan covenants. Cash was forecasted to exhaust by the end of March.
Solution
The company turned to Carl Marks Advisory Group (CMAG) in early March 2007 to develop a short-term turnaround strategy within two weeks.
The CMAG team concluded the company had potential for long-term profitability, but it would take up to 18 months to deliver results. Operating losses over a three-year period had created a cash shortage and driven up debt levels, causing suppliers to restrict orders. Lack of adequate working capital restricted management’s ability to affect a turnaround, primarily as a result of the inability to build needed inventory of the best-selling tires.
With this in mind, CMAG developed a turnaround plan for the wholesale business that featured negotiations with creditors that led to the following action points:
- The company’s lender would provide additional credit of up to $3 million in return for a lien on one of the company’s warehouses.
- In exchange for a 52-week payment plan on past-due payables, one major tire manufacturer would ship an additional $2.5 million in tires and another manufacturer an additional $1 million in consignment inventory.
- Family compensation would be immediately reduced by $400,000 on an annual basis.
- The company would pursue any parties interested in purchasing the wholesale business.
CMAG acted as advisor to the company when a potential buyer made an offer on the assets of the wholesale division and managed the due diligence process, provided operating advice on the purchase and associated agreements and organized compilation of the numerous schedules to the agreement.
Sale of the wholesale division closed on July 2, 2007 and resulted in approximately $17 million in debt, including the company’s bank credit, and all payables due to all company suppliers were paid in full.
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