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POORLY PERFORMING DIVERSIFICATION STRATEGY REFORMED — Returning Focus to Core Business Operations Restores Liquidity to Sewing Products Distributor
Problem
A $35 million importer and distributor of sewing notions, rain gear, and scissors whose products were carried by a wide range of mass merchandisers, supermarkets, and drug stores was acquired by an equity investor at a time when the market for such consumer goods was in a decline.
The equity group decided to diversify and generate new revenue for the flagging company by acquiring three new lines of business in addition to its core operations. The new business lines drained the core business’ cash flow and monopolized a disproportionate share of management’s time.
These factors affected the company’s liquidity and caused it to default on its bank loans. Lenders were unwilling to extend additional credit. Unwilling to invest further, equity investors realized it was time to sell the company.
Solution
The equity group engaged Carl Marks Advisory Group (CMAG) to facilitate the sale of the struggling company. Through a detailed assessment, the Carl Marks team determined that profitability would first need to be restored in order to maximize the sale value and set forth to restructure operations.
The restructuring plan included the following actions:
- Divestiture/closure of the newly acquired non-core business lines
- Reduction of executive management from three to one to manage the surviving core business
- Reduction of workforce
- Expansion of core business product line into sewing-based crafts, such as needlepoint kits and supplies
- Expansion of core business to more mass merchandisers
- Obtaining price reductions from overseas suppliers
As part of the revitalization effort, CMAG assumed the role of CRO to assist the company's management in developing and implementing a turnaround plan. In addition, CMAG skillfully migrated the bank relationship to one that was less adversarial and acted as the company’s liaison with potential buyers during due diligence.
The restructuring plan worked. A new equity group purchased the company and obtained new debt financing. Since the purchase, the new investors have added new product lines and also made a small acquisition. Company revenues on an annualized basis have increased more than 20 percent, and EBITDA has been positive and growing. The company now is pursuing other acquisitions, including the possibility of purchasing a major competitor.
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