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After Comfort Restaurant in Hastings-on-Hudson was denied more traditional financing needed to move into a bigger space on the other side of Warburton Avenue, chef owner John Halko successfully tapped his loyal customers for about $25,000 of precious capital, by selling them V.I.P cards, good for discounted meals for up to two years. As a result, Halko was able to open Comfort Lounge in May of this year. In a recent review, “NY Times” critic Emily Denitto told readers that Comfort Lounge is “serving up intriguing food with a refreshing focus on healthy ingredients and various cultural influences.” Decor is still being worked out, reported Denitto, “cushions are planned for the banquette, and there is a promise of some kind of art for the walls.”
When Sam Zell completed an $8.2 billion acquisition of the Tribune Company with an equity investment of only $315 million, he was described alternately as “reckless” and a “genius” by the financial press. Zell’s main strategy was to sell assets and deleverage his position, but plans to sell the Food Network fell through, while plans to sell Wrigley Field and the Chicago Cubs were delayed, and Zell took the Tribune Company (excluding the baseball franchise) into bankruptcy in December of 2008. On October 13th 2009, a U.S. bankruptcy judge ruled that the Tribune Company could sell the Chicago Cubs to the Ricketts family for $845 million. In conjunction with the sale of the team, the Chicago Cubs filed for a separate bankruptcy, designed to protect its new owners from claims from Tribune Company creditors, the “Chicago Tribune” reported.
Lesson Learned: Allow a little extra time for the sale of complex assets in your business plans, especially if that is critical to your financial survival.
According to “Rock&Roll Daily”, Muzak had nearly $500 million in debt but its assets totaled only $50,000, leading to its Chapter 11 filing in early 2009. Hard to believe, Muzak was founded in 1934!
Lesson learned: When the market you compete in changes, it’s probably time to change your business plan.
Telecommunications equipment maker Nortel’s market capitalization reached a peak of $250 billion in 2000, giving it the financial wherewithal to lay out $15 billion for the acquisition of switch makers Bay Networks and Alteon WebSystems. But the company failed to leverage its acquisitions, and did not keep up with changing technology in its core markets. An accounting fraud which came to light in 2005 didn’t help matters. Nortel filed for bankruptcy in January of this year and is being auctioned off in pieces, with bidding interest from Avaya, Cisco and Siemens.
Lesson Learned: Have a solid plan in place to fully integrate acquisitions, and execute it well!
Even before private equity firm Ripplewood Holdings loaded Reader’s Digest with untenable levels of debt, the company had grown over-reliant on direct marketing of books, music and video to its vast subscriber list, where it ran into fierce competition from Amazon and others. Whatever new ownership structure emerges from the current bankruptcy proceedings, the key challenge for Reader’s Digest will remain how to manage its flagship publication for continuing profitability while the internet continues to sap away readers and advertisers.
Lesson learned: Focus on keeping your core business profitable and healthy.
Internet gift merchant RedEnvelope suffered a net loss of $4.3 million in the last quarter of 2Edit007, citing “smaller average orders, lower profit margins and a 20 percent reduction in orders shipped.” After losing its line of credit with Wells Fargo in April 2008, the company said it had “insufficient funds to continue operations” and filed for chapter 11 in April, 2008.
Lesson learned: Try to arrange multiple lines of credit to increase the chances of getting through an economic downturn.
At the one year anniversary of the bankruptcy of Lehman Brothers, we are naturally seeing a lot of reprise coverage as this was the largest business failure in U.S. history and by many accounts, made the U.S. financial crisis much worse. With all of the focus on Lehman Brothers, many other recent bankruptcies have gone under reported by the financial press, which gives us a chance to turn our attention to these other companies, and ask, how did they go wrong?
Washington Redskins owner Dan Snyder invested a reported $34 million in Six Flags, the amusement park company, and took management control in 2005, bringing in a new CEO, Mark Shapiro. However, despite closing ten under-performing parks, and cutting costs, he ultimately was not able to overcome the heavy debt load he inherited from the prior management team. The recession and lower park visitation pushed Six Flags into Chapter 11 in June 2009. The equity holders will be wiped out, as the creditors, including Citigroup and Barclays take control.
CEO Mark Shapiro, in an attempt to reassure would-be customers, described the bankruptcy as “strictly a financial restructuring of our debt.” Trip to Six Flags anyone?
Lesson learned: Be cautious about investing in a debt-laden company, in a capital intense industry; there may not be enough capital to go around.
Many small and mid-sized businesses review their financial results less than once a month, missing out on the insights into business drivers that such a review could provide. The “New York Enterprise Report” recently ran the results from a Rudofsky Associates poll regarding how frequently business owners review their financial results. The best run businesses we have worked with use the monthly financial review as an opportunity to review key non-financial metrics as well.
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Why Businesses go Bankrupt: Tavern on the Green
Manhattan icon Tavern on the Green filed for bankruptcy under chapter 11 earlier this month, with chief executive Jennifer Oz LeRoy citing “extreme financial distress brought on by the current financial crisis and the City of New York’s decision not to renew our lease,” as the dual factors behind the decision. Described as “more spectacle than restaurant” in the 2008 Zagat guide, Tavern was informed by New York City’s Department of Parks and Recreation on August 28th that its lease would not be renewed, with the new 20-year lease for the space instead going to Dean Poll, who runs the Boathouse restaurant in Central Park.
A visitor to Tavern from Cave Creek, Arizona told Zagat in May of 2009: “The only thing worse than the food was the service!!! Absolutely a waste of time, after such a big build up. Food was bland, served lukewarm, like a low budget cruise ship or Las Vegas hotel. When I asked the waiter about a wine pairing, he pointed at the menu with his pen and rolled his eyes. Absolutely no substitutions or accommodations from the kitchen, [the] waiter explained that the kitchen staff is miserable.”
The kitchen staff probably became even more miserable to hear about the bankruptcy, especially given that Tavern owed $1.7 million to the pension and health benefits funds managed by the New York Hotel & Motel Trades Council, the union that represents Tavern’s 400-plus employees. Ms. LeRoy, who is hoping for a busy final four months until Tavern’s lease expires at year end, said in a statement that the restaurant plans to “honor all of its obligations to its loyal employees.”
Lesson Learned: In today’s recessionary environment, customers are looking for tasty food at prices that represent a good value, as opposed to glitzy decor. As “Entrepreneur” explained in their November 2009 article about new trends in the restaurant trade: “Plush dining rooms, star chefs and menus built around foie gras and truffles feel outdated – while rooms that are simple, with a personal touch, feel right.”
Tags: bankruptcy, Dean Poll, Jennifer Oz LeRoy, Tavern on the Green