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Case Study: Web Printing

Our client, who was in the business of web printing to a select group of national customers, was losing money at the annual rate of $2.5 million on sales of $20+ million. To further aggravate the situation, they were in the process of losing their top two accounts just as we were engaged to assist them.

Our immediate focus was to deal with their cash hemorrhage. We put in place weekly cash flows reports with rolling 13 week forecasts. Through a series of cost reductions and selected price increases, we were to bring the business to cash flow breakeven within 60 days. The cost reductions did not affect their level of customer service while the price increases, based upon a more careful analysis of their job costing system, did not cost them any meaningful business.

At the same time, the company found itself with sales of $18 million (reduced by the loss of the two large customers referenced above, who were in the process of leaving before any changes were implemented) and $16 million of debt with a gross margin of 10%. They were simply unable to service their debt, although the core business was viable and they did generate reasonable cash flow.

A decision was made to take the company into bankruptcy in order to sell it through a Section 363 sale, presumably with a lesser debt burden. The bankruptcy court retained Stonegate to continue to consult with the company to monitor ongoing cash flows and to provide assurance to the creditors that there was no dissipation of assets or value. When the creditors could not agree on the terms of DIP financing, Stonegate was able to convince the court that the company could operate under the concept of “adequate protection” where it was using normal cash flows (receivable collections) to keep the doors open but was in no way dissipating or reducing any assets (in this case, receivables). Stonegate was charged with monitoring the cash flows and reporting to the creditors on a weekly basis. The creditors became comfortable that the situation was under control. This assurance was critical because if the business was liquidated, the return to the creditors would have been significantly reduced.

Stonegate was also retained by the court as an investment banker to sell the company as a going concern. We contacted over 40 strategic buyers, making the case for the inherent value of the business to each prospect buyer, and ultimately negotiated purchase agreements with two buyers. We were able to play the two buyers off against each other and ultimately closed a sale for approximately $6.5 million. The end result was that the senior management of the company (not the prior owners) bought the business, retained all of the customers, and employed 90% of the existing employees. The senior lender, who had referred Stonegate as a consultant to the company, was paid in full.

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