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HIGH POINT — Following the closures of several major furniture manufacturers in less than 12 months, the home furnishings industry is debating the role of private equity in furniture companies and paying close attention to the bankruptcy proceedings that often follow such closures. Furniture Today reached out to Stump & Co., a merger and acquisition advisor firm, for a condensed overview of what happens when a home furnishings company declares bankruptcy in 2023.
According to Tim Stump, president of Stump & Co., the residential furnishings industry today has more than 40 companies controlled by private equity firms. Additionally, as of 2022, private equity accounted for 30% of deal activity, making it a critical feature of the merger-and-acquisition (M&A) landscape, Stump noted.
“In the wake of the Lane/United, Klaussner, MG+BW and now Noble House bankruptcy announcements, (Klaussner has not yet filed bankruptcy) we thought it would be helpful to outline the process involved in entering bankruptcy, as well as the mechanics of selling and exiting the bankruptcy system,” Stump said.
Following are Stump’s observations:
- Unique to the Lane, Klaussner and MG+BW deals were the abruptness of the closure, with no WARN Act notification to employees and no time to properly plan for closure. The employees are rightfully frustrated and disappointed, and lawsuits are resulting. We have learned that in these cases management couldn’t ask people to work if there was no money to pay them (the banks reportedly had frozen any outgoing money flow) so termination/furlough was the only available option.
- In bankruptcy, the owner is usually allowed to manage the business as a D-I-P, or debtor-in-procession. And usually, the bank or the owner will provide D-I-P financing to pay the bills until the company can exit the system. A bankruptcy judge oversees these activities and must approve all actions including the sale of assets.
- Frequently the bank, which usually has secured liens on the business assets and is anxious to get their loan repaid, will request a CRO, chief restructuring officer, be installed in the business to help oversee the daily workings of the business and to help preserve the integrity and value of the assets.
- As assets are presented for sale, a stalking horse buyer can emerge, whereby that buyer submits a binding offer for specific assets at specific price and terms. The stalking horse offer is then made public and effectively an auction begins. Any other prospective buyer may “upset” the stalking horse bid and multiple offers can result.
As a stalking horse, this buyer is awarded preferential treatment as the first buyer in, and if ultimately, they don’t win the auction, they are reimbursed their expenses. Also, any upset bid must be more than the fees paid to the stalking horse. Once the bidding process is completed, the judge approves the sale (or multiple sales if there are multiple sales). - In the recently announced Noble House bankruptcy filing, GigaCloud Technologies was named as the stalking horse bidder. Its offer is the first one in, and the judge has said the auction, if any, must be completed by Oct. 31. So, all eyes will be on the calendar to see what transpires these next six weeks.
- While this may be disheartening to see these grand companies fail, it is creating huge opportunities for the rest of the industry. In Hickory, the MG+BW employees are quickly sending resumes and interviewing at other upholstery companies, and those companies are now soliciting new customers to fill the void. Wayfair is actively seeking new vendors to fill the void left by Klaussner’s successful sofa program.
In Mississippi, we were told of entire upholstery teams of 10+ people moving from Lane/United and starting immediately making furniture for other local manufacturers. So, where some companies are failing, others are benefiting. This is a natural process of capitalism, and we expect more to come.
