The issue of a business restructuring proposal of Goodwill Toronto has recently been in the news. This video is an interview aired on TV Ontario, The Next Ontario show, with Dr. Sarah Kaplan, Professor of Strategic Management at Rotman School of Management, University of Toronto. The purpose of the interview is to obtain Dr. Kaplan’s views on the Goodwill Toronto closure of 16 Goodwill stores.
Toronto Goodwill thrift stores were operated, not unlike a Salvation Army thrift store, to raise funds to support the aims of the non-profit; in this case job skills and job creation for those who might otherwise be unemployable.
It takes money to restructure
We have all heard the expression “It takes money to make money”. I would like to make a slight twist on that expression by stating that it takes money to have a successful business restructuring proposal. Not only does the company and business have to be able to have sufficient cash flow in order to operate during the restructuring period, but there are also extraordinary one time expenditures related to the restructuring. Examples of such one time expenditures are reasonable one time exit fees to get out of uneconomical contracts, bonus payments to key personnel to ensure that they perform throughout the entire restructuring rather than resign for a new position elsewhere and professional fees.
Our Goodwill Toronto analysis
Our firm was consulted early in January to act as the licensed insolvency trustee in a business restructuring proposal of Goodwill Toronto. We spent half a day meeting with representatives of Goodwill Toronto in order to learn of their plight and to determine what sort of restructuring proposal might be possible.
In our meeting we learned that the main assets of Goodwill Toronto consisted of: (i) cash or liquid investments pledged to a Canadian chartered bank on account of business loans; (ii) accounts receivable with a certain percentage collectability; and (iii) inventory of items for sale, mainly used clothing, spread across 16 stores in leased locations.
We also learned that there were over 400 unionized employees, the majority of which had long term service with Goodwill Toronto. This is significant for three main reasons: (i) a viable restructuring proposal would be required to save the jobs of many, but probably not all of the employees; (ii) if the business restructuring proposal was unsuccessful, Goodwill Toronto would automatically be deemed to have filed an assignment in bankruptcy (a deemed assignment); and (iii) in a bankruptcy, the employees would have a claim under the Wage Earner Protection Program Act (WEPPA).
It takes money to implement a successful business restructuring proposal
So, why is this significant? The reasons it is significant for a restructuring vs. bankruptcy are:
- The secured portion of the employees’ WEPPA claim coming ahead of all creditors, including the chartered bank, totalled approximately $900,000.
- Next in priority was the claim of the chartered bank.
- There were no free assets after the above 2 claims that Goodwill Toronto could use to fund operations or the extraordinary expenses associated with a business restructuring proposal discussed above.
So as you can see, with no free cash flow, no excess realizable assets or a third party who could fund a business restructuring proposal (or in the worst case a bankruptcy proceeding), it would not be possible for a knowledgeable licensed insolvency trustee to agree to act as there was no source of funding available.
This is why the best of intentions and goodwill (toronto) is not always enough!
The Sarah Kaplan interview
Professor Kaplan raises many good points in this interview, including:
- We should first think about what the whole business model of the goodwill is.
- The goods that they get to sell are aimed at just generating revenues that allow them to perform their actual services like job.
- It may be that the retail environment is tougher in some ways if we think about the alternative for people who buy things at goodwill would be to go to discount stores or dollar stores.
- As the market is becoming more and more competitive we could imagine that people would not need to shop at Goodwill if they can get a t-shirt for $5 at WalMart.
- Goodwill’s in other areas though are doing fine so we may need to look a little bit more deeply into the problem.
- The entire board resigned so there could be some other management issues that led to Goodwill Toronto to be running a deficit.
- You have to be well managed and being a social enterprise is not an excuse to not be well managed; you need the same skills capabilities and maybe even more skills and more capabilities than in the for-profit world.
- The fact that they’ve taken this extraordinary really drastic measure leads me to believe that the difficult retail environment is not the whole story and therefore not the whole story for other social enterprises.
NOTE: After writing this blog, Goodwill Toronto filed an assignment in bankruptcy.
Is your company in need of a business restructuring proposal?
If your company is trapped with too much debt, you need a professional trustee to help you manage debt and create a viable business restructuring proposal (either under the Bankruptcy and Insolvency Act or the Companies’ Creditors Arrangement Act – BIA or CCAA) before it reaches a critical stage where bankruptcy is your only option. We have been able to help many companies carry out a successful business restructuring proposal. Successful completion of such a program, will free you from the burden of your company’s financial challenges to go on to be a productive, profitable employer allowing management to focus on business growth and not be plagued by debt problems.
Contact the Ira Smith Team today in order to look at the bankruptcy alternative of a business restructuring proposal. We can help and Starting Over, Starting Now you can be restored to financial health.
