How to avoid a restructuring fail

The retail industry is grappling with a wave of bankruptcies as many national retailers struggle to remain afloat. 

Brands such as Red Lobster, Express, Joann, David’s Bridal and 99 Cents Only Stores are just a handful of names that have filed for bankruptcy within the past year. These retailers faced challenges such as shifts in consumer behavior and increasing operational costs, or have struggled to stay relevant and adapt to changing market dynamics.

Restructuring is a viable strategy for distressed retail companies, as it creates an opportunity to optimize the financial and operational aspects of a business to improve profitability. Real estate is a critical, yet often overlooked, component of retail restructuring.

Aligning real estate assets with sales performance by right-sizing stores and renegotiating leases can significantly impact the company’s bottom line. The key to successful restructuring lies in paying close attention to all aspects of the business, including a company’s real estate portfolio to ensure a streamlined and effective turnaround strategy.

When it comes to evaluating a company’s real estate portfolio, there is no one-size-fits-all solution, as the needs and circumstances of each asset vary significantly. This approach is
equally important when initiating the lease negotiation process. Avoid sending a generic form letter to a landlord without first having a conversation to understand the owner’s perspective.

This strategy can come across as impersonal and dismissive, potentially damaging the relationship with the landlord. Instead, create an open dialogue to understand the landlord’s priorities and constraints before negotiating to help foster cooperation and generate more favorable outcomes. By acknowledging the landlord’s unique situation and demonstrating a willingness to meet their needs, the likelihood of achieving beneficial lease terms for both the tenant and the landlord increases, which is crucial for a successful restructuring.

Simultaneously, do not engage landlords without first developing a clear understanding of your strategic objectives. Without this direction, the negotiations will likely fail to address critical factors that could influence your future success. For instance, if you are looking to expand into new markets, downsize or optimize your spaces, and the lease negotiator is unaware of this objective, it can lead to missed opportunities or unsuitable lease agreements.

By understanding your business model, including target market, operational requirements and growth plans, it’s easier to tailor negotiations for success. Knowing the target market helps identify the locations that maximize customer reach and sales potential, while understanding any unique operational requirements ensures the space meets logistical needs such as layout, square footage and amenities. Awareness of growth plans allows for flexibility in lease terms, accommodating future expansions or contractions.

In addition to real estate strategies, exploring financing options can provide the much-needed cash flow to stabilize a distressed retailer. One option is invoice financing, which leverages unpaid invoices to unlock funds. The alternative is invoice factoring, which enables you to sell your outstanding invoices to a third party at a discount to receive an advance of around 70-85% of the invoice value. This approach provides immediate cash flow, however, it involves a contract that could potentially strain customer relationships.

Alternatively, invoice discounting allows a company to borrow against its invoices while maintaining control over its sales ledger, offering regular injections of quick cash. Both methods significantly improve cash flow, addressing immediate financial challenges while helping the retailer focus on long-term recovery and growth.

Beyond real estate restructuring, businesses should take full advantage of the comprehensive support and opportunities available through Chapter 11, rather than rushing through the process. Chapter 11 provides a framework that allows companies to systematically address their financial challenges.

By utilizing Chapter 11, retailers can reorganize their debts while continuing operations, renegotiate or eliminate burdensome contracts, secure more favorable lease terms, access new financing options under the court’s supervision and reduce overall debt. Taking these strategic steps can help retailers emerge stronger and better positioned for future success.