Trusted Advisors: Using UCC Article 9 to Preserve Business Value . Gary Nacht and Adam Duso

Gary Nacht of Synergy Enterprises sits with Second Wind CEO Adam Duso to present trusted advisors with a better option for distressed business clients. Learn how a strategic UCC9 asset sale can eliminate your client’s business debt while fully preserving the business – in a completely out of court and streamlined fashion.

My name is gary nocht Owner of synergy enterprises and as many Of you know I’ve been acquiring and advising Distressed And underperforming companies for over 25 years These companies have ranged from Startups to several hundred million in Revenue Across a diversity of industries and Channels Second win consultants is one of America’s fastest growing Business consulting firms with a core Specialization In debt elimination over the past 10 Years they’ve been driven by a mission To preserve and generate Economic value for both business owners And creditors By offering reorganizations previously Only available to the largest of Distressed companies Second win consultants makes real Solutions available to Every size business not just those with Deep pockets Effective august 1st my firm and second Win consultants formed an alliance To provide a one-stop solution for Business owners needing both an Operational turnaround as well as a Financial restructuring

Very happy to say that joining me today Is adam dusso Ceo of second win consultants adam has Been with Hi gary hi adam Adam has been with the company since 2008 assisting business owners in Restructuring their companies And settling debt obligations that would Otherwise mean the final chapter of Their business story He has successfully negotiated loans With banks all over the country The small business administration and The irs Saving thousands of companies while Maximizing Recoverable values for creditors welcome Adam thank you thank you for having me Appreciate it I have 10 questions for you today um Let’s start with the the easiest one Tell me a little bit about your firm And how you work with distressed Businesses to preserve them Sure our firm was founded by a once Practicing bankruptcy attorney Who uh would represent small and Medium-sized businesses Trying to obtain a financial turnaround By way Of bankruptcy file um however in his Experience and the experience Of most bankruptcy attorneys the vast

Majority of chapter 11 Filings failed to to get to a successful Discharge And that’s due to a number of the Inefficiencies for bankruptcy which is Really geared to help larger Institutions and doesn’t facilitate Reasonable resolutions for most smaller Enterprises So out of that frustration uh the Company was developed to provide an Alternative to preserve Underlying business value without having To face The inefficiencies of a bankruptcy so We work with distressed business owners Who oftentimes reach out to Us based on their uh financial situation And lack of options that are available To them And we work with them to create a plan That preserves their business By a way of conducting a strategic short Sale That is focused on preserving the Underlying value rather than Forcing it through a liquidation Proceeding which would guarantee The lowest possible recovery for all for All parties And because we can work in the interest Of all parties including The seller slash current business owner As well as

Understanding the needs of all of the Creditors on the cap table Were able to come to a resolution that Works for all parties and doesn’t Require The intervention of the courts So you’re talking i think about ucc Article nine primarily yes that’s our Number one tool for How we streamline these short sales uh That and it is one of our highest Specialists So talk a little bit about uh how that Process works and how it Removes or eliminates debt while Preserving the underlying business For the vast majority of business assets They don’t have a title Or vehicle by which creditors and Lenders can efficiently file Leads to secure their their interest In the collateral that is facilitated Through ucc Filings under the uniform commercial Code article nine of the uniform Commercial code Is uh is there to protect the interest Of first position and fully secured Creditors So what it allows them to do is with the Right Consents and valuations to take Possession of their collateral Outside of of course liquidation or

Bankruptcy proceeding And sell that collateral by way of Private sale To uh any number of third parties for Adequate consideration What uh we do with article nine is We where banks have an issue is they do Require The consent of the existing business Owner to conduct that transaction And in without there being something as Part of the deal to give The owner the incentive to avoid Personal bankruptcy They failed to initiate the article 9 on Their own In a streamlined fashion so what we do Is we look at the article of mine As a way to uh as akin to the 363 sale And if you can pre-package a deal that Both Offers a maximum return for the first Position creditor And also offers an incentive to the Seller Then you can streamline the consent that Is needed to Use article 9 to strip off any debt Other than the first position Understood now i i know that an Owner through this process has to give Up ownership Um tell me why an owner would do that So an owner would do that uh mostly

Because they’re headed towards a variety Of alternatives where they’re going to Lose Their equity position they are insolvent And don’t have Access to further capital so the Business will slowly wind down Its operations or they are in default With their existing creditors and Are headed towards a path of liquidation If they don’t proceed forward with some Form of alternative So when clients and business owners are Faced with insolvency Their equity position in their business Is valueless By definition and also they are On a track where they are going to lose That equity anyway By one means or another if you control It through an article 9 sale the Business Lives on and oftentimes that preserves An opportunity for the owner to be Employed with the new entity Maintain some level of control over the Operations And preserves the opportunity if they Get if they Uh financially write themselves Personally to where they would have an Opportunity To re-enter that business in the future So if losing

The equity which is valueless is Inevitable Creating a path that preserves their Ability to participate In it earn from it and potentially Re-enter Into the business that they started Developed And uh throughout the many years they’ve Owned their business It is a superior alternative to losing Ownership Without any of those additional benefits And you’ve you’ve done a lot of these Transactions Overall can you give a percentage To how many of the deals that you’ve Done like this Have resulted in the owner continuing In the new co in some capacity and Essentially earning his way out and Retaining some value uh the vast Majority of them i would say probably 75 and that’s a guess as uh In that standpoint in most cases if the Business Was the sole business of the business Owner’s sole source of income Then keeping them part of the new Company is part of what we seek after Doing We do also have clients to where they Have Other sources of revenue other

Businesses or other jobs and they are Just looking to create an exit on a Business that is no longer providing Them any value But for when it comes to the the Business in question Providing the household income that Would be necessary to settle Any personal guarantees that may exist Then Uh it is almost a requirement that we Provide that incentive that at least Allows them to participate in the new Company Whether or not they’ll ever be in a Position to re-enter will be up to their Specific personal financial statement Okay Uh so put your other hat on let’s talk About the creditors the senior Secured and the unsecured how do they Feel about this process Um most of them at first feel confused Because they haven’t been through it so A lot of our process Is about education but when they Understand that when they’re dealing With an insolvent Small to medium-sized business that the Article 9 Is going to give them the same value Or greater that they would get through Any other means but they can do it in a Fraction of the amount of time

And the business itself is going to Cover all of the costs And the bank or creditor doesn’t have to Do invest Any of the cost and forceful collection It takes a while to get them to Understand the process but like any Liquidation proceeding once a bank or a Creditor does one or two of these deals It becomes their preferred method Because of All of the efficiencies the fact that It’s a private sale the fact that the Noticing period is Is extremely short um and the fact that They can avoid All of the collection costs allows them To write off whatever bad debt may exist And collect capital in a fraction of the Time So an initial reaction is always a lot Of education the first position Predators and then After they see the the efficiencies of The process Once or twice if it kind of becomes an Unspoken Agreement that when we get on the phone We know what path we are headed down Towards a proper form of approach That makes sense um so here’s a little More complex question for you it’s a Two-parter First dig into some of the details about

An article 9 restructuring and how it Differs from a traditional bankruptcy In terms of process and cost and timing That’s on the one hand and on the other Hand There’s a new relatively new sub chapter 5 Section of the bankruptcy code and then There’s Also what’s called an assignment for the Benefit of creditors I know that’s a bit of a complex Question but could you could you talk About the The similarities and the differences Between these and why Um your primary tool is article nine Yes uh so first the primary difference Between Article nine and all of the other tools That you just discussed Is article 9 can be conducted as a Private transaction Any form of bankruptcy proceeding or abc Is a public component which means you Air Out your insolvency to the entire world Which means that the enterprise value of That business Will decline just by filing any one of Those liquidations By being able to control a streamlined Short sale in a private fashion there is No public proceeding to this

So the enterprise value of the business Does not have to diminish By an unforeseen byproduct of the Process So right from the top the private aspect Of the article 9 is one of the reasons We find it superior as a potential Investor and having been there before You Obviously resonate with the difference Between airing out the insolvency in Front of your customers and not Having to do that um so that is the The first aspect of it um the second Aspect of or just going into the process The way article 9 works is uh Once the business is determined to be Insolvent And the first position creditor is ready To call its note And start the force collection process What We do with the uh with the Guarantors and the business borrowers is We go in and we create a plan we Identify a strategic purchaser whether That’s somebody who already exists Within the institution Or we leverage our network of alliances To find strategic purchasers who are Willing to come in And purchase the assets under an article 9 transaction We then package whatever seller

Incentive we need to whether it’s a Future employment agreement or Consulting agreement or something of That nature And we bring everything to the first Position creditor As a whole pre-packaged deal to them As to how to handle the liquidation they Then have to get their Own appraisals article nine has a few Requirements It requires that the transaction be Arm’s length in nature And have adequate consideration so they Need full disclosure as to who the Purchasing party Is and to assure that there’s no Interconnectivity between the seller And the buyer and they are truly arms The second litmus test is that they have To make sure that the assets are being Sold For adequate consideration which means The bank will order its own appraisal From a forced liquidation state so They have a list of approved appraisers They’ll come in approve Appraise the collateral get that Appraisal back and weigh it against the Offer that was put forth by the Strategic purchaser So long as that offer is higher than Their forced collection value they will Accept that transaction and we will

Begin The documentation on the actual Purchaser The purchase agreement comes with Notices those notices need to be sent to Any subordinate creditor who has a ucc On fine That noticing period is two weeks inside Those two weeks Those creditors can foreclose up And pay off the first position creditors So they can take Over the first position uh debt and Conduct the short sale for their own Benefit uh but given the fact that they Would have to pay Face value and then conduct a short sale Typically results in that never actually Occurring no one wants to pay more to Sell for less So while it’s theoretically an option it Doesn’t actually practically happen Okay and then the second thing they can Do is challenge the appraisal Or the arm’s length nature of the Transaction which is why the bank will Check those boxes before even going Through the process Of sending those at the end of the Two-week notice period The subordinate ucc filings are stripped From the business Assets they are no longer valid ucc Finance

The only one that remains is the first Position ucc filing And the bank that owns it is taking Possession Of those assets and simultaneously Selling them to the third party Which they have a pre-arranged Pre-packaged agreement So at the end of the 10 10 day notice Period which is technically two weeks When you Factor in mailing times they can close The transaction And the funds are sent from the Purchaser to the bank And the bank releases the only remaining Ucc that is valid on the company and the Assets transfer over free Because of the short timeline of this The business uh Transitions with seamless operations on Friday uh it’s in the old entity and on Saturday it’s in the news There is no cessation of operation which Is that is what allows us to preserve That enterprise value That is technically the end of the Article 9 transactions But then what that does is leave Shortfall deficiencies Owed by the original guarantor And our process which fills out That uh that’s that need for seller Incentive

Uh is to stick with business the Previous business owner and help that Person Settle their personal guarantees using The income we’ve helped them secure by Way of a consulting Agreement or employment agreement to Give the creditors who still have Personal guarantees A higher return than they would through Any other So the article 9 ends at the sale of the Assets but our process Specifically sticks with the guarantors Until they have resolved All of their personal obligations and What what Court or jurisdiction does all of this Happen In it doesn’t it doesn’t this is a This is a right codified under under the Uniform commercial code in All 50 states that is wrong as creditors To have written consent from the debtors They don’t Need the approval of courts to conduct These transactions which is why it’s a Private seller is Anything you put a court proceeding is Part of public knowledge So that is what makes this very Different is that there isn’t a public Noticing period Um if the transaction were to ever be

Challenged for any number of reasons That challenge would likely be a legal Challenge And that would be in the local Jurisdiction from wherever the Transaction actually And in your experience adam how often Does that happen It’s happened twice twice we’ve done it 1500 times it’s happened twice Both of them have very quickly resolved By way of going to summary judgment Unless the subordinate creditor can Prove damages You don’t even get to litigate over the Merits of the claims And because they can’t prove damages Because they were in a subordinate Position It’s a failure to launch from a legal Challenge Okay that makes sense So now add additional comparisons Between that process And bankruptcy and the assignment of the Benefit of the creditors regardless Of what chapter or sub-chapter of Bankruptcy you put Forth you are putting or you’re putting All Of the assets of the business in the Hands of the trustee Which then has autonomy to liquidate or Do whatever

They feel is in the best interest of the Creditors So one of the biggest things in here is That the business owner loses control of The process They don’t get to determine necessarily Who the buyer is they don’t get to Negotiate any seller incentives for Themselves This then becomes only for the benefit Of this of Whatever the trustee feels is in the Best interest of the creditors Also bankrupt requires bankruptcy plans Which Gives every single creditor on the cap Table An ability to contest them for one Reason or another Okay each one of those uh those Challenges to a bankruptcy proceeding is Essentially its own hearing And mini lawsuit in and of itself which Is why a chapter 11 Proceeding can take two years to get to One conclusion or another It’s it’s it’s kind of like hurting cats Getting All creditors to agree on a plan Takes many many months and negotiations Back and forth so the article 9 Only requires the consent of the first Position creditor So rather than trying to juggle the

Needs and demands of potentially a dozen Different classes of creditors You deal with the one that has the only Monetary damages from the force Collection standpoint And you enroll them as part of the Process and so That removes the need for consent Consent is handled under the two-week Noticing period Which gives subordinate creditors a Limited window and limited recourse To stop what are the inherent rights of The first position So then adam what are the what are the Remaining reasons That companies would still choose a Chapter 11 Or assignment for the benefit of Creditors Uh mostly i mean there’s a variety of Different answers to that One is if the collateral base Is largely handled in commercial real Estate then commercial real estate has Its own level of rules it actually isn’t Codified under the uniform commercial so You couldn’t use an Article 9 on a commercial real estate Portfolio Transaction for example so sometimes the Collateral base just doesn’t make sense In other cases uh the business is large Enough to where it may on the other side

It may Actually successfully be able to put Together a chapter 11 proceeding Which would preserve its lending Relationships and on the other end of a Five-year repayment plan in the chapter 11 They would want they feel that the Company has is large enough And has can get over its short-term Pickups to be able to actually preserve The ongoing lending relationships they Have So if the company is large enough and is Just and has enough solvency left In it there are certain situations where Owners may want to preserve The relationship short of that the Answer is knowledge A lot of first position creditors a lot Of investors Aren’t aware of this strategy for the Last 30 years Every distressed investor knows the Pre-packaged 360 preset no one has heard of the Pre-packaged article mindset So they’ve made a lot of money and Wealth doing things One way a new way of doing things is Interesting but without an Actual need to shift your strategy it’s A slow Educational arc moving one private

Equity group One strategic investor at a time over Towards thinking about a new way of Doing it You know as a byproduct of the corona Virus environment we are finding Ourselves in We are now in a position where Distressed investors Are not going to be able to wait through The tsunami of bankruptcy filings to Deploy capital So there is now an outside need for Investors to find a different way to Deploy capital So we finally had some of that obstacles Be removed by way of the crazy Environment that we find ourselves in Today Um but previous to that it was one Private equity group at a time one Investment bank at a time One you know asset based lender at a Time getting them to understand that There is a Way that you can avoid all the costs and Times And the negative externalities of Bankruptcies and publicly facing Insolvency proceedings by way of Knowledge i can also weigh this against An assignment of the benefit of the Creditors which is not a bankruptcy but It’s a bankruptcy alternative where you

Essentially choose your own trustee And all of the other hiccups are Required All of the creditors need to agree to Your plan all of the creditors can Contest your plan and until you get a Global resolution with all parties The business stagnates in a situation Where it doesn’t really qualify for Future financing And it remains in a public state of Insolvency Until a resolution presents itself Which oftentimes is why chapter 11s are Converted to a chapter 7 Eventually right And if a company is uh you know Struggling and heading down a path to Having to do something Um what are the markers uh as far as When a company should initiate an Article 9 process with you Yeah so it is i mean the the main Indicators and the macro indicators that We state is That if you look at your business Balance sheet and The enterprise value is less than your Outstanding Debt then especially if Including long terms and short term Liabilities you’re not going to be able To raise more capital you’re not going To be able to raise more invest

So unless you have a path That is clear towards turning that Around you are going to end up in an Insolvency proceeding The same thing is true from a coverage Ratio standpoint if you realize that Based on your new level of revenue that You are less than a one Coverage ratio then without a short-term Injection of liquidity you are also Heading For an insolvency proceeding by one Means or another Um and the lastly is just to look at the Asset side of the balance sheet and if Just the hard assets of the business Uh are do not outweigh the long-term Liabilities of the company Uh then you are also in a different State of insolvency and should consider This before uh your back is up against The wall with judgment filings and Things Yeah i’d add a couple of things to that Adam i you know i’ve been working with Distress companies for A long time 25 plus years you know two Things One is that um everything you just Mentioned Is really a you know a fairly Sophisticated assessment of The credit worthiness or the um let’s Say the liquidity measures

Of a company and while ceos And owners may be very good at marketing And promotion And uh development they’re not Necessarily Always familiar with all of those finer Details of liquidity ratio coverage Ratios And so on so this is really a good place Where A financial advisor can play a role It’s very important for companies and i Say this over and over again Every chance i get it’s really important To have Visibility into the future because even If today You know things are you’re struggling But uh you know but decl in decline Um the ability to see forward three six Nine 12 months and and no and find out That In three six nine months from today the Liquidity issue will become more acute Then even though everything is Relatively fine today now is the time to Do something You don’t want to wait until that last Minute I would i couldn’t agree with you Anymore one of the biggest Reasons that i find that most of my Clients End up in a status of default with their

Creditors Is a lack of financial guidance they Don’t have a cfo They might have a c-o-o they might have All of these other c-level positions but For whatever reason Uh business owners like to believe that They can be their own cfo And it’s its own position and it’s its Own it’s church and state honestly Ceos want to do every project they Receive return in every single thing That they do And if they don’t have a counter balance To them helping manage the final Financial aspect to it they will do Every project they will take on every Loan because they believe that they will Return on investment on every single Thing that they do so uh you know one of The things that we work with a lot of The Entities or purchasing entities is Making sure that we are aligning this New group With the right financial support because One of the things we do like to say in Second land here is no repeat business So like well you know we clean up the Balance sheet once we put it back in the New ownership And we want to see it continuing to Generate jobs and Income and economic value we actually

Are Only looking to do it Let me flip the um the perspective for a Second We’ve been talking a lot about companies Debt and creditors but there is that Third link here which is the investor Who’s coming in to buy those assets um If if you are an investor who is looking To find opportunities like this um you Know How does the business owner or you find People like that Well we spend a lot of time by way of Bob who you now know Creating alliances and strategic Relationships with Asset-based lenders private equity Groups m a Transactionalists and strategic Purchasers So whether those are family shops or Otherwise these are businesses that are Right now Or previous to the downturn that we find Ourselves in we’re Fighting over deal flow at enterprise Values that were higher than we’ve seen In a decade So so if we can uh we’ve established Relationships to show them that we can Get them In the distressed investing world in Where the

Out the upfront capital is only Equivalent to the forced liquidation Value of the assets And any additional compensation to the Owner happens Over time based on performance so we get You in at auction Values and any additional compensation Is contingent upon you hitting your Projected roi numbers based on cash flow So you can’t that’s why we go to Asset-based lenders because they love to Lend on forced liquidation value So that means a strategic buy or private Equity group can Come in use cash and then refinance Really All the capital that they put into the Transaction back out Using a an asset based lender and Recycle that cash into another Transaction So it fits well in that space and also From just Working with a small business owner it’s Easy to determine who the right investor Is there’s been someone who’s been Interested on the sidelines for years And when they see this new value Proposition you can bring it in Or there’s the next generation of Management who has a huge vested Interest in taking this forward and all You have to do is describe to them this

Vehicle by way Of them being able to participate in Ownership so Between that and the advancements of Esops and things like that that can also Be layered into this type of transaction It’s Actually finding the investors is it it Historically has been a challenge but in Recent years has been something that We’ve worked very hard to streamline That Because our deal flow looks a lot Different than the enterprise value Transactions that a lot of private Equity groups are fighting over right Now And once we educate people by way of Bob’s work in the alliance space work It uh it allows us to have a constant Pipeline One of the uh issues we really haven’t Addressed is that It’s important to know what the cause Was of the company getting into A difficult financial situation and when You have a new investor coming in Looking to Buy assets or intellectual property all Of that at a liquidation value which is Very attractive You also have to address the operational Issues That that led to that situation in the

First place Yeah absolutely and a lot of this again It stems back to For financial management and planning There are some of these companies we’ve Talked to that have never seen a 12-month Projection until we made them so you Know it’s just And that’s why strategic purchasers and Private equity groups they are Well suited to plug these gaps because They’re doing this financial analysis And would whether or not the business Wanted them to do it it’s part of Their operation so there’s there is a True overlap from the investor Standpoint but i agree with you there’s Still due diligence that needs to be Done And there are some of these deals that We don’t even bring to market because If after we do this even at forced Liquidation value You’re not cash flow positive then this Is time to wind up this opportunity Settle the debt and move on to the next But if we can preserve enough contract Value and revenue and things of that Nature that’s where that enterprise Value really needs to be preserved And that’s where the company is based Off of so we work a lot Having a queue of investors who

Understand our mission and how we Approach those things And understanding that we would be Bringing them all positive ebitda Businesses And be able to identify what triggered The initial default Right and of course that’s where we come Into we we’ve been doing turnaround Advisory work For a very long time and we we typically Step in To companies that have for one reason or Another Fallen into negative cash flow Negative liquidity and we come up just Like you’re working on the financial Restructuring side What we do is we work on the operational Restructuring And and by marrying those two things Together When that closing takes place you you’ve Not only Fixed the finances but you now have a Very clear path Operationally about how to continue to Grow the company And keep it profitable yeah and i i will State from our standpoint we do Mainly focus on the balance sheet Financial reorganization as part of the Transaction And settling the debt and so we see and

Have Dealt with a lot of frustration where Even after we do our financial analysis And kpis and make recommendations Having somebody who can actually team And do the operational turnaround Look an owner may need know that they Need to let go of 30 Of their staff actually implementing a Plan to let go of 30 Of their staff is a totally different Story and reality for them So we do love working with operational Turnaround specialists who Are willing to not only do the analysis But help the implementation of what is Necessary to actually turn the business Around Because it’s great to take a business That has a half a million dollar ebitda Even in its all all of its Inefficiencies and strip off its debt But i also know the betty that it could Be a million or a million and a half if They ran their company profitably And just having that value go Undiscovered due to lack of Follow-through It’s one of the things we see all the Time and so teaming with Good operational consultants that can Actually take plans and turn them into Reality is really where you see All of the value of being able to do

This restructuring Right well adam Thank you for your time today it’s it’s Been a Full conversation i think we’ve covered A lot of ground And um i really appreciate it and for Those of you who are Watching today um if you or One of your clients is in need of an Operational or a financial restructure Restructuring Or if you would just like to learn more About these services We’ve provided some links below to help You Get in touch with us adam thank you for Your time today My name is gary knox and thank you for Watching You

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