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How Major Customer Changes Affect You

If a big customer announces a restructuring, you could be in for a major hit, so have a strategy in place to stay in the game.
October 1, 2005
URL: http://www.entrepreneur.com/article/79938

Anupam Gupta was shocked a few years ago when a large telecom client that contracted his company to handle its marketing databases decided to relocate its marketing department from New York City to Dallas.

Gupta, founder of Avenues International, a Parsippany, New Jersey, data warehousing firm, called his contacts at the company. He even offered to relocate a few employees to Texas to keep projects on track. His contact said they'd look into it. But a week later, Gupta, 41, received a letter in the mail. "They closed our contract immediately," he says. "And we had worked [together] for six years." It meant a 20 percent revenue loss for Avenues International in 2003.

Today, a growing number of entrepreneurs are being blindsided by large customers' restructuring decisions. ConAgra, Die-bold, Sprint, US Airways and Winn-Dixie are just a handful of companies that have undertaken major restructurings. Even IBM recently announced it will restructure and eliminate up to 13,000 jobs. In 2004, 90 companies with over $48 billion in total assets declared bankruptcy, according to New Generation Research, a Boston research firm that tracks bankruptcy data.

Corporate restructurings have declined over the past 18 months, but experts predict a flurry of filings before the new bankruptcy code takes effect October 17. Among other things, the new code will make it harder for restructuring companies to reject leases and craft key-employee retention plans. "The new code, on its face, isn't pro-company," says Sheila Smith, who leads the Reorganization Services Group at Deloitte Financial Advisory Services in Boston. "You might see a little more [restructuring] activity in late summer and early fall than one would typically see."

The Next Chapter
There are different types of corporate restructuring. In a "cosmetic" restructuring, a company is in decent financial shape but wants to merge with another company or shed underperforming assets. Under Chapter 11, a bankruptcy judge makes decisions for a financially troubled company while senior management stays in charge of day-to-day operations. Sometimes a cosmetic restructuring leads to a Chapter 11 filing down the line. Either way, restructuring is scary for small outside vendors looking in on layoffs, management reshufflings and other changes. "It's very difficult to know what's happening," Gupta says.

The steps you take in the days following a restructuring announcement could make a difference. Call your contacts at the company as soon as possible to discuss changes in vendor relationships. If it's a public company, you might have better luck contacting the company's investor-relations office for information regarding closures, cuts and realignments. Also, speak with the company's other vendors for their take on the restructuring. Small vendors have more power than they think when working together, says Jim Harris, founder of Seneca Financial Group, a Greenwich, Connecticut, investment banking firm focused on public and private restructuring.

In some ways, the new bankruptcy laws will actually benefit small, unsecured vendors. Under the old bankruptcy code, vendors that delivered goods 30 days or more prior to a bankruptcy filing were out of luck. Under the new law, vendors that delivered shipments up to 45 days before a bankruptcy filing will have 20 days after the filing to send a reclamation claim to the company, which must either return the shipments or send an "administrator priority claim" for the value of the goods. Most large companies will choose the latter option. If they do, "you've just converted an unsecured claim to an administrative priority claim that has to be paid in full before other unsecured creditors are paid," says Alan Martin, a partner with Sheppard Mullin Richter & Hampton LLPin Costa Mesa, California.

It seems counterintuitive, but the risks of doing business can be lower during a restructuring, assuming a troubled company has secured a new line of credit commonly referred to as debtor-in-possession financing. The law is also firmly on a vendor's side after the filing. "This is one of the hardest things for an entrepreneur to understand," says Craig Dean, principal with AEG Partners, a Chicago turnaround firm. "They know they've lost money, [but] the company is in a better liquidity position and the vendor is in a better legal position."

With interest rates on the rise and corporate debt being issued on weaker ratings, it's likely more entrepreneurs will see a major customer restructure. Avenues International lost the telecom client, but it kept the business of a large financial services company that restructured later on. Gupta believes small vendors must become critical to the company to survive the process. "If you're working on a project that's going to live through the restructuring, you'll also live through it," he says. This outlook has given Avenues International a new lease on life: Annual sales now top $2 million.