Member Exclusive   //   April 16, 2024

DTC Briefing: Why more brands are pursuing an Assignment for the Benefit of Creditors

This is the latest installment of the DTC Briefing, a weekly Modern Retail+ column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. More from the series →

Amid an economically challenging time for retail startups, more brands are pursuing a little-discussed alternative to Chapter 11 bankruptcy: an ABC. 

Called an Assignment for the Benefit of Creditors, an ABC is a liquidation process in which all of the assets of a company are transferred to a third party (an “assignee”) that is responsible for selling them off. Outdoor Voices is reportedly pursuing an ABC after closing all of is retail stores last month. Other retail companies that have undergone an ABC in the past six months include Bandier and Zulilly. 

The benefits of an ABC, according to lawyers and financial experts, is that it is often speedier and less expensive than a bankruptcy proceeding. Unlike in a Chapter 11 or 7 proceeding, there is no automatic stay that is imposed, meaning creditors can still bring litigation against the company.

More DTC startups seem to be taking advantage of an ABC simply because more founders and board members are becoming aware that it is an option. And, during an economically challenging time, startups are going to take advantage of a greater array of liquidation and reorganization options. In 2023, there was a 30% year-over-year uptick in the number of companies that filed for bankruptcy.

Still, there’s no widely available data on how many startups pursue an ABC versus a Chapter 11 filing.

“It is an old-fashioned form of liquidation proceedings, and it is certainly cheaper than Chapter 11,” Jeffrey Chubak, associate at Amini LLC, said. 

“It is nowhere near as known or as understood as bankruptcy,” said Steven Victor, senior managing director at turnaround and financial advisory services firm Development Specialists, Inc.  

Victor said that, anecdotally, it feels like there has been an uptick in the number of companies pursuing ABCs over the past couple of decades. He chalked that up to the fact that companies today have more diversified ownership structures. In the 1980s, he said, many more businesses were family-owned. Now, just 27.1% of businesses are family-owned, according to U.S. Census Bureau data. 

Therefore, companies are more likely to have a board member or an investor who has gone through an ABC themselves and who may recommend the process to other companies. ABCs were frequently utilized when the dot-com bubble burst in the early 2000s.

Part of whether or not a company pursues an ABC depends on what its goals are and what creditors it has to pay off. If a distressed company has a lot of debt that makes a sale unpalatable, it has a few different options: It could pursue a Chapter 11 or Chapter 7 filing; it could pursue an ABC; or, it could wind down the company. “Different insolvency proceedings might get chosen to accomplish different goals,” Chubak said. 

In a Chapter 11 filing, the purpose is to reorganize to hopefully keep the business operating. In a Chapter 7 bankruptcy, the goal is to liquidate assets.

While Chapter 11 and Chapter 7 proceedings are governed by federal law, ABCs play out in the state courts. One of the reasons companies may pursue an ABC is to keep more of the proceedings out of the public eye. There are typically fewer filings with an ABC and don’t attract as much scrutiny since they aren’t in federal court. With a Chapter 11 or 7 proceeding, “there are pleadings filed every day, every week,” he said — all of which can be fodder for journalists like, well, this one.

That’s not to say that the company will always keep the process under wraps. In fact, oftentimes it may make sense to put out a press release when a company undergoes an ABC to make potential acquirers aware of the sale process, Victor said. 

Another key component of the ABC process is that the distressed company enters into an agreement with a third-party assignee and transfers all of its assets and properties to that assignee. At that point, “if you are the management or owner of a company, or on the board of a company that is doing an assignment — you are essentially done,” Victor said. 

That can be appealing for leadership who don’t want to be involved with liquidation proceedings. Additionally, with an ABC, a company gets to choose who the third-party assignee is. That allows them to choose someone who they believe has specialized knowledge of their industry, and can potentially maximize the value of assets. By contrast, during a Chapter 7 proceeding, a company doesn’t get to choose who sells off their assets.

Once an assignee is chosen, they are responsible for then selling off the assets and distributing the proceeds to creditors. 

How long that may take depends on the parameters of the sale and what the assets are. “I can probably sell stuff in a month or two,” Victor said. By contrast, a Chapter 11 or 7 proceeding can take months, or even more than a year. When a company pursues an ABC, they likely have already tried to pursue other options at that point like securing a new round of financing or selling off the business, so they likely have already identified potential acquirers.

The one big drawback of an ABC, however, is that no automatic stay is imposed. “[Bankruptcy] affords the best form of protection from distractions during a liquidation,” Chubak said.

Different states have different regulations and stipulations around ABCs. For example, some states have unique requirements about who can serve as a third-party assignee. 

So, ultimately whether or not a company pursues an ABC depends on what state it operates in, what its goals are and what the advice is of its legal counsel. Another benefit to an ABC is that it can potentially allow a brand to live on, if that’s what the acquirer wants. Bandier, for example, was acquired by holding company BC Brands after announcing at the end of last year that it was going through an ABC.

No matter what position a company is in, Victor advises the leadership of a company to familiarize themselves with the ABC process.

“I strongly urge these boards to start considering their options, whatever they are, sooner than later, even during financing or a sale process,” Victor said. “In case Plan A doesn’t work, Plan B needs to be developed so that you don’t find yourself looking at a bankruptcy or an [ABC] with no funds to deal with it.”

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