Cole Taylor's refinancing of Classic Brands, LLC, was recently recognized by M&A Advisor as one of its deals of the year for 2011. Chief executive Mike Zippelli walks us through the details and tells us what it's like to be a small manufacturer in post-recessionary America.
They say the third time's a charm; and if Michael Zippelli, chief executive officer of Maryland-based Classic Brands, LLC, has anything to say about it, there may be more than a little truth to that old adage.
Two years out of bankruptcy and well into its third incarnation under Zippelli's watch, the luxury mattress wholesaler has regained its footing after stumbling – and as Zippelli tells it, nearly falling – when the bottom dropped from the U.S. housing market and spawned the Great Recession. Today, Classic Brands is busy leveraging a new ABL line from Cole Taylor Business Capital and the support of its Chinese manufacturing partner (and now part owner) into a strategy to reposition itself as a premier supplier of high-quality bedding.
By all accounts the company is off to a good start.
“We are strong from Florida to Boston – things are definitely better,” said Zippelli, in a recent phone interview. “I think everyone is seeing an across-the-board recovery. It's not great, but it's getting better.”
In his optimism, the 52-year old entrepreneur is expressing a sentiment that seems to be reverberating, albeit faintly, across the U.S. small business landscape.
In February, the National Federation of Independent Business reported that small business optimism inched up for a fifth consecutive month. A week later, a report released by Gallup and Wells Fargo found that more than a quarter of U.S. small-business owners say they plan to increase their company's capital spending over the next 12 months, the highest proportion in four years. At the same time, fewer businesses report cutting back on spending (35% compared to 43% in 2008) – and a full quarter say credit was somewhat or very easy to get over the past 12 months, the highest percentage since April 2009.
Scott Anderson, a senior economist for Wells Fargo, thinks the boost in confidence reveals a stronger economic and financial environment for small businesses in 2012.
“The availability of credit seems to have improved, and more small business owners expect to see an improvement in their ability to obtain credit,” he said. “For the first time since the great recession, small businesses as a whole may finally be poised to actively participate in the economic recovery.”
While things are still a long way from great, they are a far cry from 2008, when Zippelli made national news by offering 535 of his mattresses to Congress so it could stay in session overnight and address the mounting financial crisis. In making the offer (which went unaccepted), Zippelli was motivated by more than a sense of civic responsibility: He had an invested interest in the outcome.
Bad Timing
By the time he made his offer of charity to the U.S. government, Zippelli had been in the premium bedding business for 17 years, the first half of it as the chief executive officer of mattress retailer Advanced Comfort, Inc. In 1999, he bought Classic Corporation – a successful waterbed wholesaler founded in the early 1970s – and formed Classic Sleep Products. He quickly expanded beyond waterbeds and began producing high-quality memory foam and latex mattresses at a facility in Jessup, Md, and through a partnership with a Chinese manufacturer.
In 2004 he took on an equity sponsor, opened a series of high-end retail mall outlets under the Dormia brand name, and within two years had built up a franchise of more than two dozen stores in nine states. Things looked pretty good for a while, but by August 2006 – the same week the industry trade journal Furniture Today was touting the opening of Dormia's second retail location in Raleigh, N.C. – economists were lamenting a housing market in “free fall” and quietly announcing the beginning of a “nasty and deep” recession. Over the next two years, Dormia would lose more than $4 million and Zippelli would face the first of his impending crises.
“We had 35 stores in the Northeast and Ohio and as far south as Florida – we had planned to open several hundred but that expansion plan got curtained when the recession hit,” he said. “Unfortunately we opened right into the teeth of the recession; before we even get fully rolled out it seemed like consumer discretionary income just disappeared. We were moving along doing a good business and the next day buying was off by 30-40 percent and we couldn't seem to get it done.”
The Birth of Classic Brands
In June 2008, Dormia became one of the nearly 230 companies that year alone to file for Chapter 11 in Maryland (two years earlier the number of bankruptcies was just 89).
“At this point, we had a very healthy wholesale business that was growing and so the goal was to get back to where we were making money,” said Zippelli. “So we went full speed into closing these stores and getting to the point where we no longer had that overhead.”
The company worked hard to wind down the failing retail side of Zippelli's business while struggling to find a mechanism for keeping the still thriving wholesale side from going under too. According to Zippelli, there were few options left to make that happen beyond orchestrating a 363 sale and freeing Classic Sleep Products from the albatross of its faltering sibling. But that would require capital, which (in case you need reminding) was pretty scarce in 2009.
Zippelli reached out to his longtime colleague and manufacturing partner Xiong “Sam” Yu – of the China-based firm Delandis Trading Corp. – who agreed to take an equity stake in a new company. In January 2010, Classic Sleep Products filed a Chapter 11 petition in U.S. Bankruptcy Court for the District of Maryland seeking approval for a 363 sale of the company's assets to a new entity. Twenty-eight days later it emerged as Classic Brands, LLC.
Under the terms of the restructuring, Zippelli increased his majority ownership stake in the business with $10 million of funding provided by CIT and JMX Capital Partners (a Delandis entity formed in Delaware by Zippelli and Xiong Yu).
“CIT ended up being on both sides of the deal through the refinancing but [due to the recession] their whole mission was changing in terms of the way that they viewed risk and the way they viewed clients like us,” Zippelli explained,“They wanted to truly become a factor. And so it was our job to go out and find a new lender.”
To that end, Zippelli called in Philadelphia consulting firm Executive Sounding Board Associates, Inc., which managed to pull together a refinancing with Cole Taylor Business Capital on what Zippelli calls “more favorable terms” than those he had with CIT.
“[They] were a perfect fit for what we were trying to accomplish with a new senior credit facility,” Zippelli said. “Cole Taylor took the time to understand our story, outlined a flexible financing structure in a timely manner, and closed on what they proposed.”
The deal was so successful that it drew significant attention across the turnaround industry. In February of this year, M&A Advisor recognized the deal as its consumer and retail products “Refinancing of the Year” at its 6th Annual Awards Gala in Palm Beach, FL.
The Road Ahead
With the worst of the recession now past and an economic recovery slowly taking hold, Zippelli can be confident that the worst is – most likely – over for Classic Brands. But as an American manufacturer in a post-industrial economy, it's not going to be a cakewalk either. The lending environment may be rebounding for small businesses, but only in comparison to how bad it was.
Between 2008 and 2010, banks took $59 billion in small business lending capital out of circulation, according to the Small Business Administration, and there's little evidence they're in a rush to bring it back. Zippelli says the only option for businesses like his is alternative lending, which has its own drawbacks.
“I think that we are in an ABL environment, where lenders have a low risk-tolerance – they want to be able to ensure they are not impaired in any way,” he said. “In terms of facilities for the middle market, they want to lend on what they can grab: Liquidation value is where their comfort level is.”
And while Zippelli says he remains exceedingly grateful for how things turned out with his new senior lender, he is under no illusions as to his limitations as a borrower and admits it's sometimes a struggle to finance equipment in the current environment.
Yet with financing in place and consumers starting to spend money on bedding again, Zippelli says Classic Brands is well positioned to thrive as the economy picks up. The company currently has more than 60 employees and can boast $40 million in annual sales. Earlier this year Zippelli was able to inaugurate a new manufacturing facility in Fujian, China.
“We've been lucky and our business is growing year-over-year,” he said. “We've been able to maintain our relationships, and our customer base is starting to grow again. I think it's going to take a few years but we are over the hump. It's a slow crawl back but there's positive momentum.”