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A Franchise Fitness Location was Upside-down. Second Wind Ensures Owners Exit From Underneath $2MM in Debt.

Case Study | October 9, 2021

Summary

The coronavirus pandemic wreaked havoc on many small businesses and these franchise fitness owners were no exception. By the time the couple reached out to Second Wind Consultants (“SWC”), they were $2MM in debt. Selling the business would have resulted in huge financial losses for their family–not to mention a failure for the franchise owners, a vacancy for the landlord and a costly liquidation for the bank, all during one of the greatest economic crises in modern history.

Backstory 

This enterprising couple always had a dream of owning their own business. The husband–a U.S. Marine veteran with a passion for fitness–finally decided to leave his managerial position in corporate America, so that he and his wife could open a franchise fitness location in their hometown of Tampa, Florida.  

Almost immediately, there were roadblocks. Issues with the landlord and a longer than projected build-out consumed some of the business’s working capital. Finally, in February 2019, they were at last able to accept their first members into the gym. 

The location initially did quite well, but like so many in the fitness industry, the couple ran into serious issues when COVID hit. None of the actions they took were able to stave off disaster, and the extra costs incurred at the beginning had depleted the cushion of capital they now desperately needed to survive. 

With debt and rent obligations piling up, the couple scrambled to sell. Unfortunately, the business value was less than the debt, meaning that any sale would result in significant financial losses.

Second Wind’s Solution

Business default typically creates an adversarial relationship between borrowers and lenders. SWC’s involvement removes that adversity by working with all parties involved to create pragmatic and mutually beneficial solutions.  

The fundamental concept is simple: if the business can be preserved, rather than shut down and liquidated, all parties will benefit. 

SWC accomplishes this global benefit through a mechanism called a Uniform Commercial Code (UCC) Article 9 Sale. The Article 9 Sale is a form of asset sale conducted cooperatively between the bank and guarantor. Unlike in liquidation, this sale of business assets is conducted while a business is operational, rather than after it has shut down. Not only does this form of sale spare the bank the time and costs of liquidating used business assets at auction, but more importantly, it fully preserves the business operation itself, without interruption.

By result of the Article 9 Sale, debt is fully removed from the business operation. The defaulting borrower will continue to earn from the business, affording them the means to reasonably settle personal guaranties on debts removed from the business.

The Process

In September 2020, the couple teamed up with Second Wind Consultants with the goal of selling the business and settling their personal guaranties. To do this, SWC would need to secure a buyer and subsequently work out agreements with the franchisor, landlord and bank.  

While working collaboratively with the franchise brand, SWC sourced a buyer willing to continue to operate that franchise location. 

SWC also negotiated with the landlord to enter a new lease with the buyer for a reduced rent, which would allow the business to be profitable while providing a stable tenant for the landlord. 

Next, SWC negotiated an asset sale with the bank and secured the bank’s appraised asset valuation. Because Second Wind procured both the purchaser and borrower consent to the bank’s asset sale, the bank was spared the time and expense of formal liquidation. 

As a solution for the couple, SWC secured a consulting agreement with the new business, which would fully fund their personal guaranty release with the bank. 

Results

SWC’s process allowed the couple to not only exit the business but also to settle their personal guaranties. While they didn’t make a profit from the sale, they were able to walk away from an unforeseeable disaster without being left in debt and without facing a personal bankruptcy. 

The deals were finalized in December 2020, only three months after the couple signed on with Second Wind. 

In the end, all parties benefited. Husband and wife walked away without suffering financial hardship, the franchise saved a location, the landlord secured a viable tenant and the bank recovered its asset valuation without shutting down a business. 

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