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What Steps to Take When Your Buyer is Financially Distressed

Lessons for Health, Beauty & Wellness Companies [Part 1]

In this short, three-part video series, Greenberg Glusker Partners Andrew Apfelberg and Brian Davidoff discuss important financial considerations for health, beauty and wellness companies in the wake of a pandemic. Part one looks at what steps a company can take when their buyer is financially distressed, including warning signs, how to get paid, and changing credit terms.

Andrew: In a recent article by the consulting group McKinsey advising companies in the health, wellness and beauty industry, they encouraged us to focus on supply chain. And, instead of just settling for operational, they urged us to try to make your supply chain smart, flexible, and resilient. This COVID period is really giving us a chance to embed new ways by learning lessons from this crisis. Brian, I want to ask you a few questions today about some of those lessons; in particular what to do when a vendor is in distress. So, first things first, Brian: What are some of the warning signs?

Brian: Well, first and foremost, when you’re in the industry, you want to keep your eyes open and your ear to the ground so that you get a sense of what’s going on with the various players in the industry and who your customers are and try to get good a sense – as best as you can – what kind of financial condition they’re in. Most specifically, you will see it if payments start falling late. If the customer starts calling requesting possibly to bulk up on inventory, that could be a good sign I suppose. It could be a sign that they’re selling a lot. But it also could be a bad sign that they are potentially planning for a bankruptcy and trying to bulk up on inventory. You obviously want to watch your accounts receivable. If your accounts receivable is going up, you need to be more aware.

Andrew: If you see some of those signs, what do you do? For instance, should I ship to those folks?

Brian: Well, that’s always a question fraught with a lot of difficulty. On the one hand, you want to be in business, and business means shipping to your customers. On the other hand, you have to watch what your accounts receivable look like. So, there is this natural tussle between the credit and the sales side. And, as you hear potentially rumors or the fact that your accounts receivable are increasing, so you should become more cautious about whether or not you ship. There are some things that you can do. You can continue to ship, but can you try to get credit enhancements? Can you get guarantees? Can you get cash on delivery? And, in fact, if you do ship, and you subsequently learn that your customer isn’t solvent, you get certain rights under what’s called the commercial code to recover the inventory that you shipped provided that you do so within 10 days. You’ve got to send out this notice within 10 days. You’ve got to act quickly and diligently.

Andrew: Actually, you hit on my next topic, which is how do I get paid; both for the prior amounts they probably owe me and for these new shipments? It’s sort of like a double whammy.

Brian: Right, and that can be problematic because as your accounts receivable builds up and there is a desire to continue shipping and the customer is requesting more inventory, there is this tussle again between how do you get paid? Do you get paid on your old inventory – or your old sales? Or do you get paid for your current sales? One of the challenges that happens is that, if you are paid on account of old sales, there is this legal concept called a preference, where if you’re paid on account of an old debt, that that might be recovered in a bankruptcy. But then there are also a bunch of defenses to that. So, ideally what you want to do, is try to keep your accounts receivable current if possible. That will avoid a preference. And, ideally, when you ship new inventory in the future, you want to get paid currently for that inventory if you can.

Andrew: What about changing credit terms - is that an option?

Brian: Well, again, I think that depends upon a number of things. It depends on, do you have a contract with the customer? Is that contract changeable? What percentage of your business does that customer represent? If that customer represents a significant portion of that business, it’s a question of bargaining leverage. Are you going to have the ability to modify the terms of your shipping arrangements and your supply arrangements if that customer represents a significant material portion of your business? On the other hand, if they are a smaller portion of the business, and you have greater leverage, then you’re going to be able to do so. You’ve got to take into account, are you – in the commonsense word – a critical vendor to them? Are you an important vendor to them? Are they able to get their inventory elsewhere? All those things will play into the question of whether or not you’re going to be able to change your credit terms with them.

Andrew: Well, this certainly is complex and we’re certainly living in a complex world right now. Within this health, beauty, and wellness industry we’re seeing shifts from brick and mortar to direct-to-consumer, significant changes in buying patterns and even what sorts of products folks are interested in. And one of the most critical things to do is to be able to have product that you can sell when folks want to buy it. And I think your advice today, Brian, will really go a long way to helping our clients in the industry to do just that. Thank you.

Brian: Thanks Andrew. Glad to be with you.

Ready for Part 2? Click here to learn what options exist for a vendor during bankruptcy.