Jirsch Sutherland sources the right blend to save Aussie coffee house

When a sustainable, artisan Australian coffee house found itself in financial distress due to cash flow constraints, the director turned to Jirsch Sutherland to undertake a Voluntary Administration and develop a Deed of Company Arrangement (DOCA). And because of the way the business was structured, a rarely used tactic had to be deployed – with great success.

Background

The socially responsible bean-to-cup artisan coffee house, which operates five local cafes in Melbourne and one international outlet in Singapore, was impacted by the rising cost of produce and staff wages, which significantly affected the company’s cash flow. An additional pressure was a discount coupon arrangement the company had entered into with a supplier, whereby customers could purchase a discounted voucher for both coffee and food (e.g., buy a voucher for $80 and receive $100 worth of food and coffee). Unfortunately, the profit margin on the sale of coffee and food was eroded due to the discount offered.

Solution

Due to the cash flow constraints, the director placed the company into Voluntary Administration, to enable the Administrators to seek a buyer. Jirsch Sutherland then undertook an investigation to determine the company’s prior trading history and value and to seek and negotiate with a buyer.

“We worked closely with the director, who provided all necessary information to allow a detailed Information Memorandum to be completed and the businesses to be advertised for sale,” says Andrew Mattinson, Jirsch Sutherland Principal. “The sale was challenging, as the company had entered into six individual leases for each individual trading location. It meant we needed to develop a strategy to ensure any potential purchaser could carry on trading the businesses without the landlord terminating the leases.”

After undertaking a marketing campaign, Jirsch Sutherland found two parties interested in purchasing all six businesses. “Negotiations with the interested parties were protracted, which resulted in the adjournment of a creditors’ meeting on two occasions,” explains Mattinson. “Multiple offers were received from both parties, and we needed to consider the offers and report them to creditors, with a recommendation as to which offer the Administrators believed was in the best interest of creditors.”

Results

The Administrators successfully settled the sale of the six businesses during the DOCA period. A particular intricacy of the strategy adopted by the Administrators was that the company was sold in its entirety – i.e., the company’s shareholdings was purchased by the successful interested party.

“This strategy is most unusual, as typically only businesses are purchased because of the inherent risks associated with purchasing the company’s shareholding. In the event only the businesses were sold, the Administrators would have had to negotiate with the individual landlords to either  agree to  assign or enter into new leases with a new entity, which could not be guaranteed. However, by selling the company/shareholdings, the Administrators could ensure the leases could not be terminated by the landlords, given there was no change in the entity that had entered into the original leases,” says Mattinson.

As far as the Administrators are aware, all staff who sought to remain with the company retained their employment, and all their superannuation entitlements were paid out from the DOCA funds and their entitlements continued to accrue. Unsecured creditors received a dividend of 33.9 cents in the dollar which, Mattinson says, is a great result and a significant return when compared to other DOCAs.