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Case Study: Was Bankruptcy the Answer?

Her line of credit was in default. Her partnership with her mom was faltering. Could Heather Antonelli save her business?
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The trip to india was supposed to distract Heather Antonelli from her company's financial woes. But as she sat before a bonfire in Rajasthan in November 2004, business was the only thing on her mind. Antonelli, the CEO of Austin-based furniture wholesaler Eminence Style, had just defaulted on a $700,000 line of credit from Bank of America. Before departing for India, she had laid off five of her 11 employees. Faced with declining sales and a huge pile of debt, she was wrestling with a tough decision: Should she shut down her company and declare bankruptcy?

A few years earlier, such a situation would have been unthinkable. Antonelli founded Eminence Style with her mother, JoAnn, in Atlanta in 1996. They had always self-funded the business, using profits from completed orders to finance the manufacturing of the next. Sales grew slowly and steadily, reaching $3 million in 2000. Then, in 2001, a buyer from Sears ordered $2 million worth of tables and armoires for the retailer's Great Indoors division. It was a thrilling opportunity, but there was a hitch: Antonelli didn't have enough cash to pay a factory to make the furniture. For the first time, she began to shop for loans.

Landing financing was surprisingly easy--and exhilarating. In February 2002, she received a $200,000 loan from the U.S. Small Business Administration. That same week, Bank of America came through with the $700,000 line of credit. Meanwhile, she rounded up $55,000 from friends and family. "It was like monopoly money," she recalls.

Eminence Style was on track to book 2002 sales of $5.5 million, with a healthy 10% profit. But then the value of the dollar began to slip against the euro. A few months earlier, Antonelli had paid her factory in Hungary a one-third deposit of $210,000 to complete the Sears job, and budgeted $420,000 to pay off the balance. As the dollar tanked, the total bill increased by one-third, to $840,000. She paid in full, but eked out a profit of only $10,000.

At first, Antonelli saw it as a minor setback. But in early 2003, her contact at Sears left. His replacement wasn't interested in reordering. The news couldn't have come at a worse time. Bank of America expected Antonelli to pay down her entire $700,000 line of credit, which she had maxed out, in February. She pulled together $350,000 and persuaded her loan officer to give her more time. "I was convinced I could turn things around," she says.

Instead, the situation grew worse, as Antonelli began losing customers to lower-priced rivals that outsourced manufacturing to China, where costs were 50% of those in Hungary. While she searched for a Chinese factory that met her standards, she raised prices by 30% to stay afloat. Further complicating matters, she moved the company's headquarters to Austin, where her boyfriend lived, leaving her mother behind to run Eminence Style's show room in Atlanta. As Antonelli struggled to get the company on track, their relationship became increasingly strained.

Her relationship with her creditors also suffered. In May 2004, Bank of America called in the line of credit, giving Antonelli two months to pay off the remaining $350,000 she owed. A collection specialist began to call her regularly. "I spent the summer doing the bank dance," she says. "It was horrible."

When she returned from India, Antonelli reviewed her options with a business coach, Richard Russakoff, president of Richmond, Va.-based Bottom Line Consultants. When the two compiled projected profit and loss statements, budget forecasts, and sales predictions, it became clear that it would take at least four years to break even, mainly because the business could no longer afford the employees and marketing necessary to generate substantial sales. "I'd be 37 years old and back where I started," Antonelli says.

The other option wasn't much better. Antonelli and her mother had personally guaranteed their loans. By shutting down the business and declaring Chapter 7 bankruptcy, they could free themselves from the debt, but they both cringed at the thought of not making good on their loans. "It was against my better sense of morals," Antonelli says. She also worried about her reputation: "I didn't want to feel like a failure." JoAnn, meanwhile, begged her daughter to keep the company open. "I had 50,000 questions," JoAnn recalls. "What would happen to our customers? Would I lose my home?"

The burden of the decision lay on Heather, who handled the company's finances. She was torn, but she knew she had to make up her mind soon. Orders were backed up and worried customers were calling. What's more, Congress was about to pass a stricter bankruptcy law that would require Antonelli to sign up for credit counseling and possibly set up a repayment schedule instead of wiping the debt clean.

The Decision

A few days before Christmas, Antonelli called her mother to break the bad news: She had resolved to shut down the business and declare bankruptcy. Antonelli struggled to reassure JoAnn, who, at age 52, would wind up with six months' severance, or $25,000. Under the terms of the bankruptcy, the court would seize JoAnn's loft in Atlanta.

The next few weeks were a blur, as Antonelli hunted down bankruptcy attorneys for herself and her mother, compiled their lifelong financial histories, laid off her six remaining employees, and cleaned out the office. In March, she flew to Atlanta to help JoAnn pack her belongings. In the past, the two women would have uncorked a bottle of wine and chatted nonstop. This time, Antonelli says, it was quiet: "Every time she looked at me, I felt like she was thinking, 'I can't believe you're doing this to me."

There was some good news: Because Antonelli had few physical assets, her bankruptcy was straightforward. In May 2005, her lawyer submitted the filing and notified Bank of America and the SBA. Antonelli appeared in court 30 days later, and, since nobody was there to protest, the case closed that afternoon. The process cost $1,200, including a filing fee and the attorney bill.

JoAnn's bankruptcy has been time-consuming and costly because of Georgia's strict exemption laws, which required her to give up her home. The bankruptcy, which became final in October, cost her about $7,000. "I just want to flush everything down the toilet and be done with it," says JoAnn, who now works as a freelance furniture merchandiser and lives in an Atlanta apartment.

Antonelli, for her part, is designing a line of bedding and putting together an Italian cookbook. When her bankruptcy became official this past summer, she was in Ningbo, China, where she plans to open a restaurant. "I think the lessons I learned will help me make good decisions," she says. "That's really all I can hope for."

The Experts Weigh In

Reputation killer?

Fast changeover is common at large companies, and contacts come and go. Antonelli should have lined up several big clients before taking out loans. Borrowing money is sacred and shouldn't be taken lightly. Going bankrupt and closing your business is very serious. It labels you as a failure. That said, Antonelli should have only stuck it out if she really believed she had a valid product that she could make a profit selling.

Mitchell Gold
President
Mitchell Gold Company
Taylorsville, N.C.

Time to move on

Turning this business around would have been tough. If Antonelli had opted to keep her company open and move production to China, it would have taken at least six months just to get things up and running, considering her heavy debt and lack of capital. Her only other option was to find a buyer or an equity partner to deleverage the business, but that would have been difficult under the circumstances.

Holly Felder Etlin
Turnaround consultant
XRoads Solutions Group
New York City

Legally sound

Bankruptcy was the right decision. I don't think either of them had much choice. If their debt was secured by business assets, such as inventory, they may have qualified for Chapter 13 bankruptcy, which would have allowed them to pay off some debt. Morally, repayments may be the right thing to do. Legally, Chapter 7 was the best move.

Jay Westbrook
Professor of business law
University of Texas School of Law, Austin

What do you think? Was bankruptcy the right decision for Heather Antonelli? Sound off at casestudy@inc.com.

Last updated: Dec 1, 2005




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