Product Managers Need To Know What It Means When Partners Go Bankrupt

What is a product manager to do when a partner goes bankrupt?
What is a product manager to do when a partner goes bankrupt?
Image Credit: Phillip Pessar

In order to be a successful product manager, often we will have to use our product development definition to find partners for our company to work with. Once we’ve entered into an agreement with them, in order for our product to be a success, both partners have to do their part. This is all fine and good until the day that you discover that your partner has gone bankrupt. If that happens, what does it mean for your partnership? What does it mean for your partner?

What Does It Mean When A Partner Goes Bankrupt?

I think that we all understand what it means to go bankrupt – a business shuts down. However, there are degrees to everything. It turns out that among large retail and supermarket chains that filed for bankruptcy protection over the past 15 years, 45% closed all of their stores. The bankruptcies of 25 out of 55 retail and supermarket companies ended in liquidations. Partners will tend to go out of business for good if they’ve lost their place in the marketplace. Bankruptcies spanning all U.S. corporate sectors ended in liquidation an average of 13% of the time.

Liquidation has been a common theme throughout retail history. Nobody wants to reinvest in the business when they are having difficulties and they tend to end up in liquidation when that happens. Product managers need to understand that high debt balances and lease and interest payments are some of the headwinds driving partners into bankruptcy. They can also suffer from insufficient investments in operations and problems with cash flows and liquidity. At the same time, some troubled partners can have a hard time accessing trade credit. Inventory suppliers demanded cash on delivery, cash in advance or a letter of credit to guarantee payment for goods.

As a result, a partner’s inventory starts to shrink because the suppliers have stopped shipping as much product, then that causes the borrowing base to also shrink. Product managers need to understand that this creates a downward spiral. Suppliers that stocked a partner’s shelves during a bankruptcy may have to swallow losses. On top of those challenges, partners may face loss of market share to competitors, such as discounters and online-only companies, as well as declining store traffic, changing consumer tastes that put pressure on sales and pricing power at bricks-and-mortar retailers.

What Happens When A Partner Goes Bankrupt?

A partner can go into distress because it has lost its competitive edge, either due to price or real estate location, or missed execution of its operations. There’s very little unique or proprietary about a given partner that sells products that a number of other firms sell. Currently, nine companies are on a watch list for being at risk of default, including bankruptcy, based on concerns over their loans and bonds. These include J.C. Penney., Fresh Market, J.Crew, Fairway Market, Serta Simmons Bedding, as well as Ascena Retail Group, which owns Ann Taylor, Lane Bryant, and Catherines.

When a partner declares bankruptcy, they may be forced to start to sell their assets. As an example of this, the New York supermarket chain Fairway Market filed for bankruptcy protection with a proposal to sell its Manhattan stores to the Village Super Market for $70 million. Fairway had previously filed for chapter 11 protection, emerging soon after with a restructuring plan to cut its debt by more than half.

So who benefits when one of your partners declares bankruptcy? Lenders with collateral rights over a partner’s assets generally recover in full on at least one first-lien bank loan or secured bond issue claim in capital structures with more than one first-lien claim. First-lien lenders’ average recovery rate was 91%, for asset-backed loans, cash-flow revolvers, term loans and secured bonds. Asset-backed loans were often repaid shortly after the bankruptcy filings were made through a roll up into debtor-in-possession financing, a special loan provided for companies under bankruptcy protection, or with inventory sales proceeds. Second-lien creditors had a median recovery of only 41%, while those with unsecured note claims realized mostly poor recoveries of less than 10% of par value.

What All Of This Means For You

Product managers who want to make their product be a success often need to use their product manager job description to find partners to work with. These partners are the ones who will be able to step in and provide us with the product components or services that we are going to need in order to create a product that will be successful. However, there are a lot of things in this life that we don’t control. The financial stability of our partners is one such thing. In fact, there is always the very real possibility that one of our partners could end of declaring bankruptcy. If that happens, what does it mean for our product and its success?

It turns out that when a partner declares bankruptcy, they will probably have to close any stores that they are operating. The firm may end up being liquidated and go out of business. When a partner runs into financial problems, suppliers may be resistant to providing them with products and customers may start to shun them. Declaring bankruptcy can create a downward spiral for a partner as their customers leave them, suppliers shun them, and they end up losing market share. Partners who sell products that other firms offer can easily find themselves in a tight spot. When a partner declares bankruptcy, they may be forced to start to sell their assets. In the end, the people who benefit the most when a partner declares bankruptcy are the lenders who hold the most highly secured notes.

Since we are the ones who are the most concerned about the success of our products, we also need to be concerned about our partners. We need them to be financially healthy and able to support us. Going forward you need to start to monitor the financial health of your partners. If they slip into bankruptcy, you need to understand that they may end up going away. Always be prepared and make sure that you have a backup plan.

– Dr. Jim Anderson Blue Elephant Consulting –
Your Source For Real World Product Management Skills™

Question For You: If one of your partners goes into bankruptcy, do you think that you should continue to do business with them?

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What We’ll Be Talking About Next Time

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