February 16th, 2012
Thoughts on the Plight of Gorell Windows
It was with sincere regret that I learned last week of the placement of Gorell Windows & Doors into receivership. I learned this news as I was preparing to leave an otherwise upbeat Builders’ Show and it served as a reminder that we’re not completely out of the woods yet. Wayne Gorell is a statesman in the industry and was among the first few window and door companies to take a call from me in late 2005 and agree to educate me on the door and window industry. His help then and since has been invaluable and I remain indebted to him for it.
An unfortunate event like this raises the question of how various stakeholders are affected by the sale of distressed companies. An article covering the acquisition of Gorell by Soft-Lite reported that news of the acquisition was greeted by applause among the workers. I’m sure it was an emotional time for them and their response largely reflected simple gratitude for maintaining one’s job in the face of evidence the opposite might occur. Thus, the outcome of this event for the workers appears to be a positive one. Vendors are always in a precarious position when a company is bought out of receivership or bankruptcy.* They are in line behind the senior secured creditors with regard to proceeds from a liquidation. The senior and junior creditors (mezzanine debt) typically fall far short of recovering their full loan amounts, so vendors are unlikely to receive anything. However, vendors have some leverage in these situations, because products may have been designed or certified with certain components in mind or an extruder may own the dies on which profiles are being made. Thus, vendors are sometimes able to wrench out a small payment or negotiate better pricing on the products they sell to make up for their loss on the liquidation.
Buyers in liquidations acquire only the assets of the company in virtually every case. They do not assume debts and they avoid taking on liabilities, such as warranties, by not buying the stock of the company being acquired. Thus, they can make a business decision to work with long-standing customers with warranty issues while disallowing the warranty claims of former customers. Overall, a good bit of pain gets spread around when a company must be sold out of financial distress. However, having these mechanisms in place makes the overall market more efficient by allowing productive assets to remain in operation and for employees to maintain their jobs.
*What follows is a general discussion of distressed transactions and is not meant as a discussion of the details of the sale of Gorell, which are largely not known at this point.