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When creditors take control: 3 lessons from the Gibson guitar case

For a business owner, becoming overleveraged comes with significant risks.

Taking on loans is often needed to enable your business to reach its potential. Yet carrying too much debt may make it hard to cover interest payments and could cause creditors to force you into bankruptcy if the business falters.

In this post, we will discuss three key takeaways from a recent case in which this happened. The case concerns the Chapter 11 bankruptcy filing by Gibson Brands, Inc., the makers of iconic guitars played by stars such as Elvis Presley.

Diversifying beyond your core business can leave you overextended.

Founded in 1894, Nashville-based Gibson has long been a venerated brand in the music industry. Many of the 20th century’s most lauded guitar heroes had their own distinctive Gibsons. Chuck Berry gave his a name, Maybelline, and it’s now in the Smithsonian.

Gibson is also a worldwide brand, selling guitars in 80 countries, at a rate of over 170,000 a year.

In recent years, however, the company made a big strategic bet on its ability to diversify. Along with selling guitars and other musical instruments, it embarked on an aggressive attempt to become a “musical lifestyle” company. This included pricy acquisitions of a Japanese consumer electronics company (Onkyo Corp.) and a division of the Dutch company Philips.

As the New York Times noted, the decision about whether to diversify or stick to core products or services is always a fundamental tension for a business. What is undeniable is that, in Gibson’s case, the decision to diversify left it overextended on loans and ultimately vulnerable to its creditors.

When a company is facing bankruptcy, creditors may take control.

Gibson Brands, Inc. is a public traded company with many shareholders. As Gibson struggled to meet its debt payments, however, the bondholders on its loans increasingly played a more prominent role.

A group of these bondholders pushed for a restructuring of the company that would give them the control needed to force a change in management. Gibson tried to find new investors to buy out the existing creditors, but was not able to do so.

As a result, Gibson was forced to file Chapter 11 bankruptcy. Lenders with secured notes will make a new loan of as much as $135 million to allow the company to continue its guitar manufacturing and sales operations. These creditors will replace certain stockholders in priority, including the long-time CEO, Henry Juszkiewicz.

As part of this restructuring, Gibson will also sell its consumer-electronics business.

Determining whether Chapter 11 is the right decision for a business requires careful consultation with skilled attorneys.

When a business is having difficulty paying its debts, many considerations are in play. Ultimately, it may be necessary to determine whether liquidating the business or reorganizing it makes the most sense under the circumstances.

Each set of stakeholders may have very different interests in approaching this decision. In the Gibson case, for example, it became clear that the creditor group had very different interests than management.

At Rich Michaelson & Magaliff, LLP, our attorneys are highly experienced in all aspects of business bankruptcy. We can help you understand your options and take effective action.

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