By Jeff Tanenbaum – ThreeSixty Asset Advisors
Not too long ago, I had an epiphany – I have an unusual affection for what many would label “ugly” deals. Initially, I felt a twinge of self-consciousness about this revelation, but upon closer inspection, I realized two truths: ugly doesn’t equate to bad, and ugly can indeed be immensely profitable.
To be clear, when I talk about “ugly deals,” I’m not referring to projects comprised of low-value and undesirable assets that most of us might dismiss as a “bad deal.” No, my version of an ugly deal is one that is not conventionally attractive because it lacks a straightforward, visible path to profitability.
The true allure for me, in fact, lies in this very mystery. An ugly deal is akin to a puzzle begging to be solved. On one side, there’s a pool of assets brimming with potential, and on the other, a profitable opportunity waiting to be seized. What excites me is deciphering the complex journey from one end to the other, defying all odds and tackling every challenge head-on.
One of the most appealing aspects of these deals is that they often fly under the radar. They don’t attract the hordes of competitors we find in more conventional projects. And when competition does rear its head, I’ve noticed that once I’ve cracked the enigma, my proposal shines, and I can set my own price, turning the gamble into a rewarding endeavor.
If you are lucky enough to have a steady pipeline of profitable, neatly packaged deals, then no need to look in the dark corners. But, if like me, you find yourself in continuous pursuit of the next deal, then perhaps I can get you to think twice the next time you look at a file, wrinkle your nose and take a pass because it is just too ugly.
Ugly deals come in all shapes and sizes, but a few recurring themes have surfaced:
- Value is scattered across diverse locations and geographies.
- The value is difficult to discern and those who can appreciate it may be challenging to reach.
- Numerous stakeholders and secured parties possess conflicting interests.
- Holding costs or third-party demands are creating significant timing constraints.
At present, I find myself waist-deep in the heart of one of these intriguing “ugly” deals. It presents all the hurdles mentioned earlier, with an added significant challenge. The debtor in question, Worksite Labs, has multiple testing laboratories spread across the country. When the debtor’s counsel reached out, these labs had all been shuttered, post-petition rent obligations were piling up, and time was of the essence. All I had in hand was an asset list – no time for site visits, and not a single photograph to guide me. The outcome of this endeavor remains uncertain, but as of now, while we’ve uncovered a few discouraging surprises, these have been accompanied by positive ones, including the addition of valuable assets contributed by lessors. From my experience, this is the charm of ugly deals – when structured right, the beneficial surprises often outweigh the disappointments.
One of the most memorable ugly deals for me was a 2016 Tiger deal. A Friday afternoon call from an Indiana bankruptcy trustee regarding ITT Technical Institute marked the beginning of a whirlwind. We had to formulate a proposal by Monday to extract value from assets scattered across over 110 facilities, while facing landlord and access issues, the conflicting agendas of Attorneys General in each state, and no clarity on what awaited us in each location. Our plan, presented on Monday, secured us the deal, and with stellar execution by an all-star team (led by David, Raspina, Wayne, and John) the deal generated a substantial six-figure profit. This fee, though, was not based on commissions alone.
The project, while fraught with surprises, was structure around a package of value-added services that allowed us to monetize the deal in multiple ways and deliver a successful result for the estate.
More recently, I’ve stumbled upon another truth about ugly deals – sometimes the process itself holds greater significance than the outcome, and it merits a substantial reward. Coldwater Creek seemed like a dream real estate opportunity at first glance – over 60 acres of undeveloped land in the heart of a Beverly Hills residential neighborhood with appraised values ranging from $30-$60M. However, delving into its backstory revealed a different narrative. From a secured creditor with conflicting interests to years of lawsuits hindering development and a notorious developer, it was an ugly beast.
Yet, once again, the right structure set the stage for success. It addressed not only Plan A – a sale price sufficient to clear the debt, but also Plan B – a price short of secured creditor payoff. While we were unable to clear the secured creditor hurdle, the process proved the true market value of the property, the structure ensured a significant payout to unsecured creditors and the professionals, the secured creditor received the property (their ultimate objective), and we were well paid. The result was a win-win for all parties involved.
But my attraction to ugly deals goes back much further than my experiences with ThreeSixty and Tiger. It’s in my auctioneer DNA. In my early years in the business, working alongside Mark Weitz and Great American in the mid-’80s, we dove headfirst into a pool of ugly deals.
Selling retail store fixtures after a store liquidation meant orchestrating complex multi-location live public auctions – without the benefit of technology. Mark saw opportunity buried in the unattractive constraints. Time and time again, I was tasked with coordinating logistics and marketing plans for sales involving anywhere from 20 to 100 retail store locations, all in just a matter of weeks. Then, we hit the road with a skeleton crew, rolled up our sleeves and got to work.
Often, the fine line between success and failure hinged on our ability to broom sweep each 20,000 to 30,000 square foot facility within days. The stakes were high, but a modest $10,000 profit per store, multiplied by 30 stores, meant a $300,000 fee in 45 days. At one point, we were doing five to 10 of these per year… not a bad business model for guys in our 20’s and early 30’s in 1988.
The keys to transforming ugly deals into success stories boil down to the following:
- Creative, out-of-the-box thinking.
- Well-thought-out deal structures, usually with multiple ways to monetize the deal.
- A willingness to take a leap of faith on something with no proven model for success.
- The ability to re-frame the deal, craft a well-executed plan, and present it enticingly to both the stakeholders and potential buyers.
Ugly deals are more art than science. They satisfy our creative itches but come with their fair share of risk and uncertainty. However, if these qualities resonate with you, you might want to think twice before turning away from the next “ugly deal” that comes your way.
So, here’s to the art of embracing the unconventional, chasing the enigma, and finding beauty in the unexpected. The world of liquidations is an ever-evolving canvas, and sometimes, the most exquisite masterpieces are created from the most unconventional palettes.
[Side note to this article. One of my greatest pleasures is composing – proposals, press releases, articles, etc. And, in relation to ugly deals, I find putting a pretty bow around the deal with words and presentation can help win the engagement and attract buyers. With busy project loads, however, there’s often limited time available for creative writing. Enter Chat-GPT… for those unfamiliar with it, I pasted the facts of this article with the following prompt, “Rewrite the following article in a fun, engaging and inspiring tone that is not overly braggadocios”… I hope AI delivered!]