October 2012

Anatomy of a Turnaround: For the CRO, the Meltdown at Dippin’ Dots Became Personal

After 20 years of success, ice cream maker Dippin’ Dots faced a variety of hurdles due to growing pains, an uncertain economic environment and a deteriorated relationship with its secured lender, which led to its Chapter 11 filing. Conway Mackenzie’s Greg Charleston was appointed CRO to navigate the company toward a new owner while avoiding a potential meltdown. Along the way, he found that working on this case proved to become a more personal experience than many others.

When microbiologist Curt Jones pioneered the process of cryogenic encapsulation — using liquid nitrogen to freeze ice cream into little beads, now commonly known as Dippin’ Dots — he created a product that became a popular treat at amusement parks, sporting events and other entertainment venues. Jones grew the business and turned Paducah, KY-based Dippin’ Dots Inc. into one of the most recognizable companies in the country. In fact, the Dippin’ Dots brand was ranked 112th on Entrepreneur magazine’s “Franchise 500” list in 2008.

After 20 years of success, the company began to suffer from a series of missteps and events that proved to be quite costly and painful to the organization. First, Dippin’ Dots incurred millions of dollars in litigation costs while pursuing a patent infringement claim against its main competitor. The court ruled against Dippin’ Dots, finding that the process of creating the ice cream was “obvious” rather than proprietary, and that the patent was unenforceable because Dippin’ Dots had sold the product commercially for more than a year before applying for the patent.

Second, the company went through the typical growing pains of an entrepreneurial business, including several unsuccessful products and business lines, uncollectible franchisee receivables, management turnover and increasing product and equipment costs. Third, when the economy began to deteriorate in 2008, amusement parks and other entertainment venues suffered more than average, and sales of Dippin’ Dots began to slow due to decreased attendance at these venues. At that point, Dippin’ Dots had accumulated a level of debt that became difficult to manage.

As often can happen in these situations, the relationship between Jones, the owner and manager of the company, and the senior lender of Dippin’ Dots began to deteriorate. The senior lender placed increasing pressure on the company to repay its loan. To do that, the company’s only real option in the near term was to sell. However, Jones — like many business owners who find themselves in a similar situation — did not want to sell the business that he had spent nearly 25 years creating. Therefore, Jones resisted much of the bank’s pressure in an effort to keep his ownership and control alive as long as possible. This caused an emotional and legal struggle that led to Dippin’ Dots filing for Chapter 11 bankruptcy in November 2011 to avoid foreclosure.

Jones and the company staved off the senior lender in bankruptcy for several months until the company no longer had funds to operate. In March 2012, the senior lender and Jones came to a reluctant agreement. In exchange for $2 million of funding to operate the business through an expedited sale process, Jones agreed to step down as CEO and allow me to come in as chief restructuring officer (CRO) of Dippin’ Dots.

By the time I arrived on the scene, the bank, the court and the other stakeholders involved in the business had already decided what the CRO could be expected to accomplish with Dippin’ Dots:

  • Take over the leadership of Dippin’ Dots and run the day-to-day operations.
  • Convince a loyal group of Jones’ employees to cooperate with the CRO to operate the business.
  • Work with the investment banking firm Harpeth Capital to find a buyer for Dippin’ Dots and close the sale in ten weeks. (The senior lender had committed to ten weeks of funding and no more.)
  • Determine a way to sell Dippin Dots Inc. separately from the franchising affiliate, Dippin’ Dots Franchising LLC, which had contractual relationships with more than 125 franchisees representing more than 40% of the business’s revenue.
  • Work with a frustrated group of franchisees to keep them on the reservation while we worked through a transaction.
  • Keep customers and vendors calm as we entered into the summer season with Dippin’ Dots’ future highly uncertain.

It was comforting to learn that the bank and the judge had confidence that I, as the CRO, would accomplish such a feat. However, it was a little troubling that these folks made it sound so easy. I also quickly determined that it would be necessary for me to convince the judge and the U.S.Trustee to allow me to replace the company’s local Paducah, KY, attorney with a national firm that could bring extensive bankruptcy, transactional and franchising expertise to my team and enable me to accomplish all the stated goals within ten weeks.

The pressure to deliver as a CRO is always compounded by the fact that there is a large group of employees — real live people — who are relying on the CRO’s ability to navigate through troubled waters to keep the business and their jobs intact. That said, the challenges of this project were normal for operating in the role of CRO. After all, if it were easy, anyone could do it.

What I did not anticipate, however, was the additional pressure that my children placed on me. I thought it would be fun to tell my sons that I had a new project as the chief restructuring officer of a beloved ice cream company. I did not expect a big reaction from them, because they never seemed to care when I was the CRO of a compressor manufacturer or a power service company. But when the project was Dippin’ Dots, they became not only interested but also emotionally involved. My boys became very concerned about Dippin’ Dots and required daily updates on my progress. They also provided their own recommendations regarding marketing, new products, licensing and places where they would like to see the product available in the future. My children shared their thoughts with friends, our neighbors and just about anyone who would listen. Before I knew it, I had a list of numerous interested stakeholders who required frequent updates on my progress — all of whom were, obviously, in addition to the bank and the company’s employees, customers, vendors and potential buyers.

I fielded numerous direct questions (that is, grilling and cross-examination) from both children and adults, such as:

  • Are you going to save Dippin’ Dots? (Picture a group of worried kid faces.)
  • How can Dippin’ Dots be in trouble when I have to shell out $5 every time my kid sees a Dippin’ Dots kiosk? (Imagine an irritated parent.)
  • Do they pay you with ice cream? (See a small child who is just grasping the pay-for-hire concept.)
  • Can you get me some free ice cream? (Know this came from everyone.)

The first step was to take over the leadership of the business. I did that immediately and met the management and employees of the organization. I expected some level of hostility or at least distrust from this group. However, what I found was a group of people who loved their company and would do anything to save it. Yes, they felt loyal to the founder and former CEO, but their true passion and faithfulness were with the product they believed in and treasured. I was astonished by the level of cooperation and friendliness with which I was received.

The next step was to reach out to the company’s investment bank, Harpeth Capital, to fire up the marketing machine. I was pleasantly surprised to learn that Harpeth Capital had already begun to develop an offering memorandum and contact potential buyers.

I even met with Jones, the former CEO and owner, who was friendly and straightforward. I was beginning to think that this was going to be as easy as many seemed to believe. However, obstacles to success often come from unexpected places. For example, the U.S.Trustee was very distrustful of me as CRO and the outside law firm that I needed to bring in to pull off this feat. I expected that the judge and the U.S. Trustee would understand and be supportive of the approach I was taking to deal with the issues and the professional fees, which were quite modest compared with most cases, which we needed to incur to get the job done. However, we spent several days during the short window of funding to face objections from the U.S. Trustee. Each objection was eventually resolved, but we incurred extra time and costs while facing the objections.

We also confronted difficulties and challenges from the franchisees and the affiliate franchising organization. The complications related to Dippin’ Dots Franchising were critical both to our ability to sell the business and to our relationship with the franchisees. These issues impacted the negotiation with the buyer and required a group of clever and level-headed attorneys to resolve.

While marketing the company for sale, facing the U.S. Trustee’s objections, negotiating franchise issues and keeping all of the stakeholders informed and comfortable with the process, we kept Dippin’ Dots rolling. We continued to produce Cookies & Cream, Banana Split, Moose Tracks, Rainbow Ice and many other favorite flavors.

In the end, we sold the Dippin’ Dots business through an expedited sale process to a newly formed company based in Oklahoma City that was funded by private capital. The terms of the sale enabled the bank to recover 95% of its value, and most of the creditors were repaid through contract cure arrangements or a negotiated carve-out of the proceeds for unsecured creditors. The employees kept their jobs and the headquarters remains in Paducah, KY. Jones was also reinstated as chief executive officer. Furthermore, the new owner has capital to invest in and grow the brand, and the future of Dippin’ Dots looks very bright.

Most importantly, my children and other people’s children will be able to enjoy Dippin’ Dots into the future. I have become quite a celebrity to the neighborhood kids, because Dippin’ Dots provided me with several free shipments of ice cream during my tenure as CRO. I am now affectionately known by these kids as “the man who saved Dippin’ Dots.” I cannot think of a more fulfilling outcome.

Greg Charleston is a senior managing director and leads Conway Mackenzie Inc.’s Atlanta turnaround practice. He has served as chief restructuring officer and as interim CEO and CFO on numerous engagements. He has worked with middle-market debtor restructuring clients in many different industries. Charleston is a Certified Turnaround Professional, Certified Public Accountant, Chartered Financial Analyst and treasurer of the Atlanta Turnaround Management Association. He can be reached at 770-394-9905 or gcharleston [at] conwaymackenzie [dot] com.