The recent events regarding Crumbs, famous for its high-calorie, high-taste cupcakes should serve as a case-in-point for many businesses that get too big, fast by following the fickle trends of the day. Crumbs started with a simple idea: Lush and tasty cupcakes for everyone! Sounds wonderful, doesn’t it? However, the idea grew too big, too fast resulting in bankruptcy a mere 3 years after going public on NASDAQ. What happened and why should business watch this bankruptcy unfold?
The Beginning In 2011
Crumbs started with a simple idea that grew too quickly. Eventually, the company had 65 locations in 12 states, as well as the District of Columbia. The dream was simple enough. They wanted to create cupcakes that people would want to eat every day, all the time. The dream came true. As a result, the company elected to expand from a local operation to many operations spread over several states.
The problem for the company is that they rode on the tail of a trend. Everybody wanted cupcakes, so competitors jumped on the bandwagon to provide for the cupcake boon. As with most trends, customers grew bored and stopped buying cupcakes. Crumbs specialized in one product, so when the trend died, so too did Crumbs. Their competitors and other businesses that specialize in one product should take to heart these events happening now with Crumbs.
Filing For Bankruptcy To Save A Dream
Crumbs recently filed for Chapter 11 Bankruptcy in Newark, New Jersey. In their documents, they indicated $50 Million in Assets, which sound like a lot, but it’s not enough. After Crumbs filed for Chapter 11, which is intended to allow businesses time to reorganized their affairs and assets so that it can hopefully return to business operations and become financially healthy, they closed all their stores on July 7th, 2014.
Crumbs sold, or auctioned off its assets, to Marcus Lemonis LLC and Fischer Enterprises LLC, who plan in their joint venture to provide financing to Crumbs. Crumb’s benefactors own Wicked Good Cupcakes and Little Miss Muffin. They understand the market of Crumbs Cupcake Shop, which will enable them to evaluate Crumb’s retail plan. After the sale is complete, within 60 days, Lemonis and Fischer plans to open select locations or open completely new locations. They may be able to save the dream.
Business Bankruptcy Process
Personal bankruptcy is challenging enough but imagine how much more involved the process is for businesses. Individuals only have to deal with their own concerns and work directly with the courts and creditors to clear their debt. Personal bankruptcy looks at individual income to debt ratio to arrive at the cost of repayments. It is somewhat cut and dried compared to the process for businesses. See here for personal bankruptcy.
Businesses have to deal with investors, stockholders, and others along with their own financial concerns. Chapter 11 is intended to help businesses reorganize with the hope that they will be back in business after the case is discharged. It is more complex and expensive than other forms of bankruptcy.
Under Chapter 11-bankruptcy proceedings, the company will be assigned a committee that represents the interests of the creditors and stockholders. It is the responsibility of the committee to develop a plan for reorganizations and debt repayment. If the court allows it the stockholders can vote on the committee’s actions and decisions.
If the company fails to reorganize and become profitable, all the assets are liquidated and the stockholders are paid off according to the concept of Absolute priority.
Chapter 7 is more abrupt than Chapter 11. Under Chapter 7 the company goes out of business, and all assets are liquidated to repay debts. Investors are given priority for repayment under chapter 11. Crumbs may be back after it completes the process under Chapter 11. If they can find a way to reorganize, perhaps by reducing the number of stores it operates they can become a profitable success. The lesson learned has been a hard one for the company. It is a lesson other trend followers should take heed to and respect to avoid the same events in the future.