NastyGal Files Bankruptcy: How Your Startup Can Avoid The Same Fate

Here’s a look at three practical ways you can reinforce and shore up your business before you have to bring it back from the brink.

Photo: Erica Nicole, Founder and CEO of YFS Magazine; Source: Jhnea Turner, Photographer
Photo: Erica Nicole, Founder and CEO of YFS Magazine; Source: Jhnea Turner, Photographer

Ten years ago, #Girlboss author Sophia Amoruso launched Nasty Gal as an eBay store, and this week the retailer, with an estimated 550,000 customers in over 60 countries, filed for Chapter 11 bankruptcy.

Reports suggest the LA-based brand has more recently struggled to find its place in the ever-shifting retail landscape.

Bankruptcy is often a last resort for early and late-stage companies alike. However, when you’re unable to repay outstanding debts and cash is on life support it’s a viable and often necessary option.

“The past couple years have been tumultuous for the brand — despite opening two brick-and-mortar stores […], the company laid off 10 percent of its staff in February and has been the subject of lawsuits from former employees for discrimination and wrongful termination,” according to Hypebae.

 

“Our decision to initiate a court-supervised restructuring will enable us to address our immediate liquidity issues, restructure our balance sheet and correct structural issues including reducing our high occupancy costs and restoring compliance with our debt covenants,” Nasty Gal chief executive officer Sheree Waterson told WWD. “We expect to maintain our high level of customer service and emerge stronger and even better able to deliver the product and experience that our customers expect and that we take pride in bringing to market.”

 

NastyGal has filed Chapter 11, also “known as the business reorganization bankruptcy,” which means the curtain has closed, but the players will be back for a second act. Chapter 11 is persued by businesses who opt to continue operating while reorganizing their debts through a repayment plan.

 

Photo: nastygal.com
Photo: nastygal.com

According to Nolo.com, “Under Chapter 11, a debtor can restructure its finances through a plan of reorganization approved by the bankruptcy court.  By reducing obligations and modifying payment terms, a Chapter 11 plan can help a debtor balance its income and expenses, regain profitability, and continue in operation.”

If you’re carrying a significant amount of debt, Chapter 11 bankruptcy can help you save your business. But wouldn’t it be nice to avoid the stressful rigmarole altogether?

Here’s a look at three practical ways you can shore up your business before you have to bring it back from the brink.

 

1. Create a ‘personal runway’

How long can you keep food in your mouth, regardless of the state of your business?

Whether you’re at the seed stage of your business or anticipating late-stage growth, don’t overlook the importance of giving yourself some runway – airplanes need it (literally) and so does your small business (financially).

 

Photo: © visoook, YFS Magazine
Photo: © visoook, YFS Magazine

If your company takes off before you reach the end of your personal runway, you are open for business (raise a glass). But if you reach the end of the runway and you fail to lift off, brace for impact.

“Your personal runway is critical to the success of your business,” says entrepreneur Wil Schroter. “The fact is that startups don’t truly go bankrupt until their founders go bankrupt.”

Schroter insists, “It may be noble to forgo all personal income in order to help your business, but it will crush you in the end.  Your business can go a month without any activity; you can’t go a month without eating.”

How much personal runway do you need? It depends. “Eric Ries defines the length of your startup’s runway as the number of pivots you can make before you run out of money.” Graham Ashton, founder of Agile Planner, takes a more concrete approach to calculating your startup runway.

Consult with a personal financial planner and a business accountant to review your unique situation and develop a fluid financial plan that doesn’t leave you grounded.

 

2. Invest in legal insurance

We live in a litigious society. The U.S. has one of the highest number of lawyers per capita – 1 lawyer for every 300 people. When disgruntled parties come to their ends, “We’ll see you in court!” is the battle cry.

Legal problems can be extremely expensive and lead to a forced business closure or bankruptcy. In NastyGal’s case, a litany of costly lawsuits initiated in recent years (e.g. employee claims of being fired because they became pregnant, falling seriously ill, and copyright infringement, etc.) undoubtedly delivered devastating blows.

 

Photo: © berc, YFS Magazine
Photo: © berc, YFS Magazine

While you may never have your day in court, it’s still wise to protect what you’ve worked hard to build. At a minimum, a BOP (Business Owner’s Policy), “helps protect your business in much the same way that a homeowner’s policy protects your home and personal possessions,” says The Hartford, a U.S. based investment and insurance company.

“By combining some of the most important coverages small business owners need, including Business Liability, Business Property and Business Income, a BOP can save you money…” – acting as a safeguard for the worst case scenario.

 

3. Protect your profit margins

There’s one thing you can count on in business – Ch-ch-ch-ch-changes. From changes in consumer spending, trends and costs … everything is in play; nothing is off the table.

According to WWD, Nasty Gal made over $300 million in revenue but was still “aggressively looking for capital.” One of the quickest ways for startups to access capital is to boost revenue. This is why protecting your margins is a priority.

 

Photo: © cherryandbees, YFS Magazine
Photo: © cherryandbees, YFS Magazine

Diligent cost controls are the first step. Operate with a “lean and mean” mindset.

Look closely at every single cost along with areas where revenue has curiously dropped. Streamline operating costs and rein in your purchasing – negotiate rate locks on contracts and revisit vendor/supplier agreements (seeking out new partners when necessary). These are just a few proven ways to quickly boost your margins and gain the capital you need without knocking on (or closing your) doors.

 

The “good” news? “With an estimated net worth of $280 million, Amoruso herself is no longer as involved in Nasty Gal’s day-to-day and is rumored to be resigning from the company after already stepping down as CEO last year.”

 

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