weekly feature | Sep 6, 2023 |
Your vendor closed overnight. What next?

The design industry experienced a massive shock last week when beloved brand Mitchell Gold + Bob Williams halted operations and closed its doors overnight, citing financial troubles that became untenable when the bank cut the company’s line of credit. Still, the abrupt shutdown was not an anomaly: Just last month, Klaussner Home Furnishings unexpectedly shuttered in a similar manner. It can happen to companies of all shapes and sizes—in recent years, designers have been left in the lurch following dramatic closures at brands like onetime textile powerhouse Robert Allen Duralee, high-end showroom Jean de Merry and custom manufacturer The CEH. Each collapse sent a jolt through the company’s immediate community—especially for the long-standing employees who were suddenly out of work—but also left countless designers still awaiting orders at a loss for how to proceed.

That’s the position Atlanta designer Niki Papadopoulos of Mark Williams Design found herself in last week. When she came across the news of MG+BW’s closure, she wasted no time in springing to action—reaching out to the company (“Radio silence,” she says), as well as her attorney, insurance provider and accountant in quick succession. Still, the path forward, both to recoup her deposit and to furnish her client’s home, remains unclear.

“I have to wait for the company to figure out what they’re doing, but I still have to provide for my client,” says Papadopoulos. “What do I do now? And what do I do when I’m not getting any information?”

Business closures will always be a part of the industry—meaning, designers will always face a certain level of risk when dealing with outside vendors. But there are some steps designers can take to protect themselves. BOH consulted experts to learn how to spot red flags, how to proactively shield your firm from the financial fallout, and what to do when a vendor shutdown does happen.

Warning Signs
Before a business shuts down, there are often months or years of internal dysfunction and financial stress. For obvious reasons, it’s the sort of information a company rarely shares with customers—and since most design vendors are privately owned companies, their financials are not accessible to customers, either. Still, there are a few observable warning signs that can signal a company’s impending closure.

According to designer and business coach Kimberley Seldon, a few such clues can be seen from a customer’s vantage point. Given that many of the broader supply chain issues that plagued retailers during the pandemic have subsided, empty shelves could now potentially be a sign of internal rather than external stress. “At this moment, everybody should be seeing a robust turnover of inventory and new styles,” she says. “If it’s not getting replenished, that’s a sign that something’s going on.”

It also helps to keep track of your usual dealings with the company to maintain a baseline in case of future changes. If a vendor used to ship within a certain time frame, and suddenly begins slowing down or not adhering to a stated timeline, it could signal workforce reductions or operational inefficiencies—likewise if your sales representative is suddenly avoiding your calls. “That can sometimes indicate a cash flow [problem] on the other end,” says Ruth Ann Janson, president and head of financial and marketing service at The Dove Agency.

Next, take note of the company’s personnel. Recent layoffs could point to internal budget-tightening—but changes at the top can also be a sign of instability depending on who’s stepping into a new senior role, according to Sherrill Furniture’s vice president of marketing, Dax Allen. “When the people coming in aren’t really experienced in furniture manufacturing, that’s something I’ve seen as a warning,” says Allen. “It doesn’t mean the wheels are coming off the track tomorrow, but you need to see some really positive indicators over time to put a lot of eggs in the basket of that relationship.” He also stresses the importance of paying attention to a company’s positive signals, especially when it comes to transparency—offering open lines of communication, or even inviting clients and customers on plant tours and visits, can point to a company’s internal health.

Designer and business coach Traci Connell recommends an even simpler approach—one that may seem obvious but is frequently overlooked. With a quick Google search, see what others are saying about a company by surveying the business’s online reviews, scanning the comments section on their social media posts, browsing the employment website Glassdoor (where employees often talk about what’s going on behind the scenes) and checking out their profile on the Better Business Bureau website to see if they’ve had any violations in the past. Beyond that, signing up for Google alerts related to the company can help designers stay on top of any business struggles or restructuring that might have otherwise gone undetected.

Protect Yourself
In addition to researching the vendors you work with, diversifying your sourcing is also a wise move. Seldon also stresses the importance of making sure that assortment includes a healthy mix of wholesalers and retail establishments.

“When a wholesaler goes under, you’re likely not going to get your money back, because you’re going to be behind a whole bunch of people who are owed money—and [repaying] your $6,000 [deposit] is not going to be a top priority,” says Seldon. “Retailers have lots of different lines, so if one has gone under, that’s going to hurt them, but their insurance is going to kick in and take care of it. If they want to keep you as a customer, they’re going to try to make your money right.”

When it comes to paying for product, Janson recommends attempting to negotiate terms that some vendors offer, such as paying 50 percent upfront. It’s a strategy that may have mixed results: On one hand, the industry is currently a buyer’s market—a reversal from the pandemic years, when an influx of orders meant vendors could remain more rigid on their terms—putting designers in a better position to negotiate with their vendors. On the other hand, whether or not a vendor is willing to extend terms to a designer depends on a variety of factors.

“If you’re a small designer and you don’t have big buying power, you won’t be able to dictate terms—but if you’re a bigger house and you have more significant volume going through these vendors, you will have more say in how you pay them,” says Janson. “That’s going to be dictated [case by case, depending on] what their relationship is with these vendors, based upon volume and their own payment history with those vendors.”

In other words: You only have so much control over your relationship with vendors. Clients are a different story. Experts generally recommend creating a policy, included in your contract, that outlines the course of action in case of a business closure. Some designers may immediately default to shouldering the costs of a replacement themselves, while others might pass the bill on to the client without blinking. Business coach Sean Low recommends designers reflect on their fee structure before landing on an approach. Fee-based firms aren’t making money on an item anyway, though the time spent selecting a replacement product should be accounted for, whether you offer half your rate for that time, or your full rate after a set number of no-charge hours. Designers making money off of markup should decide if they’re going to make a percentage off the replacement item or not.

“The reality is more money is going to have to get spent,” says Low. “The question is whose money, and how are you going to help your clients spend that money?”

Too Late
Sometimes, in spite of best precautionary efforts, the worst-case scenario happens—a company closes before fulfilling your outstanding orders. Is there any chance of recovering your goods? It depends on how the business’s demise unfolds, according to legal advisor Seth Kaplowitz, but the prognosis is generally not good. Once a company files for bankruptcy, then its assets (including the products sitting in a warehouse) technically belong to all of its creditors—even if you’ve already paid for all or part of the piece. Unfortunately, customers who’ve paid for an item, including designers, are technically considered unsecured creditors—who are last in line for repayment. “[You’re] behind secured debt holders, employees, the banks, other suppliers,” says Kaplowitz. “In a bankruptcy situation, it’s virtually impossible.”

If the company’s reputation is on the line—as in, the brand is aiming to bounce back in some new iteration—then there may be a chance for recovery further down the line. (Havenly’s attempt to make good on many of Interior Define’s outstanding orders after buying the company’s intellectual property is a good example of this.) Otherwise, designers do have the option to hire an attorney or a legal advisor to attempt to recover their goods, though it won’t necessarily increase their likelihood of success. Due to the additional expenses incurred through legal fees, Kaplowitz’s rule of thumb is that it’s not worth taking a case to court unless a designer has lost more than $100,000.

As a last-ditch effort, designers who know their pieces are sitting in a receiver’s warehouse may attempt to go to the facility themselves and coordinate an independent pickup. But if the insolvent company is no longer paying its receiver, the warehouse likely won’t release the products. Janson has found that some designers have been able to work out private agreements and payments with receivers in such situations. Still, she and other advisors maintain that the best course of action, in general, is to take all possible precautions before signing on with a vendor and acknowledge the inherent risk that comes with working with outside companies.

“You can do all the homework possible, but there’s still a chance that once in a while, businesses are going to go under, and you’re going to feel the brunt of that,” says Janson. “I don’t think this is necessarily a bellwether for the whole industry, but I do think it’s a great opportunity to look at how you’re vetting your vendors and how you’re protecting yourself with your contracts between yourself and your clients.”

Homepage image: Kevin Lau for Business of Home

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