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June 16, 2010

Prophet Equity's Latest Deal Reveals Lifeline For Small Businesses

By Laura Kreutzer

6/16/2010 Prophet Equity is breathing new life into a former subsidiary of P&F Industries Inc. with some help from the Uniform Commercial Code, a set of rules designed to harmonize commercial transactions across states.

The Southlake, Texas, firm has purchased the lion's share of assets of Marion, Va.-based WM Coffman LLC, a former subsidiary of publicly traded P&F that manufactured and distributed wood and iron stair parts. Prophet has folded those assets into the firm's new company, WM Coffman Resources LLC, according to an announcement that the company sent to its customers. The newly formed entity has also hired the former subsidiary's roughly 45 employees.

Basically, the transaction involved the use of Article 9 of the UCC, which allows a senior secured lender--in this case PNC Business Credit--to foreclose on a company's assets and then sell those assets to a new unrelated qualified purchaser.

In WM Coffman's case, PNC sold the assets to WM Coffman Resources. Through this structure, the firm not only was able to execute the deal in about 24 days, but also helped the business avoid disappearing entirely, said Prophet co-founder Ross Gatlin.

He said the deal could potentially become a model for similar transactions involving small companies facing a severe capital crunch.

"When faced with a liquidity problem, small companies many times will liquidate in Chapter 7 because they can't sustain the restructuring process," said Gatlin. "A secured lender will often just liquidate, because the cost of restructuring will impair the value of what they have left in their security."

However, Article 9 of the UCC allows a secured lender to foreclose on a company's assets and sell them to a qualified purchaser in a much shorter time frame than the estimated three to six months that it would take to restructure.

Although WM Coffman's business was hit hard by the decline in new home construction in 2008 and 2009, the company still has strong business presence in the Eastern United States, which helped attract Prophet. The investment from Prophet will help the team complete a transition from a heavy focus on manufacturing to one that is focused on distribution.

Although the firm invested less than $10 million in the initial transaction, Prophet plans to provide additional capital to the newly reconstituted company going forward to help it grow and expand.

Gatlin said his firm could use a similar structure again for other deals in the future, although he pointed out that a number of factors must be in place to complete this type of deal. They include the support of the secured lenders as well as a company's board members.

"It's an additional arrow in our quiver," Gatlin said. "It's a way for businesses that don't have a clear path to surviving severe working capital needs to rise from the ashes."

Reach Prophet at 817-898-1500.

Featured in LBO Wire, June 16, 2010.

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