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Classic Party Rental, the biggest player in party rental has just filed for Chapter 11 bankruptcy, but its financial woes don't reflect the industry as a whole, rental respondents say
Jeff Black, CEO of Classic Party Rentals, which filed for Chapter 11 bankruptcy on Friday.
The news Friday that Los Angeles-based Classic Party Rentals, the longtime No. 1 on the Special Events list of the biggest party and event rental companies, has filed for Chapter 11 bankruptcy and put itself up for sale came as a surprise to some in the rental industry, but not to others.
"Classic’s voluntary BK [bankruptcy] is not a surprise to me," says Jim Lisi, a business valuation expert at American ValueMetrics and former owner of a party rental company in Santa Barbara and Ventura, Calif. Lisi bought into the party rental business in 1995 and exited in 2012. "During my tenure in the industry, we heard rumors of two or three internal recapitalizations of the company and that Cort/Berkshire-Hathaway was looking to buy them out of their issues at a low valuation."
WHAT WENT WRONG? Some party rental pros question Classic's "rollup" business model, which banks on putting a wide array of companies under one management team. In recent years, Classic acquired a wide range of marquee rental companies across the U.S., including Regal Rents (Los Angeles) in 2004, Ducky-Bob's (Texas) and Abbey Event Services (Los Angeles) in 2005, and Chicago Party Rental (Chicago), TriServe Party Rentals (New York) and Panache (Florida) in 2007.
The payoff from rollups is thought to be reduced costs from streamlined, sophisticated management and, for rental, greater access to inventory for various outlets. But challenges include servicing debt and being able to adapt to unique needs in different markets.
"It's difficult to expand business nationally, particularly one that depends on interpersonal relationships, as party rental does," says John Dawson, founder of Please B Seated in New York and formerly of TriServe Party Rentals, which, as noted above, Classic bought in 2007. "That being said, within Classic there is a huge stable of talented people who have a long history in and knowledge of the party rental business, like Michael Stern in L.A., Bick Jones in Dallas, Kelly Murphy in Florida, and Lance York in New York."
"In the beginning I liked their rollup strategy from an investor standpoint," Lisi says. "In fact I had hoped to benefit from it either directly or indirectly. We both saw the market opportunity. However, the leveraged approach was risky. It appeared to be based on an exit strategy that would cash out the debt. Meanwhile, as they were executing their plan, the dynamics of the industry changed dramatically. Part of the negative dynamic was a result of their own strategic mistake."
"In a healthy economy this [rollup] business model shows fantastic upside potential but in the long run, economies experience recessions and other unpredictable economic forces that challenge cash flow," notes Jim McManus, executive director of sales with giant Party Rental Ltd., based in Teterboro, N.J. "If a business cannot service its debt long term, it will face the consequences. The fallout from this has not been determined yet, and I am sure there are people with real concerns especially those who are owed money."
Classic's growth strategy signaled a new phase in the event industry, Lisi says. "Classic has helped bring credibility, awareness and structure of the event industry. Their biggest fault was buying up too much market share. It left the market without many ‘good competitors’--ones that knew their costs and had long-term plans to grow their businesses. Then with the rise of cheap imports and the Internet, entry barriers fell, resulting in a lot of new competition. New competition includes home-based, work-for-a-living businesses, caterers using rentals as loss leaders, and specialty providers of linen, chairs and furniture. Then the entrenched competition was induced into irrational pricing in order to keep enough cash flow going to keep their doors open."