We could all use a haircut when we come out of lockdown.
That’s what three early players in the quarter-century-long saga of the hipster barbershop chain Rudy’s are betting, after winning a fight in bankruptcy court to wrest back control from a New York private equity firm that longtime employees said had eroded the company’s culture while overextending its reach.
Ground-floor Rudy’s Barbershop execs David Petersen and Wade Weigel, along with the operation’s first accountant, Tom Bailiff, have teamed with Portland investment firm Sortis Holdings to pay roughly $2.5 million for their old company.
In a bankruptcy auction, the trio beat out a distressed-equity firm that’s been snapping up salon chains battered by the pandemic at bargain-basement prices.
Weigel and Petersen sold a majority stake in the barbershop chain to New York-based buyout specialist Northwood Ventures in 2014 for $4.5 million. It was supposed to signal the start of their retirement, Weigel said, but the pair soon regretted the decision.
“It was a big mistake that we sold it in the first place,” Weigel said. “To have our baby back seems like a dream come true.”
The founders hope to obtain a federal coronavirus relief loan and rehire employees as soon as possible.
But Rudy’s, which had expanded to 25 locations in Seattle, Portland, Los Angeles, New York and Atlanta before the coronavirus, will shrink.
The founders said they had hoped to keep all the stores open, but acknowledged that will not happen. A few Los Angeles stores will be sold to competitor Fellow Barber. Bailiff said those employees will have the opportunity to transfer to other Rudy’s salons.
Once stay-at-home orders lift and Rudy’s surviving salons reopen, Petersen said his post-pandemic mission is to “make clients feel just as comfortable as they used to feel at Rudy’s. Rudy’s is a place to gather, to meet people, to be with your loved ones.
“How do we get that back in this world? That’s how we’re going to keep winning.”
Capitol Hill beginnings
It started as little more than an East Pine Street hole in the wall, offering mohawks, buzz cuts and tattoos.
But Rudy’s, founded in 1993 by Weigel and now-deceased hipster-turned-entrepreneur Alex Calderwood, expanded quickly from its grungy Capitol Hill origins. Petersen, the only hairdresser of the group, soon joined as a partner. Within years, the company had a small empire of barbershops.
Like another well-known Seattle brand, Rudy’s envisioned itself as somewhere to find community outside of the home — a “third place.” Its laid-back arts-scene style catered to the 20-somethings flooding metropolises in the 1990s and 2000s — but everyone from toddlers to club rats to old-timers got trimmed at Rudy’s.
“Rudy’s introduced me to Seattle,” said Seth Javier, who started dressing hair at the original location in 2010 then became a manager at the Pioneer Square salon. Other salons he’d worked at felt close-minded, he said. At Rudy’s, Javier said, “We’d show racist and homophobic people the door. This is not your place.”
The brand was chugging along when Petersen and Weigel sold out in 2014. But by the time Rudy’s went into bankruptcy, it was weighed down by debt — to creditors, but also to its owners.
When Northwood bought the 15-shop chain in 2014, it planned to triple the number of Rudy’s stores. Four years later, the company was running 27. The new management started using words like “synergy,” Javier said. “It was like, What? We don’t use those kind of words.”
Some of the stores that opened during the rapid scale-up quickly folded, including ventures in Brooklyn, New York, and Nashville, Tennessee, according to archived versions of Rudy’s website.
The investment group put a new emphasis on merchandising, said Stephanie Stalcup, who’s worked as a Rudy’s stylist since 2006. “We felt like numbers,” she said. “It didn’t feel authentic. Who wants a Rudy’s-themed candle?”
The expansion came at a price.
Northwood loaned millions to Rudy’s, charging an interest rate of 18% each year — terms the Seattle founders would later characterize as “usurious.” When Rudy’s filed for bankruptcy in early April, its largest outstanding obligation was $2.7 million still owed to Northwood.
Northwood, which has been an investor in well-known brands such as Redhook Brewery, Hooters and Dick’s Sporting Goods, did not respond to requests for comment on the bankruptcy.
In both 2018 and 2019, Rudy’s operated at a net loss of roughly $2.2 million. In late 2018, Rudy’s began trying to sell off its salons or merge with another, more profitable brand, Rudy’s CEO Kathleen Trent wrote in a court filing.
Those efforts failed. And then the pandemic struck.
To comply with stay-at-home orders listing barbershops as nonessential businesses, Rudy’s shut down its salons and laid off 600 employees in mid-March.
By that time, the company had found a potential buyer, New York-based Tacit Salon Holdings, Trent wrote. Tacit gave Rudy’s a short-term loan to cover operating costs and hire attorneys to file for bankruptcy, and planned to purchase the chain in a bankruptcy auction, Trent wrote.
In bankruptcy proceedings, much of a company’s outstanding debt can be written off, lowering the amount a purchaser must pay.
Trent asked for a one-month deadline for bids. “Absent an extremely quick sale … any hope of reopening the business and saving the employees’ jobs will be lost forever,” she wrote. “Time is of the essence given the unprecedented situation facing the country.”
A battle in court
After jump-starting Rudy’s in 1993, Weigel went on to found the Cha Cha Lounge, Percy’s & Co. in Ballard, and the Ace Hotel chain, the last with Calderwood. Petersen moved into retail, managing a line of men’s grooming products. Bailiff opened Ristorante Picolinos in Ballard.
Weigel and Petersen retained minority stakes in Rudy’s after they sold. But they only heard of the bankruptcy filing in mid-April from Bailiff, who said he’d read about it in the news.
Learning the company was going bankrupt “broke our hearts,” Petersen said.
The three decided to try to win back the company, but time was short. The bankruptcy auction was set for April 30 — leaving them just two weeks to line up several million dollars. Tighter lending restrictions caused by the pandemic’s fallout on business complicated the effort.
“In these days, you can’t just go down to the bank and get a loan,” Bailiff said. They connected with Sortis’ Butch Bannon, who developed the founders’ negotiating strategy with fund chairman Paul Brenneke.
Tacit planned to pay roughly $2 million for Rudy’s, court filings show.
The closely held fund is on the prowl for salons that are surrendering their shears due to the economic onslaught of coronavirus shutdowns. In another bankruptcy proceeding in late April, Tacit acquired Creative Hairdressers, which operates roughly 750 stores nationwide under brands Hair Cuttery, Bubbles Salons and Salon Cielo. Creative had also been pushed into bankruptcy by the pandemic, court filings show. Tacit did not respond to questions for this article.
The Rudy’s founders tried to stall the bidding, alleging Northwood and Tacit had “pre-engineered a rocket docket bankruptcy situation to frustrate third-party good faith bidders from making bids” so Tacit could scoop up Rudy’s at a lower price.
A judge agreed.
“This is as tight of a schedule as I’ve ever seen,” a Delaware bankruptcy judge said in a mid-April hearing, pushing the auction date back to May 7. The sellers hadn’t even given potential bidders access to financial documents they’d need to come up with a competing offer, she noted.
As the deadline drew closer, the founders encountered more obstacles.
Northwood had accepted nearly $1.9 million in financing from Tacit to cover Rudy’s operating expenses. The founders feared Tacit would buy the $2.7 million debt obligation Rudy’s owed Northwood and pitch that credit into their bid. All of that could have raised the amount the founders needed to pay to win the company back.
“It was really a battle,” Weigel said. In a move challenged by the founders, Tacit upped its offer by $200,000 the day bids were due.
But when the dust settled after a contentious auction, the company was back with its original owners.
When he learned Rudy’s would be coming back to them, “I had this smile on my face for days,” Weigel said.
The battle, though, is far from over. In Washington, Rudy’s won’t be able to cut hair until at least June 1, under the governor’s phased reopening plan.
Until then, the founders say, they’re developing “stricter than strict” health precautions and marketing hand sanitizer under the Rudy’s label.
Bailiff said he expects the store to outlast the virus. “And if not, we’ll get a lesson. But we’ll have gotten it doing the right thing.”