The heat is on American Apparel Inc., which has hired investment bank Moelis & Co. to explore strategic options, according to sources familiar with the situation.

This story first appeared in the December 29, 2014 issue of WWD. Subscribe Today.

Moelis will field interest from would-be acquirers, such as Irving Place Capital, and also will review the company’s capital structure. The move could signal that the American Apparel saga has entered a phase that will ultimately untangle the complicated web of forces vying for control of the high-profile U.S. apparel retailer.

It’s a tricky time for the company, which not only received a letter of interest from John Howard’s Irving Place, but is also working on a turnaround under new leadership while fending off ousted founder Dov Charney, who could sue his former employer and is seen seeking damages of more than $100 million.

Shares of American Apparel spiked in recent weeks on hopes of a takeover — Howard is said to have said the company could be worth as much as $1.40 a share pending due diligence. The stock, which traded as low as 50 cents this month, held steady on Friday at $1.06, giving the company a market capitalization of $185 million.

But Charney, the company’s iconoclastic founder and creative lodestar, remains the big question mark.

He’s the company’s largest shareholder and holds a 43 percent stake, although he shares the voting rights for that stock with investment firm Standard General. Charney had a falling out with Standard General, which controls much of the board that ultimately fired him this month.

American Apparel named Paula Schneider his successor as chief executive officer and tapped Colleen Brown as chairman. The company is said to have offered the founder a multimillion dollar gig as a consultant if he would sign away his right to sue, but the deal never came to fruition.

In a statement to WWD last week, Charney explained: “I was unable to settle with the board primarily over board composition issues. Had I settled, the business and all of its stakeholders could have been placed in a position of risk.”

American Apparel isn’t just a job for Charney — it’s a passion and one he seems unlikely to give up anytime soon.

“What is most interesting and exciting is that American Apparel is building a business that involves manufacturing, distributing and retailing products that people desire and they are doing so in a humane fashion,” he said. “American Apparel provides living wage jobs and living wage opportunities in the United States. That to me is so electrifying.…We have proven that the Made in USA, sweatshop-free business model not only works — but competes, successfully, with offshore models.

“I remain focused on creating jobs, most importantly in Los Angeles, and working to prove that the sweatshop paradigm can be broken within the context of the apparel industry,” he said. “This has always been my life journey.”

Charney said the company has been unable to expand its store base over the past four years due to a “constrained capital structure, which has also impaired the company’s ability to correctly manage the timing of raw-material purchases and its manufacturing flows in a way that maximizes sales and profitability.”

American Apparel has 245 stores, but people who have examined the business believe it could profitably expand to 500 or so.

“American Apparel’s earnings power to date has been hampered by the leveraged capital structure it has been saddled with as a result of the global financial crisis of 2008,” Charney said. “Under the company’s existing debt covenants, American Apparel’s prospects have been and continue to be challenged.”

Charney continues to find support within the company and employees have been weighing in with their backing at a new Web site, teamdov.com.

With the hiring of Moelis, the battle for American Apparel appears to have returned to where it began.

According to sources familiar with his thinking, Charney believes the struggle began when elements within American Apparel started agitating for a sale of the company in February. But before the board moved to oust Charney, it convinced him to agree to a stock offering that diluted his stake, thus weakening his hand when the axe finally fell.

That is at least part of the argument Charney believes he could make in court — if it comes to that.

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