Equity Lifeline: Sale of the Distressed Company

If owners of a troubled shop are bold enough, selling may ensure the company's survival.


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In the present tumultuous economy, cash flow pressures have risen to an all-time high for many businesses. A good number of excellent companies are finding themselves threatened by a thin capital base and an inadequate margin for error. A few sequential bad breaks can make mere survival tenuous. In a difficult market, inadequate back-up equity can mean the difference between survival - and the alternative.

For companies in danger, there is a ready and real solution. If owners are bold enough and pragmatic enough to sense danger early, there is ample equity in the marketplace to fund the purchase and revival of their companies. The first and greatest obstacle is speed. Owners must be willing to conclude and act in time.

Visualize a canoe in a fast-moving river as it approaches a waterfall. The closer the canoe comes to the drop-off, the more difficult it becomes to paddle toward the shore. Reaching the shore is the financial equivalent of selling a cash-strapped business. Attempting to turn around and return up-river is comparable to achieving internal recovery from within - which is even harder to accomplish. If the canoe's occupants don't act in time, it can quickly become too late to survive. The same thing is true for an owner of a troubled company. If a business was profitable only a few years ago, it is hard for owners to face up to the possibility that they may be unable to recover alone. The decision to take action can be a very hard one. They truly do care about saving jobs and helping their company survive. However, they naturally remember better times, and sometimes they hold out hope for a miraculous recovery longer than they should.

If owners do face up to the trauma before them and consider selling, how should they go about it? The following is true-to-life, experience-based advice for taking control and maximizing value in a possible sale.

Controlling the Process

It pays to begin a hard-line recovery process with a down-to-earth assessment of the company's worst-case value floor. What are the company's assets worth? What is the equipment's value at liquidation levels? What is the real estate worth? What is the sales volume worth, and could it be transferred to another operator?

Gather firm evidence and perhaps even hard, worst-case scenario bids for disposing your business. This gives you both a floor in terms of asset liquidation value and evidence for lending minimums, both of which will be valuable and helpful to potential business buyers. Any bids you entertain for the sale of the business will be based, in part, upon the fact that buyers will only be at risk for the amounts paid over the floor value. Even if buyers are unsuccessful at turning around a company, their financial loss should never drop below the floor threshold. Even though it may seem counter intuitive, knowing a company's "worst case" value actually can be highly useful evidence in supporting a better selling price.

Secondly, owners should keep lenders and minority investors fully apprised of their contemplated actions, in order to keep them calm and supportive. Lenders with credit extended to under-performing companies usually are pleased and comforted by a pragmatic and aggressive effort to court new equity support. You will need your lender's continuing cooperation to sustain you through the selling process. The fastest way to lose such support is to mislead or provide less-than-thorough information. Responsible disclosure pays dividends in trust and support.

Thirdly, get professional help. There are many excellent intermediaries experienced in the sale of distressed companies. They will provide competition among buyers, and will always strengthen pricing and terms. They are experts in sale and their efforts leave you free to run the company and hold down the fort until a sale is accomplished. Any reputable, quality intermediary will earn their fee many times over from the increased proceeds they will help you receive.

Business owners typically sell once, and only once, and they simply do not present themselves well. Experts speed the process and enhance the terms. Find the best for your business and hire them from the absolute first moves in consideration of sale.

Achieving Top Dollar

Owners often ask what makes an under-performing company sell well - still drawing top dollar pricing and powerhouse support for the future. Many of the elements valued in the sale of a distressed company are different from the value elements in the sale of a stronger, profitable company. Generally, buyers of turnaround opportunities get excited about improvement potential. They seek low-hanging fruit - in the form of problems or weaknesses that they believe they can readily fix.

Are these buyers bargain hunters and therefore not worthy of talking to? All buyers are - to some extent - seeking bargains. Don't be afraid of that. Every selling process begins with bidders, and every bidder hopes to buy at favorable terms. Just because a buyer enters the purchase competition hoping for a value deal does not mean that he is unwilling to pay true competitive market value. If a buyer becomes excited about the future potential, he can probably afford to strengthen the bid price as necessary to win the deal. Healthy competition will ensure fair market pricing, and sometimes even more.

So what kinds of features market well to buyers of troubled companies? Here are three:

Sales Volume Potential
To identify - and then pay for - the intangible value of a business, buyers always look first to sales volume potential. Loyal and supportive customers are attractive. Even if a company's sales have dropped precipitously, strong buyers will often believe they can retrieve lost business - especially if that drop is recent. Buyers also look excitedly at opportunities for possible cross-sale with their own business holdings. If one company makes tooling, and its buyer is a processor, the buyer may hope to cross-sell his newly acquired tooling capability to his existing customers. He also may hope that the company's present tooling customers may in the future consider using his processing services. Thus the acquisition adds sales dollars in total.

Do sales need to be of a certain size or volume minimum to be interesting to buyers? While there is no magic sales volume number necessary for buyers to be interested, it is true that bigger is better. Certain mass gives greater room for expense coverage, and greater cushion against failure in case recovery takes longer than hoped.

Another hot spot indicating sales volume potential may relate to proprietary processes or capabilities that have not been fully utilized due to financial trauma, capital constraints or lack of marketing knowledge. Turnaround purchases offer rare opportunities for sellers to actually increase value because of a weakness. If a company has puttered along decently with zero sales force for a significant time, buyers are apt to believe that even modest marketing efforts may be highly effective - particularly in comparison to a "zero" past. Potential for rapid sales growth means added value.

Some turnaround buyers may make a great fit because they seek your location. In a struggling economy, buyers seldom are seeking simple raw capacity. However, capacity located in a specific desirable geography is a different matter. Always consider those suitors who might benefit powerfully from your location.

Additionally, companies that are not performing strongly often have been capital deprived for some time. Growth opportunities may surface as soon as a certain technical or mechanical capability is available. Ready capital may solve these problems, and thus may create speedy returns in the form of new business with existing customers.

One other common problem for the traumatized company might involve physical plant layout. Buyers often glance very quickly at plant floor layout and see opportunity for improvement. Sellers often resent the implied criticism of possible change, and actually take pains to argue against the proposed changes. Bad move! If buyers feel that they can enhance effectiveness with changes in physical layout, their interest in - and/or excitement about - such opportunity will only increase their desire for purchase.

Buyers look for two things in assessing people in a turnaround acquisition opportunity. Their first interest is in finding possibly frustrated or underutilized talent. When staff members have been thwarted in dealing with the problems of a troubled company, they often haven't been able to perform to their maximum potential. Buyers love opportunities where the right capital and infrastructure may multiply productivity for key people.

Buyers also remain alert for the opportunity and even the necessity for paring personnel from the old regime. If a company has marginal performers or excessively paid employees who may have been carried to avoid the unpleasantness of terminations, buyers will see such situations as opportunities. Marginal-value people will be at risk, but culling staff, even fairly modestly, can create much greater staying power for the ongoing business and remaining people.


The well-sold company can recover amazingly fast from a distressed position with strong capital backing and with a little specialized expertise. Weakened companies should not be afraid to contemplate sale. Buyer markets are strong, cash is plentiful, and even in a distressed economy, a competitive sale can still generate excellent pricing.

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