July 2018 Vol. 7 No. 7
charlie goodrich

Simply put, a business is worth no more than what the highest bidder will pay for it. And a distressed business will rarely fetch as much as a solvent, reasonably well performing operation. 

What you ultimately walk away with depends on any number of factors, including your timetable, the skill of your advisors, and many unknowns. Today's newsletter explores these factors and the options available.
All the best,
Charlie Goodrich
Founder and Principal
Goodrich & Associates
In this issue…
How Much Is My Distressed Business Worth - Today ?
Heard On The Street - Another recession coming soon?
About Us
How Much Is My Distressed Business Worth — Today?
Often, I am brought in to monetize a troubled business: to pay off creditors; to get owners out of personal guarantees; or, on rare occasion, to get before the getting gets less.

Lots has been written on the subject of "valuing" such businesses and there is no shortage of academic theory to support this. But I'm a practical guy; I know that in the end, a business is worth no more than what the highest bidder will pay for it. So rather than talk about theory and formulas, today we take a look at the range of situations that drive value from high to low.

What is the maximum value for a distressed business? Well, it's what the business could be sold for if it were not distressed.

What is the worst case scenario? It's when there are no buyers. At that point, the remnants are liquidated for little or no return. (More about these ugly outcomes in last July's newsletter, here .)

Three key elements

Several years ago, Dr. Shan Nair , entrepreneur and consultant, spoke about selling the business he founded to private equity. He outlined three "must haves" for a high sale price:
Time. Lots of time to sell the business, both to have a proper sale process and to turn down offers you don't like (and find something better).
Management. A management team so good that you are no longer needed. This allowed Nair to hand over running the business to his team and focus his own efforts on the sale. It also meant the buyer wouldn't need him after the sale close.
Performance. Strong financial and operating performance during a lengthy sale process.
Unfortunately, distressed businesses tend not to have any of these things. In these cases, the options — from highest value to lowest — are:

Selling the business as a going concern. A business or investor buys the entire business to operate (the how doesn't matter, for now). Limitations here may include not enough time for a full blown sale process (and the prospective buyers know this); limited seller representations and warranties (see my last newsletter ); limited buyer due diligence; a reliance on key contracts that a new buyer can't easily and quickly take over; and buyer concerns about getting tagged by stiffed creditors in the absence of enough time for a legal process to "clean" it.

Selling the enterprise in chunks of smaller ongoing businesses. For example, I was involved in the bankruptcy of a multiple-location scrap metal company in the Midwest. An integrated steel mill was interested in the entire company, while various companies and investors were interested in individual locations.

We held a "dual track auction" to pick the highest combination of bidders, offering the entire business and the individual locations simultaneously. After several buyers for some of the individual locations began bidding, the prospective buyer for the entire enterprise finally came to the table and purchased the whole thing.

Sometimes, selling one business unit buys time to fix the others, ultimately realizing a higher price. In one case, a company owned by an investor that had paid too much ran into covenant problems early on after a restructuring. So the owner sold the company off, one division at a time. The better performing divisions were sold first, at a good price, through a normal sale process. That cash was used, in part, to buy time to improve the performance of the struggling business units. While the return to the investor was less than initially hoped for at the time of investment, there was a return of capital and the situation remains largely unknown to the investment community at large.

Sell clusters of operating assets as an ongoing operation, but not really as a business. For example, in one bankruptcy I was involved with, the lender group, for a variety of reasons, would not fund the company long enough to sell the business as a going concern. The company made wrought iron patio furniture, and had one plant that did the metal work and another that made the seat cushions.

Both plants were sold as ongoing operations to different buyers that used them for different purposes: One was a competitor that used the wrought iron plant to replace an outside supplier; the other was in the textile business and wanted the capacity. The factories were bought in place, with all the land, buildings, equipment, and most employees retained. There was no interest in the brand names, customer contracts and so forth. (This can happen in non-manufacturing industries too. For example, a company that makes application software might buy a middleware software company to eliminate licensing fees for someone else's middleware.)

Straight liquidation. Here, the parts are sold (never for much) on an individual basis. Again, see my July 2017 newsletter.

A few overall tips for selling a distressed company:
Hire the right professionals, sooner rather than later. Insolvency M&A is very different than "regular" M&A . Often, my liquidation clients are those who did not run a proper distressed sale process. They didn't have the right investment bankers, lawyers or financial advisors. The advisors they did hire used up all the company's cash while the business was at breakeven and ended up with poor — or zero — offers. If you are a lender, make sure you have people on staff with experience in these situations.
Consider options that will provide sufficient liquidity to run a longer sale process and/or improve financial performance. Either put more money in the company as the investor or creditor, or use junior creditors' potential recovery to maximize your recovery and minimize its variance. (A topic for a future newsletter.)
Wait for better times and, perhaps, improve the performance of operations. Consider the example above of the company that sold a few product lines early to fund improving the other businesses. Waiting for the market for the company's products or the economy at large to improve, can make sense as well.

Wherever you may fall on this continuum, and whatever tactics you may employ, a distressed business will rarely fetch as much as a solvent, reasonably well performing operation. What you ultimately walk away with depends on any number of factors, including your timetable, the skill of your advisors, and many unknowns.
Heard on the Street
Recession time is near, perhaps as soon as next year.

So says Paul Kasriel, retired Chief Economist for The Northern Trust Bank, in his recent post, here .
About Us
Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent liquidity problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.

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