Often, I am brought into a faltering company when it is too late to make operating changes, restructure the balance sheet, or bring in more equity. And so, today’s newsletter is about how to approach the challenge of
liquidating
a business for maximum value to pay creditors, while also minimizing the loss to owners and guarantors of any debt or liabilities.
As a first step, make sure you manage near term liquidity and understand near term cash flow with a
13-week cash flow projection
.
This will show how much time there is before the business will be shut down from a lack of cash or by creditors. Simultaneously, understand the major assets and liabilities. Pay attention to the major creditors and if they are or can become secured by the assets of the company. Secured creditors usually get paid from their collateral before unsecured creditors.
The Best Way
Typically, the best recovery involves selling the bulk of the assets, including contracts, as an ongoing business.
So, try that first. Given the upside-down balance sheet, only a fool will buy the equity and assume the liabilities, so this is going to be an asset sale.
But be realistic. This is not a normal, orderly sale, so the purchase price will be less than what the value of the business would have been without these liquidity and liability problems. After all, there is a lack of time to conduct a full-blown marketing process; an inability to pay all creditors from the sale proceeds; records, reporting, and computer systems may be lacking; and nothing will remain post sale to back up representations and warranties for the buyer.
A few suggestions for selling the assets as an ongoing business…
Expect a short sale process.
The time between retaining an investment banker and signing a letter of intent (LOI) is often less than 60 days. Approving an Asset Purchase Agreement (APA) and closing will sometimes occur in a matter of a week or two — again, rarely more than 60 days. For example, one of my clients signed a LOI 46 days after retaining the banker and will likely close three weeks after signing the LOI. Total elapsed time: 67 days. Why so fast? Because typically, the company is burning cash throughout the sale process.
Always keep in mind that
the essence of the terms in a distressed sale is simply this: “
You get what I got and no more
.”
That will require an adjustment in thinking for many potential buyers.
Look for the ideal buyer within your own industry,
particularly a firm that can fund the purchase without new equity or bank lines. Why? First, because raising capital takes time, whether by an entrepreneur from local investors or a private equity fund with a capital call. As do bank loans.
Second, because intra-industry purchases may offer particular advantages to a potential buyer. In one bankruptcy case of mine, for example, my client was in the scrap metal business and the buyer was its largest customer, a steel mill. The buyer shut down the business after the sale. With fewer buyers of scrap, prices plummeted dramatically, reducing the mill’s raw material costs. Now that is a way to increase profits!
Understand the value of the next two options listed below.
Any price above that should strongly be considered.
The Next Best Way
If you are unable to sell the assets as an ongoing business, try to sell parts of the business to different players.
This could be as simple as selling profitable contracts, selling products, selling business units, and so forth, to multiple buyers in a process similar to what I described above.
The Final Option
Wind down the business.
Shut down operations, collect A/R to the extent possible, and sell whatever has value. Save key records to complete final tax returns, comply with tax audits and such. Abandon what is left; all of that is now the landlord’s problem.
Reserve funds to pay final wages and payroll taxes and wind down retirement plans (a final Form 5500 must be filed). Think about
who needs to stay on
in some capacity to handle all this.
Some additional tips…
Understand the value of time.
Several years ago, I liquidated a company that used a building half-owned by one of the business owners. The company had accepted an offer to buy the assets as an ongoing business, but more time was needed to close the deal. The owner had personally guaranteed much of the debt and had significant assets to back that guaranty. So he borrowed against the building to buy time to close the sale. He lost less than he would have otherwise.
Hire experts early on.
You will need the counsel of a financial advisor, investment banker or broker, and attorney with experience handling distressed sales and liquidations. If you don’t hire these people, a sale process will take too long; lawyers will waste time (and your money) over lawyering documents and worse; and advisors may encourage you to agree to terms that you shouldn’t (e.g., indemnifying the buyer).
Work with secured creditors that have a lien on all or some of the assets.
Their consent in any sale is required.
Walk serious tire kickers through the liabilities early on.
For potential buyers of the assets as an ongoing business, get them comfortable quickly with the risks involved.
Avoid leaving assets in the business for angry creditors to attach.
Some such assets can be assigned to secured creditors that will have a deficiency after the sale. In general, things that lead to litigation such as earn outs, escrow balances, and so forth, are not good.
And finally
read —
several times
— my newsletter on
business burial costs
,
so that you may avoid personal or corporate liability.
Final Thoughts
When winding down a business, don’t lose more than you already have.
If you don’t have an ownership stake, make sure that
all
you lose is your job. If you are or work for a guarantor of debt, work to minimize the shortfall for the guarantee (that means maximizing the value of the assets).
Having to liquidate a business is rarely good news for its owners. However, when faced with these unfortunate circumstances, some outcomes are better than others.
