Sell, Don’t Liquidate!

Often, the best way out for a faltering company is a quick, distressed sale of some form.?Sometimes it can be as a standalone business that operates somewhat independently within a larger company. Usually, however, the sale is some combination of customers, people, and both physical and intangible assets. Such sales typically bring more value than a liquidation.

Selling a distressed business is not like the sale process for profitable, solvent companies — and for several important reasons including:

• A lack of time to conduct a full-blown marketing process
• Poor records, reporting, and computer systems
• An inability to pay all creditors from the sale proceeds
• Nothing remaining post-sale to back up representations and warranties for the buyer

These differences mean the sale process must be expedited and buyers will have little time or information to conduct extensive due diligence (and no effective recourse should things go wrong).

Here is how to go about it…

Get a handle on liquidity.?

How much time is there to run and close a sale process??A rolling 13-week cash flow projection is a key tool here.

Hire the right professionals.

At a minimum, these should include a financial advisor, investment banker or business broker, and an attorney.?These are not the same professionals used for “healthy” business sales — they need to have done this before. Otherwise, the sale process will take too long and the company may run out of cash before a sale can close. Traditional investment bankers or brokers simply don’t know how to run an expedited sale process.?Legal documents have different terms too.

Identify the value.

Figure out what is most valuable in the business. Often, it is the customer list, either to expand the buyer’s geographic, product, or market presence, or to increase utilization at an existing facility.?

Look for a buyer within your own industry.

Intra-industry purchases may offer particular advantages to a potential buyer that do not exist for outsiders. Further, look for a firm that can fund the purchase without new equity or bank lines. Why? Again, it’s a matter of speed. Raising capital — whether from local investors, private equity, or bank loans — takes time.?

Get potential buyers comfortable with the risks quickly.?

Walk serious tire-kickers through the list of creditors early in the process.?Make them aware of any known issues upfront. (More on this below.)

Get the best offer.

Play the buyers against one another. Knowing that others are out there is often enough to get buyers who can quickly close to come to the table.

Close the transaction.?

Buyers want protection from creditor claims, so the choice of legal mechanism for the sale is usually a negotiation between the buyer and the senior secured lender, with the seller acting as the “man in the middle.” The strongest protections involve noticing all creditors, such as in a formal bankruptcy process or in what is known as an “Article 9 Sale” — but these protections entail risk to the lender.

Winding Things Down

There are two parts to this: monetizing what is left and formally winding things down.

Monetizing

Often, not all assets are sold in a distressed sale; the buyer doesn’t want them. Sometimes they are significant, such as accounts receivable, inventory, and equipment. In the case of stores, there are “going out of business” sales as well as special liquidators for consumer products.?

Sometimes, there are “nuggets” — intangibles such as brand names, proprietary software, and so forth. Consumer brands can bring in surprisingly large amounts of money.?

Things that can’t be monetized are usually abandoned. If it’s something physical, it becomes the landlord’s problem.

Formal Wind Down?

The winding down of what is left can have pitfalls that snag owners, directors, and management. All fiduciary taxes such as sales tax and withheld employee taxes must be paid (the government can and often does pursue owners and officers in particular).?

Unpaid wages can become the personal liability of owners, directors, and officers. Tax returns should be filed as final for all taxes; retirement plans such as 401k plans must be properly and formally ended (the Federal Department of Labor is known to pursue whomever is listed as plan administrator). Consider buying tail D&O coverage to protect yourself against suits from creditors and others.

A Few More Pointers

Buy time. That means increasing liquidity. There are standard things financial advisors can do with vendors and creditors, although often that is not sufficient. Are there business assets that be used as collateral for a short term loan? Will an at-risk creditor or guarantor inject funds for a better recovery?

Develop and maintain a “waterfall.” This specifies the priority in which creditors will be paid. Secured creditors get their collateral first; wages, fiduciary taxes next; and so forth. Make sure burial costs are funded. When you get to the creditor class that won’t be paid in full, pay on a pro-rata basis. Revise the cash flow projection showing when assets will be monetized with remaining cash disbursed in the waterfall.?

Size up the creditors.?Which are secured (and by what) and which are not? Have a UCC (Uniform Commercial Code) search run for all of the company’s locations, to be sure you know which creditors are really secured. And consider more than just the obvious: lenders, vendors, and landlords. Payroll and payroll taxes, for example, can be an ugly surprise; you need to pay all employees’ wages that are due. That often includes unused vacation, guaranteed bonuses, and more.?

Work with your secured creditors throughout the sale process. They must consent to the sale of any asset upon which their liens are attached.

Identify potential deal killers. Have all tax returns been filed? Are there old UCC filings, liens on vehicle titles, or muddled titles on real estate? Are there critical contracts that must be assumed?that require the consent of the other party?

Understand liquidation value. That is your minimum acceptable bid. It may be lower than you’d like, but a bid for liquidation value is better than liquidating yourself.

A Different Animal

Selling a distressed business is not easy, nor is it like selling a business that is healthy and solvent. You’ll need experienced, capable professionals by your side and a bias towards moving quickly.

That said, when done well, selling under these circumstances often leads to a better recovery for creditors and less of a loss for guarantors than does liquidation.

------- Charlie Goodrich is Founder and Principal of?Goodrich & Associates, a management consulting firm that specializes in helping its business clients solve urgent liquidity problems. He 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.