Troubled Companies: Protect Your Nest Egg

Golden Parachutes for Troubled Companies:
Protecting your Nest Egg

Our firm has made its living for more than eighteen years by sellingcompanies - some in great times, at absolute peak moments, and others at moments where they were heading downstream quickly, and fast-approaching the waterfall drop-off to end it all. This year we keep hearing owners say, "It's
getting really tough to make money in this industry" (and they're talking about a frighteningly wide range of industries). "I don't think I can sell right now, even though I would love to reduce risk. I feel like I have to wait for an upturn."

So, if it is really bad - if your profits are getting impossible to hold, what should you do?

Protect yourself! Take charge and sell while you, your company, and your employees can still survive! You can do it and still come out whole!

Facing Facts

The hardest thing for the owner of any down-turning company to face is that the business may not be "fixable" by existing management, or by the kids coming along. It takes great courage and resolve to move decisively to sell before it's too late, but the payoff is two to five times more in value. Business descent inevitably accelerates, like a bicycle on a downhill path without brakes. Just slowing the descent is hard. Turning and coming back to the top is extremely difficult, requiring an owner willing to invest substantial money and time to back the changes needed.

We sold a metal stamping company in Chicago several years ago. The owners of the company had been flirting with the possibility of sale for about 5 years. As times got increasingly tough in their industry, they took on new, large, but not-very-profitable business. They knew it wasn't the most desirable business, and yet they rationalized that surely it did help to "cover costs." Finally, they found themselves with a nicely sizable company in total revenues, which was consistently LOSING money. They finally pulled the trigger and hired us to sell them. Two months after we began the selling process, the company was thrown involuntarily into Chapter 11 bankruptcy, due to actions taken by fearful trade creditors. We continued with our selling efforts, and finally got appointed by the federal bankruptcy judge to continue representing them in sale. We did get it done, and we got enough to pay all of the banks, all of the trade creditors, and a little to the shareholders. The final proceeds were almost $25 million less than we had first estimated 5 years earlier. That was true in spite of the fact that the federal bankruptcy judge said he had more bond-posted, able bidders in the courtroom on the final day than he had ever seen in this type of proceeding, in his entire life-long career. Thus - we did a great job comparatively and competitively, but we brought a disappointingly small amount to our shareholder clients. Timing made all the difference.

There are a great many companies today, which are struggling, but which are only now coming to fully appreciate their problems. In today's economy, combined with a new and higher level of international competition, they suddenly feel the pressure - with great force! The cold, hard fact is that continued overseas pressure, a decade of consolidation, and depressed U.S. markets have created tough times. If you're in a pressured industry segment today, it will probably continue to be more difficult to be strongly profitable.

Tighten Up

If you're tough minded enough to face reality and to move aggressively to save what you can, begin with a hard look at yourself and a healthy dose of belt tightening. You may have to stop the bleeding just to survive long enough to sell.

Cut every cost you can, to trim down to a firm, solid core. Don't mortgage your future. Keep cognizant of the fact that core assets and good people will be needed for the next step up. However, resist the urge to rationalize or stall. If you have excess people, cut back. Where costs can be pared down, do it. Tighten up! Watch cash flow with the keenest of interest.

Punch service to an all-time high. Look for opportunities to strengthen and lengthen service connections to key customers. Build "partnerships" to enhance customer ties. Add services, such as design assistance or finish and assembly aid. Stay alert to opportunities for advantage when competitors falter.

Get Expert Help

Without delay, NOW, get the process of sale started. Do not pick up the phone and open up dialog with every casual prospective buyer you know. Your employees will hear and become afraid. Your customers will hear and will begin developing "back up" sources. Be smart, and hire professional help to sell your company. There are dozens of excellent business brokers out there, and they are clamoring for work right now.

Moving quickly is tremendously important for the troubled company. ("If you're gonna skate on thin ice, you gotta be FAST!") Professional help can make an enormous difference.

Be selective. Hire someone who focuses only on the purchase and sale of businesses. Your attorney or CPA may be happy to take the job, but they won't have the focused experience or expertise to do it as well as a specialist. Neither do you. Check references. Look for experience with turn-around sales. Look for intensity and commitment in the firm you hire.

What will professional help cost? For the mid-sized or larger transaction (say, $25 million plus), a Lehman formula is common (5% on the first $1 million, 4% on the next $1 million, then 3%, then 2%, to a residual 1% on the balance). For the smaller transaction (say, under $10 million), broker fees are higher - perhaps 10% on aggregate proceeds, and the brokers actually do less of the work. Nevertheless, good representation will put money in your pocket, every time. Also, be warned, virtually all quality intermediaries will charge some up-front retainer. Frankly, if they work for no up-front retainer, they probably aren't very good, and you will get what you pay for. Our advice would be to find a quality expert, seek a fee arrangement that will incent the broker with a strong success element, and check references. The best have done this before and have done it well.

Calm Lenders and Investors

Depending upon how distressed your company is, you may have some critical issues looming with banks or with other lenders or investors. Communication often can alleviate enormous tension. Your bank does not want to own your assets. Your investors will not like surprises. Often a well-timed and frank discussion of your recognition of the problem, and the actions that you are taking to correct it, will go far in calming outside pressure.

Usually it pays to tell bankers that you are planning sale. In most distressed situations, bankers are pleased and relieved and will react very supportively. They may grant you a standstill on principal payments, interest, or both. They will, however, want to ensure that when you exit, they get paid off. Thus, if they don't have all assets pledged as collateral, they may seek to tighten up their position. Your intermediary or business broker should be able to help and advise you, and keep financial backers calm.

Whatever the level of proactive disclosure you choose, be scrupulously honest in all communications with lenders and investors. You will be glad to have earned their trust and cooperation in tight moments ahead.

The Chapters

Three or more creditors can throw a company involuntarily into bankruptcy with legal demand. Alternatively, a company may choose to voluntarily seek Chapter 11 status, to operate on an ongoing basis, while being sold. Chapter 11 is a distinct disadvantage in sale from a marketing view because everyone will know you are weak, and that the company can be purchased for a low price. However, buyers love the "no strings attached" cleanliness of purchase. When they buy through Chapter 11, they are guaranteed clear title, with no exposure whatsoever for liabilities relating to past operations. Also, the Chapter 11 filing does buy time by freezing debts for the prospective seller, and forestalls repayments until matters are resolved. Chapter 7, alternatively, is bankruptcy with the intent to liquidate and close operations. Under Chapter 11, you may achieve some value for ongoing customer relationships, intangibles and goodwill, and a significant core of people may well go on to jobs with the new owner. Under Chapter 7, operations generally cease as soon as practicable, and there is seldom any potential for a goodwill element in sale.

The issues in consideration of bankruptcy election are complex, and far beyond the scope of this article. However, if there is any possibility that sale won't result in proceeds adequate to pay off all creditors, then you, as owner, need to fully understand and consider every alternative.

So, what makes sellers come out well?

1. Move early and move quickly - sell before value deteriorates.

2. Tighten your belt to prevent further value from draining away.

3. Hire expert professional help.

4. Be forthright with lenders and investors - you need their cooperation.

5. Know and study your rights, to protect your assets.

There is an old saying, "You can't really tell who's swimming naked until the tide goes out." If you think that it might be you, stop pretending, for goodness sake! Move while the getting is good, and save your company.

Buyer markets today are strong, broad (very international in scope), and highly acquisitive. If you're struggling, timing is not bad to get cash and help. If you're doing well today, you're even MORE valuable and desirable. Use the law of supply and demand to your advantage!

Deborah Douglas, Managing Director and Author
DouglasGroup.net

'Ripe: Harvesting The Value of Your Business'
‘Cashing In! Selling Your Company for Maximum Price'