Rescue Plan:
Save Value by Selling a Struggling Business
Christopher Porter
Plant Magazine
October 2008
We all know the current credit situation too well – no need to go there again. For manufacturers struggling to secure affordable financing – considering how much of their own money and collateral to put into the business and wondering how many more sleepless nights they can take – this could be the time for a rescue plan. Arranging the sale of the business to a purchaser that is able to act quickly may preserve value. A sale may also limit the exposure of directors and officers to liabilities, save jobs and continue the life of the company.
No matter what the state of the economy, there are potential purchasers seeking more capacity, geographic expansion, a market niche, new customers, a skilled workforce, intellectual property rights, a talented sales or management team or other strategic advantages. These prospective buyers could be customers, suppliers, or others in the same or a related industry. There are also international purchasers looking for investment opportunities in Canada.
Selling the business, or portions of it, as a going concern rather than after the bank calls a loan can generate more value for all stakeholders (owners, employees, suppliers, customers, creditors). Generating the most value possible when a company is experiencing financial pressure, however, requires decisive and timely action.
First, the management team needs to determine how long the business can continue. Preparing cash flow projections of best- and worst-case scenarios will tell you if the business can meet its financial obligations and for what period of time.
It’s essential to know the company’s cash balance at all times. Managing cash flow effectively is critical to staying in business and having the time to orchestrate a sale or merger. Track the company’s cash position and cash flow on a daily basis. Review the balance sheet, income statement and cash flow statement each month to assess year-to-date sales and revenue, net worth, net profits and cash flow. At the same time, identify cash flow impediments and consider ways to accelerate and extend cash flow: reducing the work force, selling surplus or underperforming assets, negotiating extended terms with suppliers, offering discounts for early payment.
No matter how much the business is struggling, it’s vital to continue communicating with the company’s important stakeholders: suppliers, customers and especially, lenders. Their cooperation may be critical to the success of a sale. Your lenders will take silence as a bad sign; in these economic conditions, no news is bad news.
It’s important as well to objectively assess the strengths and weaknesses of the business so you know what may appeal to – or deter – buyers. For example, potential purchasers often look for strategic advantages such as long-term customer contracts, brand recognition, patents, trademarks and proprietary technology. On the other side, prospective buyers may be deterred by things that could readily be reduced or eliminated. Cleaning out slow or obsolete inventory, taking a provision for overdue receivables, and updating accounting records, for example, can generate a positive impression.
If the company is a family business, it’s also important to “normalize” non-arm's length transactions such as compensation and benefits for family members who work in the company. Consider whether some people are being paid above market rates.
Also consider your goals in selling—and also what you want or have to sell. Do you want to retain a job for yourself, your management team or your employees? Do you want to sell all or part of the company? At this point, it’s important to consult with business transaction professionals who can objectively assist in determining the feasibility of your goals, of selling or merging the business and the best approach for doing so, and who can also advise on potential outcomes.
Timely and efficient marketing, prospect vetting and due diligence are essential to a successful sale. Transaction professionals have wide-ranging contacts and can canvass the market, generate interest, and secure confidentiality agreements to protect the seller’s privacy. These professionals can also assess the status of existing contracts and the willingness of lenders to support a merger or sale. They can help you make your business as attractive as possible to a purchaser/investor; structure the transaction to minimize taxes and maximize value; and guide the sale process through possible challenges by stakeholders such as shareholders, employees, creditors and lenders.
While most sellers want to sell shares, if a company is experiencing financial difficulties, most buyers prefer to purchase assets in order to avoid liabilities such as creditor or employee claims or litigation. Transaction advisors can develop a process to separate liabilities from assets. By filing for protection under the Companies’ Creditors Arrangement Act or by issuing a notice of intention to make a proposal, a company may be able to stay its creditors for long enough to restructure the business or close a transaction.
There are innumerable ways to structure transactions that can meet the goals of seller and buyer. For a company experiencing serious financial challenges, however, this is not the time for procrastination. A successful merger or sale relies on fast action in order to preserve value.
Christopher Porter, MBA, CA•CAIRP, is an associate in the Transaction Advisory Services practice of BDO Dunwoody Ltd. (www.bdo.ca), which provides corporate finance and mergers and acquisitions services. You can reach Christopher at (416) 369-3062 or cporter@bdo.ca.
