We are often asked to explain the divestiture process for a financially troubled company and the difference versus the sale of a stable and profitable business.
Businesses, situations and industries differ. But, in general, here are some of the key differences and considerations when selling a troubled business:
1. Stop the bleeding. It can be very difficult to attract buyers in a fluid situation, particularly a negative one. Stop the bleeding before going to market or at least have a realistic plan that can be communicated to prospective purchasers. Growing your way out of trouble is rarely a realistic plan.
2. Seek Stakeholder Buy-in. Stakeholders such as employees, secured creditors, suppliers or contractual counter-parties often have a more significant say in the sale of a troubled company than they would with a profitable company. Evaluate the role of all stakeholders and develop a plan to garner their cooperation.
3. Estimate the Intrinsic Value. The purchase price equation is: maximum possible purchase price = intrinsic value of the business (stand alone) + strategic purchaser premium – transaction costs. The intrinsic value of a financially troubled company is often its aggregate net orderly liquidation value, which, to determine, the vendor may require the assistance of third party appraisers and other experts. Historical or projected earnings based valuation approaches often do not work in a troubled situation.
4. Create the Structure. Risk of the unknown, particularly on the balance sheet, is the primary hindrance to purchasing a troubled company. Much of the purchase risk can be eliminated with the right purchase and sale structure. Most strategic purchasers are not experienced at creating such structures and, therefore, the vendor, and its advisors, should create the structure in advance. This may require having insolvency professionals on stand-by.
5. Don’t Underestimate the Value of Replacement Cost. In targeting strategic purchasers and estimating strategic purchaser premiums, the value of the turn-key nature of the vendor’s business and/or platform is often overlooked. We call it the “if you want to be in this business, in this geography, right now” premium. The premium can relate to time saved by the purchaser or the often significant difference between the aggregate OLV of the operating assets of the business versus the prospective purchaser’s cost to purchase piecemeal the same assets and to set them up for operation.
6. Be More Flexible on Purchase Consideration. Vendors of troubled companies often attempt to sell a story about why things will be better in the future. The vendor should not expect the purchaser to pay a cash premium for the hoped turnaround. At most (although not always), the vendor can hope to share in the success of the turnaround.
Posted by Scott Sinclair, Range Advisors
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