Cashing In!
Douglas Group
|
|
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!
By
Deborah L. Douglas -- Managing Director of the Douglas Group, a
private
investment banking firm based in St. Louis, Missouri, which specializes
in the sale of middle market companies. Ms. Douglas is the author
of "Cashing In: Selling Your Business for Maximum Price," and a
frequent key-note speaker at trade and industry
events. For additional information, contact Ms. Douglas
at 314.991.5150, or email ddouglas@douglasgroup.net.
Click here to read more articles on buying/selling a business
|
|
|
|
|
All New Website!
Visit our new educational,
informative website at
www.douglasgroup.net
Its easy to follow format is content-rich and well worth visiting to learn about buying and selling a business.
|
FREE WEBINAR
Learn How To Prepare
Your Business For A
Successful Sale:
Click here to register for
our Free Webinar.
|
|
