As a business sale advisor with Exit Strategies Group, I help business owners obtain the best price and terms available in the market during a sale process.

We sometimes encounter situations where the owner would like to sell the business, but the business is in a distressed position with the following characteristics:

• the fair market value of a business is less than the outstanding debt on the business,
• the business cash flow does not support the current debt service
• the asset value of the business is less than the debt owed on the business.

When a business is in a distressed position, there are few attractive exit options for an owner. Typical options include bankruptcy reorganization or liquidation. However, for a distressed but otherwise viable business, there is another exit option available that often produces a better financial outcome for the seller. That sale option is a UCC Article 9 Controlled Private Party Short Sale.

In this type of a sale, the business is sold to a single purchaser of the business with the intention of continuing to operate the business and the first position creditor agrees to accept the sale proceeds as satisfaction of their debt.

Winning Outcomes for the Exiting Owner

This structured sale process creates several winning outcomes for the exiting owner:

1. A successful exit option for the owner when there was none
2. Avoidance of bankruptcy
3. Avoid taking on additional expensive debt
4. Preserve the business and employee jobs the owner created
5. Earn from the new company through an employment agreement
6. The ability to resolve personal guarantees on subordinated creditor debt
7. The structured sale process can be completed in 45-60 days

My goal is always to obtain the best exit strategy possible for my business owner clients. For company owners facing financial distress, this type of structured sale may offer the best exit option.

For more information on the Article 9 short sale process, or buying or selling a business, Email Louis Cionci at LCionci@exitstrategiesgroup.com or call 707-781-8582.

We’ve been getting this question from more business owners over the last few weeks. As with many important questions, the answer is, “it depends”.

Financial distress occurs when a firm can’t generate enough profit to meet its immediate or long-term financial obligations. If your business is consistently accumulating debt, has unseasonable and sustained increase to accounts payable, or is falling behind on payroll taxes, it is likely distressed.

Buyer’s Perspective

The potential to sell a distressed business depends on the ability to attract a buyer that believes that, based on their skills, resources and synergies, they can address the cause of distress and create a profitable future for the business. A strategic investor would look to profitably integrate the target business into their own operations. Strategic investors that can take advantage of synergies are more likely to buy a distressed business than financial buyers. However, there are well-funded “distressed investors” that specialize in acquiring and turning around distressed businesses, in good times and bad.

When assessing an opportunity to acquire a compromised business, savvy buyers will consider many factors including the cause, severity and duration of the distress. The causes of financial distress fall loosely into four categories.

Four Categories of Distress

Often, financial buyer prospects will not be able to address “unmanageable” issues any better than the current business owner. This makes the business inherently difficult to acquire and turn around.

However, even in an extreme event like a world-wide Covid 19 pandemic, there are exceptions. For example, a strategic buyer may be able to redeploy the assets of a whiskey distillery that lost its restaurant and bar customers to manufacture a product in exceptionally high-demand, like hand sanitizer. A good broker or intermediary can help to identify these opportunities and bring buyer prospects that can capitalize on them to the negotiating table.

Manageable causes of distress may be event-driven (like loss of a key customer) which often results in an acute crisis for the business. Or there they may be systematic causes of distress (like poor cost structure) which slowly impairs the business over time, as per the diagram below. Left unresolved severe distress will eventually lead the business to bankruptcy.

Path to Bankruptcy

Generally speaking, the less enduring and less severe the distress, the easier it will be to find a buyer that can turn the business around. Initiating the sale process early enough is critical. Waiting too long is a common mistake.

The likelihood of selling a distressed business depends on the circumstances. If you own a business showing signs of distress and are considering selling, please contact me at awiskind@exitstrategiesgroup.com or (707) 781-8744 for a confidential, no-obligation assessment of your situation.

Smart preparation and planning can help you build a business that’s ready to sell when you are. Ideally, you’ll start preparing for sale early in your business life-cycle. The more you know about what buyers want, and what you can expect from the market, the more options you’ll have to exit your business and maximize value upon exit.

Seven Steps in the M&A sale process:

1. Status and strategy:  The first step is to check in with yourself and your business. Are you ready to sell? Is the timing right in terms of market conditions and business performance? Does the value of your business match your goals? What are your exit options and how might different scenarios affect your readiness?

We recommend a status and strategy check every couple of years. A regular Estimate of Value can provide important benchmarking information. It’s an affordable tool to ensure your business is on track to hit your value milestones. If not, we can show you how to unlock hidden value in your company while you still have ample time to make adjustments.

2. Valuation enhancement:  The value enhancement stage is really part and parcel of status and strategy. Sometimes we may suggest some changes that would make your business more salable and increase its value in the marketplace.

Depending on your goals, this might be a six-month period of minor changes or a multi-year strategy to make your business more desirable to buyers who will bring the most value. In an ideal world, we’d talk to business owners years before they actually wanted to exit.

Early planning allows you to better time the market so you can exit during a market peak. The more time we have, the more room we have to make meaningful changes that impact business value.

3. Preparation:  Before going to market, we work with the seller in an intense period of preparation and information gathering. We’ll recast your financials to highlight your cash flow and incorporate projections to show where the company is going. And, depending on your business, we may also recommend select pre-due diligence activities to uncover issue areas that might be of concern to buyers.

At this stage, we’re also doing exhaustive buyer research. Businesses in the lower middle market often have an enormous pool of potential buyers. Some of these potential buyers come from your contact lists, some come from our global network, and others from our sizable investment in data mining tools that allow us to target the most relevant, qualified set of possible buyers.

4. Going to market:  As we go to market, we’re focused on getting in front of the right buyers at the right time, telling your story, and protecting your confidentiality. It’s all timed and carefully packaged in a sensitive mix of marketing and preliminary negotiation that should, ideally, bring multiple buyers to the table in a competitive auction environment.

Part of the marketing process involves pre-qualifying would-be buyers, securing nondisclosure agreements, and tracking information access via a secure data room. At this stage, we’re carefully weeding out the tire-kickers and smoking out “buyers” who are more interested in competitive intel than a legitimate acquisition.

5. Negotiation:Generally, sellers get better results when negotiating with multiple qualified buyers. The market is hot and buyers know there will be competition for the best deals.

The key is to control the process with respect and professionalism. We provide clear, consistent timelines and expectations. There’s a lot of activity out there right now, and buyers will pass over deals with inexperienced advisors who might waste their time.

Purchase price is only one point of negotiation. Deal structure, financing, employment contracts, working capital, reps and warranties are just some of the bigger issues that factor in. We will negotiate with multiple potential acquirors until you find the best fit for what is important to you.

6. Due diligence to closing:  At this stage, your target buyer has a period of time to complete due diligence and confirm they want to proceed with the deal. Together, both the buyer and the seller teams will be working through legal and financial requirements to ensure everyone is on the same page, appropriately protected, funded, and ready to close on schedule.

7. Post-closing transition:  After closing, you’re usually involved in a transition period. How long you’re staying and in what capacity will have been hammered out in earlier negotiations, based on the type of buyer and deal structure you approve. Post-closing commitments may involve transitioning relationships, explaining trade secrets, and otherwise helping set the new owners up for success.

Sellers routinely tell us how surprised they are at how much time the sale process took and how glad they are they didn’t try to run a sale process on their own. The final year before a transition is a critical time when strong business performance matters most.

At the end of the day, you want to exit your business with peace of mind and satisfaction, knowing you got what you wanted and didn’t leave money on the table. Sellers who start planning early can sleep easy at night confident that they did the best thing for their business and their family.

It’s never too early (or too late) to have a conversation about maximizing value in your business. For further information contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.