Best Practices for Turning Around Distressed Companies: Successful M&A Transactions of Distressed Assets
It is important to remember that a turnaround is not always possible, and sometimes closing the company and/or selling off its assets to pay down the creditors is the right answer. In this installment, Yoav will discuss a case where this was necessary, as well as the steps he took with the distressed company to facilitate a successful transaction.
I recently received an urgent call from an asset-based lender asking me to conduct an urgent review of their collateralized loan against a $50 million manufacturer of consumer goods.
The next morning I met with the company’s CEO, who told me that he had been in the final stages of selling the company, but at the last minute the buyer backed out of the deal. During the final months leading up to the sale, the company was squeezed by a steep decline in new orders from their largest customer, causing a major cash flow crunch and an inability to pay the salaries of its suppliers and employees.
I reviewed the accounts receivables and inventory, and determined that the collateral was short by almost $1 million. In addition, the lender stopped funding the company so they barely had enough cash to continue operations for a week.
The only option was to try and sell the company’s assets, which was comprised of only current and future book of orders, to a strategic buyer. A strategic buyer could immediately step in and buy the finished goods from the company’s suppliers so that customers will get their orders in time, and then deliver all future orders in order to maintain the client base.
I first met with the buyer who backed out of the transaction and offered to sell the company’s assets for substantially less than what he was willing to pay a few weeks earlier. We negotiated a transaction by which the secured lender would take possession of the assets and sell it to the buyer, thus protecting both the company and the buyer from a fraudulent conveyance transaction. We reached a final agreement within a week and had set a time for closing; but the buyer got cold feet again and never showed up for the closing.
The evening of the cancelled closing, the CEO and I met with another strategic buyer, and after an hour and a half discussion, we shook hands on a deal that was better than the one we just lost — more money and no contingencies. The deal closed within two business days, and the secured lender received most of its loan back.
So, what led to a successful sale and recovery of the secured lender’s loan?
- Quick analysis of the situation, setting an action plan, and fast execution
- Implementing an aggressive plan to collect all outstanding accounts receivable
- Meeting with several strategic buyers to discuss the merits of a transaction that would make sense to both the lender and the buyer
- Communicating with the factories and the customers, and ensuring that we kept both sides engaged
- Communicating with the sales team (which was instrumental in keeping clients informed) and helping the eventual buyer deliver the orders (most sales people were offered jobs with the new buyer)
To be successful in facilitating a distressed asset sale, one must quickly grasp the major challenges, then delve into the nitty-gritty and develop a plan with the senior management team and creditors (in this case, the secured lender) to address each challenge. While leading the execution of the plan, one must be able to make fast decisions, and be able to be flexible and change course as needed.