While it can be emotionally and financially painful for the owner, selling a distressed, owner-operated company can be the best -- and sometimes only -- option. Making this decision within the "window of opportunity" is crucial to maximizing value.
Businesses encounter financial distress for a variety of reasons such as lack of response to a changing business environment, over expansion without supporting business revenue, or unexpected liquidity problems. Many business owners wait too long before considering the option to sell, believing that the "one big customer" is just around the corner. All the while, vendors become disgruntled, lenders grow impatient, existing customers become wary, and the company's value deteriorates.
Considering their available resources, owners and their advisors should swiftly evaluate the likelihood of a successful turnaround. If a recovery is deemed unlikely, the owner should consider selling to a buyer who may have solutions to the problems at hand.
While there is a tendency to maintain secrecy about the future of a company, prudent communication can be a valuable tool in managing stakeholders such as bankers and vendors and in preserving the value of the business. Likewise, communicating with key customers and employees can help stabilize the company throughout the sale. Stakeholders are typically more likely to provide financial flexibility in light of a sale process if they are informed and involved.
At the outset, the owner must take steps to steady the business in order to prepare for a sale. Managing daily cash shortages or other liquidity issues can be a distraction from the process. Negotiating with lenders for additional flexibility, discussing alternate payment terms with vendors and customers, and developing a weekly cash flow schedule are steps owners can take to establish some short-term financial stability and liquidity to allow for an orderly process.
During the selling process, the objective must be to find prospective buyers and structure a sale that can provide the most value. Prospective buyers may be interested in purchasing a distressed company for various reasons such as strategic fit with existing operations or access to facilities and equipment for expansion. Possible buyers may include competitors, customers, vendors, investment firms, and others.
Leading a distressed company through a sales process requires careful thought and skillful implementation. The best "window of opportunity" for a distressed company is usually the period when financial resources have diminished beyond long-term viability, but before operations can no longer be maintained. Delaying a sale beyond this window often leads to significant devaluation of the company.
KraftCPAs Turnaround & Restructuring Group and its affiliates have the experience and expertise to assist owner-operators in evaluating their current positions and alternatives.
