Selling a
Distressed Company

In periods where the economy is slower than normal, many owners of distressed companies have looked to the mergers and acquisitions market as an answer to their problems. Although this is a less than desirable activity for the seller, it can occasionally lead to a positive outcome given the right set of circumstances.

 Over the past couple of years, we have received many inquiries from prospective sellers of distressed companies who are looking for relief. Much of the information that they seek is pertaining to how a transaction of this type may be consummated. Aspen Mergers and Acquisitions do not very few transactions for distressed companies are ever completed... However, on occasion, there are a number of items that a distressed company may have that could interest a buyer specialize in these types of transactions. We have completed a few based upon our knowledge of the market. We thought that it might be appropriate to list some of the important information that a seller of a distressed company might need to know and understand before looking to the acquisition market as an outlet.

First, it must be understood in the beginning that very few transactions for distressed companies are ever completed. Without question, the preponderance of potential buyers in the market are looking for established firms that generate healthy profits and have a solid infrastructure. However, on occasion, there are a number of items that a distressed company may have that could interest a buyer. These are as follows;

• Book of Business – Generally a buyer of a distressed company will most likely be interested in transitioning the seller’s existing book of business to their company. One can imagine that if the sales can be properly transitioned, they can greatly accelerate the buyer’s profitability. The key issues to transitioning a book of business involve the seller’s salespersons' location, types of accounts, account concentration, location of accounts, acceptable pricing, and contract transferability. It must be understood by the seller of a book of business that, unlike hard assets in a business such as equipment, etc., that the accounts being sold essentially represent the goodwill of the seller’s business. For this reason, they will be valued differently which we will discuss a bit later in the article. Accordingly, the transient nature of most accounts leaves the buyer with little alternative but to arrange some If a distressed company is located close to one of the buyer’s existing facilities, there is an opportunity to merge the two locations into one type of a payment schedule for these assets as the seller proves that he can transition them to the buyer over some period of time.
  
   
• Geographic Location – If a distressed company is located close to one of the buyer’s existing facilities, there is an opportunity to merge the two locations into one. By eliminating the duplicate expenditures and taking advantage of the synergies between the companies, the buyer may conclude that the distressed company could present a good target of opportunity as an “add-on” or a “tuck-in” to its existing operations. Items that need to be considered in this area are the length of the seller’s existing building leases or whether the seller owns his building. If the building is owned by the corporation instead of by the shareholders, this could lead to additional problems. Additional areas of concern may involve environmental hazards, special equipment installation necessities, and the overall necessary space needed to house the additional operation. Suffice it to say that the geographic location of the seller can, and usually does, have a dramatic impact on whether the distressed company will be seriously looked at as a real candidate for merger or acquisition.
  
   
• Valuation – “What would my firm be worth to a buyer since we are not performing well?” This is the most frequently asked question that we receive from owners of distressed companies. Although there is no single specific answer to this question, we can shed some light on how to arrive at a reasonable valuation for this type of a firm. Naturally, most companies are valued on a multiple of adjusted earnings. This adjusted earnings figure can sometimes be arrived at through calculating the company’s EBITDA, Earnings Before Interest Taxes, Depreciation, and Amortization. It essentially provides a buyer with a measure of a company’s continuing cash flow.
  
  Unfortunately, distressed companies will most likely exhibit a very low EBITDA or, quite commonly, none at all. In these cases buyers will attempt to place values on specific assets of the distressed company. Keeping in mind that one of the most important assets of the distressed firm is its customer base, a value must be ascribed to it. As we have already pointed out, a buyer will attempt to affix some value to this client base based upon the seller’s ability to deliver results from these accounts over some specified period of time. A measuring stick such as the amount of gross sales or gross profit will be specified as the target to which Sellers must understand that whatever the upside performance that a buyer accrues from the transaction will benefit the buyer and not the seller... the seller will be compensated. Additional assets such as equipment and inventory will be valued at either book or market value depending on how the buyer views them.
  
  In many cases, the buyer will not be interested in buying these hard assets and the seller will be faced with disposing of them himself on the open market. In any case, it should be apparent that the seller is not in a strong bargaining position in order to negotiate a better value for his failing company.
  
  We frequently have heard sellers of distressed companies indicate that they feel as if their company is worth more based upon the fact that it will make the buyer’s company more profitable. In many cases, the seller wants to get value for what the buyer creates through the merger or the acquisition. Sellers must understand that whatever the upside performance that a buyer accrues from the transaction will benefit the buyer and not the seller. This is the main reason that the buyer has entered into a transaction of this nature. Naturally, they would be unwilling to pay the seller for anything more than the value of the company as it currently sits based upon its existing performance. The seller will have to decide whether a transaction of this nature will assist him in his current dilemma.
  
   
• Synergy – It sometimes becomes apparent that a distressed company’s product mix or market niche may be beneficial to a buyer by allowing him to expend his product offerings. Should this prove to be true, it could positively impact a buyer’s view on whether the distressed company is a reasonable target.   
   

As we openly stated in the outset of this article, this type of a transaction is usually unpleasant for the seller. However, if an owner can accurately perceive his existing circumstances and understand that the future may become much brighter given an effective strategic partner, these transactions can be beneficial to all parties involved.