Companies in distress often undertake a sales of assets to alleviate cash flow or debt repayment issues when other lines of credit or source of funds have been exhausted. Such decisions are not taken lightly, especially as the disposal of assets is likely to detrimentally impact the underlying business or forecasts. Ultimately creditors’ demands and survival instincts will result in action being taken however it is often too late and to the detriment of the business.
Companies in distress include: those with diminishing cash positions, disproportionate exposure to fluctuating commodity markets, those operating within an oversaturated or competitive market, those that are overleveraged or experiencing soft pressure to repay debt from their financiers, those with an increasing number of unpaid creditors or businesses where there has been a pattern of slippage in terms of trade. The most extreme version of a distressed sale is one of insolvency where the company is no longer under the control of its directors, be it through administration, receivership or liquidation.
There are a number of key areas of concern or focus in such a distressed sale scenario, including:
- Perception– how a distressed company’s competitors and customers will interpret the sale is quite important. This can be an extremely important stage to manage as poor perception may have a lasting impact on the business (irrespective of any sale outcome);
- Timing– it is critical there is a balance between getting a quick sale away to alleviate immediate concerns and ensuring value is obtained. A rushed sale can flag distress to the market whereas a prolonged drawn out sale will likely lead to the ultimate demise of the business;
- ‘Jewel in the Crown’ – the allure of selling the highest performing asset in a group’s business is clear as it will often reap the most value. Often there is creditor pressure to do so. The downside however is it may leave the remaining business impotent even after a debt reduction. Companies need to ensure there is forensic consideration given to the impact of the exit of any asset on the future business;
- Liabilities, Warranties, Indemnities –sellers need to realistically assess what level of warranties and indemnities they can give in distressed circumstances. It is often worth considering whether warranty and indemnity insurance policy is a viable option;
- Third Parties - managing third party counterparts can be one of the most challenging aspects of a distressed sale. The third party may see it as an opportunity to reprice or recut the deal, and prolonged negotiations will hurt the seller. Proactive approaches to third parties is a critical step in getting away any distressed sale; and
- Directors’ duties – the directors of a distressed company need to be increasingly mindful of solvency considerations during a distressed sales process. The inability to pay creditors will not only mean the business will likely end up under the control of an insolvency practitioner, but it may have serious personal consequences for the directors themselves (for example insolvency trading allegations).
Ultimately for a purchaser the risk will dictate the price, and it is the seller’s role to ensure the risks are minimised or otherwise dealt with to maximise return. Clearly there are a number of separate concerns that arise in an insolvency sale such as statutory obligations (section 420A), personal liability, adoption of contracts concerns and asset control.
For further information about the considerations of both sellers and purchasers in a distressed scenario please see Distressed Asset Sales.