Distressed Company Sales

I have received a few emails from readers asking about what to do with a distressed company.  We (Woodbridge) do not work with distressed companies or turnaround situations, and I’ve not had much experience in the past.  But I’ll provide the information that I do know, and maybe it will help provide guidance to some.

First, know that companies and individuals are buying right now, and many are looking for distressed situations.  In fact, we had a client that was getting ready to sell, and then he realized he could probably get more for his company by first buying up some competitors.  Within a day he turned from a seller to a buyer, and he is looking at both performing and non-performing companies. 

Since there are companies looking, it makes sense that you would want to be out there on the market where you can be seen.  Unfortunately that can be difficult because many brokers / M&A firms (well, like us) do not work with distressed companies.  

If you are small, you might want to get a younger, inexperienced business broker to take you on.  If that doesn’t work, email me and I’ll send you a document that describes how you can get out on some of the business-for-sale websites on your own. 

If you are larger, the best way to get help may be to pay for it.  There is a list of resources at www.turnaround.org.  You can also get help from a financial consultant such as www.b2bcfo.com If you are larger than $5mm in sales, you may be attractive to a private equity group that focuses in distressed sales.  You can Google various terms and come up with some of these, and I found at least one list you can purchase.  Be aware that the private equity groups will be very pragmatic about the viability of the business.  In the words of one insider: “the key to this business is determining between the train wrecks and the company that is just underperforming but has potential."

Valuation of distressed situations is a difficult subject.  If there are no earnings to put a multiple on, valuation becomes pretty fuzzy.  I once saw a detailed analysis of the valuation multiples of commercial printers, from very profitable to zero profit.  The valuation started at the resale value of the printing presses.  That was the floor, basically liquidation value of the assets.  As earnings rose off of zero, the valuation was flat for a bit, then started to rise.  For awhile, the value was a mix of asset value and some component was earnings.  When the earnings were high enough (depends on the size of the business), then the value was almost purely dependent on earnings, not assets.

That is an extreme case of an industry that is very equipment dependent.  I know this example doesn’t help if you have few assets.  I do know that earn-outs are being used in distressed sales, where a low base price is paid, but additional cash is paid in the future when the business starts to perform.