Whatever You Do, Don’t Liquidate!

When a company is experiencing tough times and finds themselves in default to its creditors often the solution implemented by the creditors is to push for a liquidation of the assets that have secured their loan.  Often, company owners (debtors) are swept up in fear, confusion and exhaustion and end up agreeable to a quick resolution and agree to a liquidation. 

At Ravinia Capital, we have found from years of experience with distressed situations that liquidation of assets is rarely the best solution for either the creditor or debtor.  There are often many other solutions that help preserve the going concern value of the company.  These solutions must be custom fit to the situation and can involve a combination of a competitive sale process, operational support and legal guidance. 

We are entering Turbulent Times which will include more companies facing possible Liquidation

Admittedly, the last several years have seen an abnormally low amount of defaults on business loans and thus very few firms facing the possibility of liquidation.  There are many reasons for this, including a modestly healthy economy, low interest rates, an abundance of capital available for leveraged loans relatively unconcerned with risk.  While this has gone on, the amount of corporate debt on companies has grown while the collective memory of experience to deal with and know the options for helping a distressed company has shrunk.  For example, workout departments at banks are a fraction of their former size, turnaround consulting firms have shrunk or shifted to process improvement and how many young bankruptcy attorneys do you know? 

One only has to glance at the business news to understand we are on the cusp of turbulent times and it is only a matter of time before defaults begin to return to their normal levels and creditors become concerned with risk and want their loans paid back.  Thus, the need and reasons to resist liquidation will become more relevant.

Why companies are worth more as going concerns:

For company owners (debtors), the reasons to resist a liquidation and find an alternative solution are obvious.  A company is almost always worth more as a going concern.  Not only are Accounts Receivable worth more since they are easier to collect, inventory is worth more to ongoing customers, equipment is worth more in place, but most important other intangible values such as intellectual property, customer lists and goodwill created over the years is worth infinitely more.  In the heat of the moment when a company is losing money and in default on its loan, the true value of a company is often obscured or neglected.  It’s our experience that any company that has been able to grow above $25 million in revenue, no matter how they are doing currently, had some value or they would not have been able to attract this amount of business.  Now it might be that currently the company has just had a bad event that has pushed them from profitability to a loss such as loss of a key customer, or perhaps they are in the down part of an industry cycle or maybe they simply have poor management that has made some bad decisions.  Regardless of the current problem, there is almost always something that was good about this company.  In order to ensure capturing the maximum value for a company’s goodwill beyond its asset value, it is necessary to run a broad competitive sales process that allows the world of potential interested investors to understand and bid on the company.  Until you show the opportunity to a wide group of potential suitors you cannot know what the company is worth, since the value is determined by how the investor estimates that purchase of the company will increase its cash flow discounted by the risk.  For example, one buyer may be interested in a company as a platform investment for future growth, while another sees value in entering into a new market and gaining hard-to-acquire customers, while yet another company sees value in the capacity of the equipment.  You just never know until you run the process. for example, we once sold a toy company losing money at a high price to a family office that was collecting toy companies like toys. 

Why lenders should not liquidate:

For creditors, the reasons not to quickly liquidate are not always as obvious.  The decision on whether to liquidate can depend on the risk of the collateral covering their loan but also often the choice to liquidate can occur from the company (debtor) and their advisors failing to put alternative better options in front of them.  For the lender, some reasons to not liquidate can include better return on collateral, incentives to continue to fund during the default period, the possibility of a continuing company to lend to and the ability to preserve their reputation as bankers who will work with a company during a tough time.

Business owners learn your options:

Thus, during these turbulent times, we urge those who can decide the fate of companies in default on their loans to consider all of the options and not just jump to what is expedient.  For company owners, we urge them to know that they have options.  They should make their first priority when they are heading into a default on their loan to be finding competent, experienced professionals who will have their best interests at heart.  Often for business owners who are experiencing a distress for the first time, everyone seems like a vulture looking to take a piece of what little they have left. Others seem in cahoots with the lenders looking to win favor for future opportunities.  We recommend the company (debtors) discuss with their most trusted, experienced advisors how to best get the help they need. An advisor (like Ravinia Capital) can look at all of the possible solutions whether operations, sales or legal, and recommend the path forward that works best for the company’s interest.

Barry SnyderComment