How the Distressed Sale Process Differs
Mirus brings unique qualifications and experience that are critical to effectively executing a distressed sale transaction. Several of the key differences to the sale process in distressed situations are highlighted below:
Who Initiates the Sale
In distressed situations creditors often initiate the sale process, as lenders seek to liquidate their claims in a struggling company that represents a deteriorating credit. Mirus has the expertise and the credentials to establish credibility with senior claimants and obtain their support for a value-maximizing course of action.
Distressed companies with negative cash flow must often be sold quickly before they run out of cash, leaving liquidation as the only available alternative. For service companies where the company’s receivables are their primary asset, a transaction must be accomplished before customers bolt and refuse to pay. Accordingly, a distressed M&A advisor must have the resources and experience to move quickly and be able to assess the trade-off between time and value. Mirus Special Situations Group has completed transactions, with a competitive auction, in as few as 22 days from initial engagement.
Although the process of contacting buyers and facilitating due diligence is similar to that of a healthy company M&A process, the expertise required to facilitate a distressed deal is highly specialized. To manage a distressed company sale process the advisor must:
- Work with the various parties-in-interest, including secured creditors, landlords, shareholders, directors and management;
- Work in a compressed time frame to avoid an extended and expensive bankruptcy process;
- Understand the current precedent for stalking horse bids and negotiate defensible bid procedures including break-up fees and overbid protections;
- Position and articulate the value drivers that make the company’s assets attractive to a buyer; and,
- Effectively communicate with the other professionals involved, including crisis managers, bankruptcy attorneys, bank workout officers, bond holders and other parties-in-interest.
Successfully navigating the bankruptcy process means more than merely getting the transaction done. Selling a business that has no other options is easy. Bringing additional options to the table is what Mirus Special Situations Group does for its clients.
Working within the Chapter 11 process requires significant knowledge of bankruptcy procedures and the respective rights and remedies of the various parties-in-interest. For a variety of reasons—including directors’ and officers’ liability, the rejection of executory contracts and leases, taxation (the cancellation of operating loss carry-forwards), valuation, title (free and clear of liens), environmental liability, fraudulent conveyance exposure, and plan cram-down—many distressed sale transactions are consummated in Chapter 11. Consequently, Mirus can articulate to buyers the benefits to be realized by purchasing assets from a company out of bankruptcy, allaying the concerns of bankruptcy-wary buyers.
A Note on Conflicting Interests in Distressed Situations
An important caveat in distressed sales is that the cash and consideration received from a buyer in a distressed transaction is often insufficient to satisfy all claims, creating a contentious negotiating dynamic where certain parties (such as retired pension beneficiaries or “out-of-the-money” creditors) have an incentive to hold up the transaction in order to extract (or some might say extort) a share of the proceeds. Therefore, a distressed M&A advisor must have the experience and savvy to be alert to these conflicts and keep the transaction on track.
Why “Distressed M&A” Is Different
No matter the underlying cause of the distress, all financially troubled companies face similar challenges that require a heightened sense of urgency on the part of management as well as the financial advisor. When a business lacks the capacity to pay debts as they become due, the going-concern value of the business is jeopardized, as creditors (including the company’s suppliers and employees as well as its lenders) may begin to take steps to protect their interests, thereby accelerating, and exacerbating, the problem. As a consequence, the decisions and actions of the company’s management in such special situations take on a greater importance, and therefore it is critical to retain experienced professionals to advise on the legal, financial, and bankruptcy-related issues that will arise as the company seeks to identify workable solutions to critical, time-sensitive issues.
Why Experience Matters (“The Playbook”)
In every distressed situation, there are a variety of constituents that have a stake in the outcome. Many of these constituents are (or eventually will be) represented by attorneys that are seeking to protect their clients’ interests. These attorneys are all playing by a set of rules, colloquially known as “the playbook”. It’s critical that your company is represented by competent and experienced professionals that know the rules and know how to avoid making a bad situation worse. Here are a few highlights from the “book” to give you a better sense of why experience matters:
- Chapter 1 (Creditor’s Rights), Page 1: As a supplier to a company that has stopped paying or stretched out their payments, you can force your customer into bankruptcy if you can convince two other creditors (such as the company’s landlord and one other supplier) to sign on to the involuntary petition.
- Chapter 2 (Debtor’s Rights), Page 5: If the company shutters a facility (or several) and cannot secure a release from the landlord(s), the outstanding lease obligation may imperil the business at the expense of other stakeholders. In such event, the company may file for relief in the Bankruptcy Court, and in most cases, settle the obligation for the equivalent of one year’s rent (or less).
- Chapter 4 (Fraudulent Transfers), Page 21: Any transfers from the company to insiders (including bonuses, severance payments, etc.) made less than 12 months prior to filing can be disgorged by the Court. Therefore, if management is taking bonuses in December and then failing to pay creditors in August, the creditors can petition the Court to take back those bonuses in order to satisfy the company’s obligations to suppliers and other creditors.
- Chapter 9 (Fiduciary Responsibility), Page 112: If the company employs 100 or more employees, it is required to provide a 60 calendar-day advance notification of any plant closing or significant reduction in force, per the terms of the Worker Adjustment and Retraining Notification Act (WARN Act). If adequate notice is not given, then the company can be held responsible for paying equivalent wages for the 60-day notice period, and if the company can’t pay, then the Board and/or the executive officers of the company can be held personally liable.