Selling a company is sometimes the only option for businesses facing insolvency. But a financially distressed business is challenging to sell due to the highly time-sensitive situation. Preparing for the sale and having the right team of advisors are key to an efficient process. It is essential to understand and anticipate the due diligence likely to be requested by potential acquirers.
Here are some examples of items to prepare that potential buyers will most likely request.
The Story – How Did Your Healthy Business Become Distressed?
All potential acquirers will want to know the history of your company. They will want to see how your company came to be and what made it successful. Buyers will seek to understand what made your business valuable before financial distress came onto the scene. Draft a narrative of the company that explains the successful beginnings and what caused things to turn sour. It is crucial to describe what drove your healthy company to distress, both internal factors, such as operational inefficiencies, and external factors, such as an economic downturn. The story should highlight the catalyst that triggered the sale, such as missed loan payments, violated debt covenants, or bankruptcy.
Your Company – What Is the Situation Today?
Once the buyers understand your company’s background, they will want to know the status of the current distressed situation. They will need to understand the severity and urgency of the situation to determine whether there is sufficient time and the required resources to get the deal done. Here are some typical questions that will need to be answered:
- What is the current cash burn rate?
- What is the status of your customers? (Without customers there is no business.)
- What is the situation with your lenders?
- What is the relationship with your vendors?
- Have you paid all your taxes?
- How is employee morale?
The Road Map – Why Is Your Business an Attractive Acquisition?
Potential buyers will need guidance on what is needed to turn around your business. While the immediate financial needs may be apparent, potential buyers need to understand the long-term requirements and time frame to return to solvency or profitability. Highlight target dates for the sales process related to time restrictions imposed by creditors or bankruptcy proceedings. Setting expectations early about the process time frame will benefit those on both sides of the transaction. Be prepared to answer the following:
- How is a turnaround feasible, and what are the underlying values of your business?
- Have any target dates been set by the bankruptcy court or others?
- What is needed to return to profitability?
- What is the estimated time frame to fully resolve the situation?
The Players – Who Are the Key Stakeholders?
Creditors and lenders will play key roles in the sale of a distressed company. These stakeholders will likely be required to approve the transaction, so it is important to have them involved early in the process. A potential acquirer will need to know:
- Who are the financial creditors?
- What is the principal and interest owed to each creditor?
- What are the terms of these loans?
- Do specific assets secure the loans?
- Have there been discussions with the creditors about specific transactions?
Additionally, potential buyers will want to know about key employees, customers, and suppliers. They will want assurances that your key employees will remain with the business after the sale. They will request schedules of top customers as a percentage of total revenue and top suppliers as a percentage of total expense to see whether there is any concentration risk. Be prepared to discuss the tenure and status of these relationships, since they are vital to future business operations.
An Efficient Process – Fast-Paced Due Diligence
Distressed acquisitions are typically under considerable pressure from creditors or bankruptcy courts to resolve the situation. Buyers who understand this will work quickly and efficiently and expect you to do the same. This requires an ultra-time-sensitive due-diligence process. Buyers require a large amount of documentation under short time frames and will focus on key considerations related to the distress. You must be able to answer many questions across a wide range of areas, including financial, operational, legal, payroll and HR, environmental, etc. It will be best to include your CFO, key managers, and advisors to assist with gathering the requested information.
Preparation is critical due to the time sensitivity of a distressed sale. Engaging investment bankers early in the process will better help you prepare for the accelerated process. PCE investment bankers understand the process and the detailed due diligence that potential buyers will request. We can help build the virtual data room to be easily accessible and supplied with the right information for potential buyers, which will save everyone time and make for a more efficient process.