June 4, 2016 | American Bankruptcy Institute
BY KEN MANN, SR. MANAGING DIRECTOR, HERITAGE EQUITY PARTNERS
Your client or borrower is a troubled business that desperately needs to find new money or a buyer, and fast. Somebody suggests that your client/borrower hire an intermediary, but the company already has one “offer” (for purchase, refinance, investment), so is reluctant to hire an i-banker to run a thorough process to find other possible solutions. We have all seen that horror movie, and we must advise our clients of the pitfalls of their single suitor, single solution approach:
1. The company is making a decision in a vacuum
Without a competitive process, how will management know it got the best deal? How can you choose a type of transaction (refinance versus equity infusion, for example), let alone the best suitor for that type of transaction, without knowing what all of your options are?
2. The single solution approach puts the company at great risk of failing to get the needed support for its chosen path
As an offshoot to pitfall #1, you are not likely to get the support of fulcrum creditors or a bankruptcy court without showing them evidence of a true market test; they don’t like to make decisions in a vacuum.
3. All of the company’s eggs are in one basket, and its bottom is very weak
The touted “offer” is usually nothing more than an indication of interest. As we all know, this interest means little until it is supported by a binding transaction document, a good faith deposit (if a purchase), and evidence of ability to close. In almost every case where our client tells us they “have an offer”, we later learn that the offer was “less than half baked”; there is much work to be done to get the interested party across the finish line, and the client is usually not well-equipped to get it there.
4. Even if the company has a bona fide offer, the price and/or terms are likely to “melt down” by the time its suitor gets through diligence
During diligence, the potential new lender will want to disqualify certain collateral, the potential buyer will want price reductions based on its findings, the would-be investor will want a bigger piece for less money, and the number of reps and warranties will likely grow. Sometimes the meltdown is for legitimate reasons, and sometimes it is simply an unjustified negotiating tool. Either way, absent competition and real options, the troubled company will be dealing from a position of weakness and have no way to prevent the freefall.
5. Missed deadlines and broken promises are likely
Get ready to be disappointed. Settlement dates and deadlines of all kinds have a way of slipping. Almost inevitably, things come up, and absent a date certain process or competition, settlement gets pushed back a few weeks. Management hangs on, clinging desperately, with no other options handy. Then another delay comes up, the company’s position gets weaker and weaker, management gets more and more desperate, and it gives up more and more. They want to draw a line in the sand, but absent viable alternatives, their ultimatums have no credibility, and the suitor continues to make all of the rules and controls the pace. Time is lost while damage is done to the business as customers, vendors and employees, already nervous, lose faith and disappointment sets in. Even worse, perhaps patience is lost, and without cooperation, the deal craters. If you thought you didn’t have enough time at the start of this process, now it’s worse; you are out of time and haven’t been looking for Plan B.
6. You leave money on the table
Competition drives price. We like to think of ourselves as expert negotiators that squeeze the last few dollars out of any buyer, investor or lender. But nothing, or no one, improves price or terms better than a competing bidder. Absent that, you are extremely unlikely to get the best possible deal. So, if you didn’t run a process, you probably left money on the table.
With so much at stake, why are some companies reluctant to run a process?
Seemingly reasonable and natural justifications exist, but they are dead wrong. “Dead” wrong because the single suitor approach is very likely to lead to the premature death of the distressed business. Following are 4 common reasons management may be scared of a robust process (and how you might respond to your client’s concerns):
1. Typically, negotiating from weakness, the management team is afraid to insult or chase off their potential white knight, which is likely demanding exclusivity
An experienced expert can explain, to the suitor on the table, why a process is necessary, and in fact, benefits them -protection from follow on litigation, release of liens and encumbrances, garner necessary approvals, etc.)
2. Management is trying to save the fee associated with “closing a deal I already have”
This is penny wise and pound foolish. The improvement in price/terms that comes with a process almost always far exceeds the costs of the process. Further, the offer on the table might not be “approvable” without the process. Finally, it is important to develop a Plan B to the current offer, just in case it falls apart. Proof you need, and insurance you want, come at some price.)
3. Perhaps this particular suitor is offering employment and/or equity to the management team, and so they are not enthusiastic about pursuing other possibilities
Management should play “free agent” and consider each meeting with each potential investor or buyer as a job interview – a chance to prove its value and to determine the best fit for them going forward. The first offer is not necessarily the best one the team will see. Oh, and there is this thing called a “fiduciary responsibility” to maximize value for your creditors!
4. Your client, and perhaps you, believe there “isn’t time to run a process”
The lack of time is precisely why you must run a process; it will be too late if you start the process after your initial deal falls apart. Lenders and courts are reticent to cut you off if you are running a real process, and usually welcome an outsider coming in to conduct it. Finally, the process is faster than you might think – it is often done in 60 days, and it is not unusual to have it done in 30 days when one bid already exists.
Sadly, most of us have failed, on occasion, to get owners and managers to accept what we can clearly see. Those owners have frequently lost their companies and, ultimately, look back at their “white knight” as the “grim reaper”. It is incumbent upon us professionals and advisors to help our clients avoid these pitfalls. Thankfully, we have had success in getting our clients to see this logic, and their outcomes have generally been much better because of it.