Driving Value in a Distressed Transaction

Valuing a company, distressed or not, is the easy part; creating that value in the first place is the more challenging task. In transaction terms, value is determined by what a willing buyer will pay to a willing seller. Add distress to the equation, and the “game” could affect stakeholder class outcomes (secured lenders, mezzanine lenders, unsecured creditors, equity holders) in substantially different ways.


Given Covid-19, investing in and disposing of under-performing companies/distressed companies is increasing in interest. The following are key considerations in creating and obtaining “value” in the sale of a distressed organization.


6 Tips to Obtaining Value in a Distressed Organization


Strategy and Timeline: Spend time assessing the company’s strengths, weaknesses, opportunities, and threats to develop a believable recovery and operating strategy. Simultaneously, the company should develop a liquidation strategy and associated timeline. Time is money. Moving swiftly and gaining the buy-in for all stakeholders is important. The team should weigh the tradeoffs of taking additional time to execute a transaction versus the risk and cost of running the company. Make an assessment. In some cases, it’s worth it to negotiate with vendors, customers, lenders and other vested stakeholders.


Revised Financial Forecasts, Cash Flows and Budgets: Create short- to intermediate-term cash flow forecasts, budgets and revised financial statements. Financial statements should contain reasonable adjustments to EBITDA for non-recurring and other extraordinary expenses. Furthermore, they should be shown in a manner that is easy to defend and assist the buyer in understanding the cost of the “distress.” Since the past results are typically negative, specific emphasis should be put on forecasting near-term numbers to illustrate the opportunity and potential value to a buyer. The financial statements should also include a forecast for multiple years (five years) and include an accompanying balance sheet.


Financial Support: If required, speak with your secured lender to offer additional support or availability to assure that the company can get through the transaction. Of course, there will be give and take with the secured lender in terms of cost and time. If additional capital in required, you will need to provide a specific timeline and illustrate how the secured lender’s “position” is improved or at worst, not harmed. Try to create a win-win situation with the secured lender by offering incentives (higher interest rates, fees, etc.) to the secured lender.


Due Diligence: Contract a reputable third-party firm to conduct sell-side due diligence and provide seller diligence support for any potential buyer. Diligence services are being used more in transactions, especially in distressed sales. Key considerations in determining whether to use these services are: reducing time to close, identifying potential problems and risks prior to starting the process, justifying adjustments relating to the distress and giving the buyer with an independent analysis of the company’s historical performance.


Focus On Go-Forward Performance: The traditional transaction will focus most value expectations on historical performance. This methodology does not hold true for a distressed company. The team must focus the potential buyer on the potential opportunity as evidenced by a “run rate” EBITDA of forecasted EBITDA, which reflects the expected improvements.


Management: It is important to critically and honestly assess key managers. In particular, with distressed transactions, carefully evaluate management capabilities and their ability to execute on the turnaround post-transaction. Sometimes potential buyers will have already identified the management team. However, buyers frequently assess the existing management/ownership for their ability and desire to continue with the company. Because of the past challenging financial history of the company, continuing management, if asked to stay on, is frequently compensated with bonuses, increased fringes and other forms of incentive pay.


Companies in distress, with proper assessments and processes put into practice, can survive and even thrive in a challenging economy.



EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: http://www.ema-group.com.

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