How to sell your distressed business
The recent events have brought up some trouble for many businesses. For some business owners they have had to think past the near term and assess their business prospects. For others, it has proven to be an opportunity to use their saved up cash and acquire new businesses.
What is a distressed business?
If your business cannot pay the creditors when they become due and generally cannot keep up with its financial obligations, it is a distressed business.
How can you sell your insolvent business?
If your business has operating liquidity, it may be better for you to sell your business so that you can achieve a greater return as compared to a pre-pack sale. The most important factor this will depend on is the cash-flow of the business. If your business has sufficient working capital, it will increase the chances of getting a better offer.
Conversely, if certain areas of your business are performing well, yet, the business is still operating at a loss, you may be able to find better offers for the part of your business that is doing well. However, you have to assess whether this will be cost-effective and in your best interest.
What is a pre-pack sale?
A pre-pack sale is an insolvency procedure whereby the assets of the company are sold to pay of the creditors. In a pre-pack sale, your company’s assets will be valued which will then be sold under the administration of licensed insolvency practitioner.
The insolvency practitioner will also help you market your business and it will be sold to the highest bidder. Often, existing company directors purchase company assets due to the nature of a pre-pack sale. This is speedier and ensures discretion.
Advantages and disadvantages for buyers of a distressed business
The most obvious advantage for your buyer will be that the purchase price will be lower. Further, the buyer will have more leverage to negotiate terms of the sale since the seller will not have the luxury of time.
The most significant disadvantage for the buyer is the risk. There is a lot of risk such as successor liability or fraudulent transfer.
Advantages and disadvantages for seller of a distressed business
As a seller, you may prefer to sell your business to get a better purchase price as compared to bankruptcy proceedings. Further, by selling the business, you may be able to satisfy all the outstanding obligations if you get the right purchase price and deal.
However, as a seller you will have less leverage to negotiate the terms of sale, particularly, since you will not have time on your side.
How can sellers prepare to sell their distressed business
If your business is in distress, you may be feeling squeezed for cash. If it is so, then it is important you find the right set of advisors to help you with the process. They will ensure that you receive the best deal which also mitigates the risk a seller faces when selling their distressed business.
You should also prepare a schedule of all the debts of your business and other obligations and their corresponding due dates and interest accrual, security interests, personal or other guaranties.
Evaluation of business
Further, you will need the advisors to evaluate your business. You need to ascertain whether some parts of the business or products are more profitable and could be easily sold or whether the business is more valuable as a whole.
The process of due diligence is one that provides a thorough investigation into a proposed investment transaction. It means you check the investment worthiness, and assess the full claims made by the owner. This check is usually performed by a solicitor and accountant who act on behalf of the buyer. A large portion of due diligence will involve checking financial statements and accounts.
If yours is a struggling business, it is vital that you prepare in advance for all the information the buyer may ask.
Click here to find more about due diligence.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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