Invest to Divest
Strategizing for sucess in exiting distressed situations
Date May 2014
Featured in ABL Advisor
Avoid Letting "Lender Fatigue" Drive the Process
It is a natural reaction for a lender to want to get out of a bad situation quickly in order to cut its losses. Nothing creates anxiety like hemorrhaging money, especially if it seems like there is no end in sight.
It is critical during these times, however, to maintain perspective and continue to think strategically. Among asset-based lenders, there is a phenomenon known as “lender fatigue.” It is the result of a seemingly ongoing cycle where a lender has to prop up the borrower, and deal with an arrangement that is a constant drain on resources. It’s at times like these when the relationship between lender and borrower can become adversarial and filled with mistrust. Nevertheless, as counter intuitive as it may sound, it is important for lenders to take the time to determine the best course of action, particularly at the onset of “lender fatigue.”
Rather than dismantling a company and quickly selling off individual assets in an attempt to avoid a potentially larger loss, a strong argument can be made for continuing operations as a way of unlocking untapped value. The liquidity necessary to pursue such an approach is not always available to a struggling company. A lender might not be willing or able to extend any more credit into what is already a challenged situation. Furthermore, it takes substantial resources to continue operations, while simultaneously focusing on maximizing efficiencies and positioning the company and its assets for sale.
There are scenarios where a third party firm such as Gordon Brothers Group, with the necessary financial and operational resources, is willing to invest in the situation, provided that a close examination of both sides of the balance sheet indicates there is remaining, untapped value.
In this circumstance, continuing operations can be a benefit in a number of ways. This approach not only gives a lender and its borrower a chance to turn raw materials into salable finished items but it also provides for an extended timeframe to allow a suitable buyer to be found and for the maintenance of the company’s customer base, thus retaining enterprise value for the future.
Building a Bridge
Decisions made in a hurry, or in a state of disruption without all the necessary facts, rarely turn out to be good ones. Continuing operations allows time to ensure that all options are considered and made available. In some cases, keeping machinery and equipment in a “warm state” can help build a bridge to a point where a business can be saved with new financing or under a different ownership structure.
In the process of continuing operations, customer relationships and the order book can be maintained. These assets are often overlooked as elements that can enhance the overall value of the collateral.
Even if a company cannot be salvaged, losses can be mitigated, if not avoided altogether. With operations still underway, it is easier for a potential buyer to see the value of the whole as opposed to the individual pieces of a company.
These principles, when put into practice under the guidance of experienced business partners can make all the difference between a costly exit and a graceful wind-down that provides for future growth, as illustrated by the following examples.
Lengthening the Timeframe: F&F Foods
Gordon Brothers Group is often miscast as an auctioneer, but it is the firm’s efforts at repositioning and revitalizing distressed companies that have reinforced its confidence in the myriad different options short of liquidation. Such was the case with F&F Foods, a throat lozenge and candy manufacturing company whose lender Gordon Brothers Group initially engaged with on an informal consulting basis.
As a result of its review, it was determined that even though there were financial and contractual challenges, they were not insurmountable and the company could actually leverage its current assets to re-invent itself.
Gordon Brothers Group’s Commercial & Industrial Division utilized not only its analysis, but its credit and capital to invest into what it saw as an opportunity. Gordon Brothers Group bought the company’s debt at a premium from the asset-based lender, paying more than other bidders that were solely focused on liquidation.
The Gordon Brothers Group team recognized that when kept together and leveraged operationally, the company’s various assets could help them realize additional value for its existing raw and finished inventory. F&F Foods’ manufacturing operations were maintained to fill the existing order book and distribution of the popular Smith Brothers® brand was increased, adding to F&F Foods’ overall revenues and contribution margin.
These continuing operations also extended the company’s active life, allowing Gordon Brothers Group to work with new long-term lenders in supporting a new company and to identify a new group of equity investors. Also, continuing operations allowed for raw materials to be turned into finished, salable product, recouping much more than if the raw materials remained as is.
Over the course of approximately one year, Gordon Brothers Group’s support enabled F&F Foods to move from a substantial operating deficit to an 11% EBITDA profit margin. Even more significant, F&F Foods was successfully reorganized and sold, saving hundreds of jobs in the Chicago area. Today, the company is financially stable and poised for growth.
Cushioning the Fall: Commerce Corporation
Commerce Corporation was a nationwide distributor of lawn and garden products. Its lender had asked Gordon Brothers Group’s Valuation & Advisory Services Division to perform an appraisal of its inventory. This appraisal of Commerce’s inventory and related customer concentration revealed that they had an uneven reliance on one particular supplier, the Scotts Corporation. Between its seed and feed products and the Miracle-Gro product line, Scotts, was, and still is, a major brand in that space.
The examination by Gordon Brothers Group revealed that while Commerce’s relationship with Scotts was a big plus, it might also prove to be a liability if that relationship was ever severed. When a change in its strategy caused Scotts® to end its distributor relationship with Commerce, its asset-based lenders were prepared. The company asked Gordon Brothers Group to perform a further assessment to determine the best course of action, up to and including a complete liquidation.
After a thorough review of the situation, Gordon Brothers Group’s Commercial & Industrial Division made the suggestion to pursue an orderly wind- down of operations outside of bankruptcy. The company chose to pursue the process under its own direction, with Gordon Brothers Group serving as a passive advisor to the lenders.
After several weeks, the company determined it did not have the expertise to perform a strategic, multi-part wind- down of operations and released Gordon Brothers Group from its lender side advisory role and asked Gordon Brothers Group’s Commercial & Industrial Division representatives to assume management of the process.
In performing an orderly wind- down of operations over the course of four months, Gordon Brothers Group sold one of the company locations as a turnkey to a regional competitor. Gordon Brothers Group was also able to prepare the necessary wind- down budgets for the balance of the operation, renegotiate vendor contracts and fulfill existing contractual and logistical obligations. In doing so, it successfully monetized existing inventory, and conducted a sale of all hard assets including furniture, fixtures and equipment.
Gordon Brothers Group was able to dramatically reduce the bank’s impairment by keeping elements of the business together and extending the operational timeline. It retained more value compared to a hurried liquidation and substantially reduced the bank’s losses in the process.
It is not always possible to carry on operations in the face of financial hardship. But when there is an opportunity, a thorough analysis should be performed on all aspects of the business to determine what other options are available. Sometimes this simply means recouping more money than was originally perceived as possible, but a close examination might also reveal that a company has more life left in it.
Whichever the case, the transition is best handled with the help of advisors experienced in multi-faceted business situations and if those advisors are willing and able to absorb some of the financial risk, it is all the better.