As part of their case study series Peter Godfrey-Evans from Mercer & Hole outlines how restructuring expertise rescued a family business from closure when liquidation appeared inevitable.
Additional time is almost always helpful when pursuing the best possible outcome for a financially stressed business, but even when time is short opportunities may be created.
A family motor vehicle recovery business with over 40 years of trading history had experienced increasing financial pressure due to onerous regulatory requirements affecting its pricing, which caused them to lose a number of contracts.
The directors and shareholders marketed the business for sale and were hopeful of finding a buyer who would continue the business and maintain the high quality of service provided to customers, while retaining the company’s long standing work force of over 25 employees.
A number of parties showed an interest in buying the business and a sale was being negotiated. However, the potential sale fell through and the company’s reserves had all but been used. There was uncertainty about the level of future profits and consequently the directors made the difficult decision to cease to trade and informed staff of their immediate redundancy.
There seemed to the directors to be no way forward for the business and they took steps to put the company into liquidation. At first, a standard liquidation sale procedure was envisaged with either private treaty or auction sales of the recovery vehicles and other chattel assets. Expectations were limited to achieving realisations sufficient to pay the preferential and the floating charge creditors, with only limited returns expected to be available for the unsecured creditors.
However, we reviewed the marketing exercise undertaken by the directors and it became apparent that there was value in the business, and that a competitor or market entrant may be able to secure contracts sufficient to allow a level of on-going trade which might save a number of jobs.
In the short period available prior to liquidation we therefore embarked upon a distressed M&A exercise, which included holding discussions with several potentially interested parties, entering into non-disclosure agreements, providing relevant financial and operational information to potential purchasers and arranging site visits. This resulted in two firm offers for the business and assets which would allow recommencement of the trade. A preferred purchaser was identified who was able to provide proof of funding to settle the purchase price on completion.
Having identified a purchaser for the business and assets, we then needed to obtain the landlords’ agreement to offer new leases, across three separate sites. The process of securing tenure for the purchaser was particularly difficult given that two of the leases had run their course and, in light of the pending liquidation, the landlords could choose whether or not new leases would be granted. Without being able to occupy the premises, neither the preferred nor the reserve purchaser would be willing to proceed with the acquisition.
Following tri-partite negotiations, new leases were agreed in principle and licences to occupy all the premises were granted to the purchaser, which would allow the sale to complete shortly after liquidation.
As a consequence of identifying potential value from the insolvent entity, and the pursuit of an intense sale process prior to liquidation, trading could continue and a significant number of the former employees were offered new employment with the purchaser following completion.
Points of interest
When a sale has fallen through and the company’s reserves are exhausted, its future profits uncertain and its cash limited, cessation of trade and liquidation may appear inevitable.
Whilst late in the day, rescue might seem unlikely restructuring expertise can still be brought to bear. An ethos of seeking to identify and maximise value was the driver for an accelerated M&A exercise, a successful sale, continuation of trading and an enhanced return to creditors.
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