Imagine the following situation.
A third-generation, family-owned, metal-bending business was in distress and lacked a proper exit strategy. While sales were strong, the management and facilities had not kept up with market conditions, and the business continued to lose money. The original factory was long since outdated, and half of its space was used for storage on prime real estate. The Mexico operation had been generating all the profits for years, even though it was treated as the corporate stepchild.
The family leadership was well into its 70s—and tired. The types of decisions that needed to be made caught leadership like a deer in headlights. The bank was trying to avoid a workout, and it was still supportive, but it was approaching the limit of what a long-term relationship can do to help a non-performing business.
The new CEO was a trusted employee with technical skills, and the family patriarch passed the baton to anyone who would take it. The Board did not consider searching for an outsider with the skills and talents required to save the situation.
So, there was a lack of leadership, capital and cash flow, but not a lack of commercial opportunity. The Board had decided it needed to market the company to relieve the family of the financial burden, and to provide an exit strategy for the family executives. They knew the business was not worth much, but they felt as if they had no choice.
At one time, the business was worth between $20 million and $30 million. Currently, there was no value left in the business. It needed to be fixed for the family to regain capital above liquidation value. The real estate was worth more than the business, but the family was not making good decisions. The family was unable to do this themselves and unwilling to bring in help while they owned the business.
Fortunately, through my network, I was able to find an alternative. An asset-based lending (ABL) fund I worked with specialized in mature manufacturing businesses. They proposed to buy the bank debt (at a discount) as a distressed debt investment, inject capital to revitalize the factories and supplement management as needed. They had a very strong background in metal-bending businesses, having been through this process several times. They would bring in talent, fix the manufacturing problems, sell the non-productive real estate and force the necessary, tough decisions to improve the value of the business.
The family would not have to sell all of its equity. In addition to a distressed debt investment, the ABL fund would take a minority position in the business. With these actions, they hoped that all parties would exit at a rich valuation in several years. This created an option for the family that did not previously exist, saving hundreds of jobs and redistributing risk and reward more appropriately. While it is too soon to know the final outcome, we are optimistic that the situation will end well for all parties. Sometimes, it is who you know, not what you know, that matters.
[Editor’s Note: Check out these related webinars, which can be taken for Continuing Legal Education (CLE) credit, or simply for practical and entertaining education for business owners, Accredited Investors, and their legal and financial advisors: Transition & Exit Planning: Planning and Executing a Sale & Other Exit Strategies, Opportunity Amidst Crisis – Buying Distressed Assets, Claims, and Securities for Fun & Profit, A Distressed Company and Its Secured Lender, Help, My Business is In Trouble!]
Then sign up to receive our weekly Financial Poise newsletter, our take on the most relevant and topical business, financial and legal issues affecting investors and small business owners.
Always Plain English. Always Objective. Always FREE.
Bruce Werner is the Managing Director of Kona Advisors LLC and served as an outside director on private company boards for the last three decades. Kona Advisors LLC provides advisory services to the owners, investors and CEOs of private and family-owned businesses. With deep experience in governance, succession planning, finance, strategy and management issues, Kona…
Catching Up With Carrie Rosenbloom: Co-Founder and Senior Consultant at Evolve Family Business
What are Private Placements?
An Initiation Into Private Equity Funds
Accredited Investor Installment 9: Venture Capital Investing
Ready, Set, Action: Investing in Film Under a Smarter Lens
Installment 8: Venture Capital and Angel Investing
Please log in again. The login page will open in a new window. After logging in you can close it and return to this page.