A board member called me on a Tuesday, informing me that the company couldn’t make Thursday’s payroll without a bank loan. Luckily, the loan came through on time. I was asked to submit a bid to restructure the business so the owners could delay or avoid selling the company, and fortunately, I won the assignment.
We immediately moved to reduce overhead by 40%. This was possible since the business model and markets had shifted to a less intensive service model, but the company was still carrying staff from the older, high service way of doing things. So while it was painful to the individuals, the business was shedding unneeded functions.
Next, we negotiated with the bank to buy time and avoid selling the company. We refinanced the existing debt, spreading out the payments to ease the monthly burn. Due to a good relationship and prospects, the bank complied with our financing request. The core business was healthy; it just needed time to restructure.
Then, we went about rebuilding the management team and compensation structures. We added significant recruiting and marketing capabilities since that is what we needed to drive growth. Since we had cut every possible cost (including the owner taking no income), we had to grow our way out of trouble.
After 12 months of work, we had the business on a good track. The new management team had gelled, the business plan was optimistic, and the team was feeling good about the situation.
But at the same time, we knew the market was changing. While we were busy trying to save this business, many new competitors had entered the business. The industry was being flooded with hot, private equity money; recent deals were peaking at 15 times EBITDA (earnings before interest, tax, depreciation and amortization), a measurement used to compare profitability among competitors. The competitive landscape was changing. New competitors were picking off our key employees.
Our owner was also coming close to his natural retirement age. While he wanted to work for a few more years, he knew that he’d have to sell the company for a specific minimum amount to ensure his financial security.
Everyone knew the acquisition frenzy wouldn’t last, but no one knew when the music would stop. There were numerous forecasts to suggest we had a year, maybe two years, maybe less. But we knew that we would only know the tide had turned in retrospect, and it would be easy to miss the market if we waited too long.
In the past 20 years, there had been no significant competitors who could threaten the business. There were a few small shops that were competitive nuisances, but no one was a mortal threat. Now, a major competitor was targeting each of our prime locations and stealing key staff.
We had fixed enough of the business to have a reasonable sale, so I recommended that the owner sell while the market was hot, but he deferred. He thought that he could get more value by spending another year improving the distressed business further.
Another year has passed, but the business is doing worse, not better. The competition got tougher. The supply chain flexed its muscle and took back a piece of the profits it didn’t have before, reducing margins materially. The new management team had a few hiccups.
So, we hired a banker, and the sale process is starting. We started to hear rumors of buyers walking away from deals saying, “That is just too expensive to buy.” There were already cracks in the market. Don’t wait too long to sell the company. Every day you are not selling your business, you are buying it back.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Roadmap to Selling a Business or Taking on Outside Investors; Opportunity Amidst Crisis – Buying Distressed Assets, Claims, and Securities for Fun & Profit; and Transition & Exit Planning: Planning and Executing a Sale & Other Exit Strategies.]
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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…
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