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To Sell or Not to Sell — That Is the Question

March 19, 2014, 07:00 AM

As a lender, you dutifully review and assess reports from your borrowers on a regular basis. For several months in a row, you see nothing amiss (assuming all reports are accurate). You don’t notice anything to indicate problems looming on the horizon.

Then, one month, a particular report from a particular borrower makes your "spidey sense" begin to tingle.

Maybe a scheduled payment arrives late — the first time this has happened. Perhaps a financial report projects lower earnings for the coming quarter. Somewhere in the data, you notice the company seems to be stretching payables. A phone call with a member of the management team suggests choppy waters ahead. You learn the business has lost a major account.

All possible early warning signs of a business in trouble.

What do you do?

Clearly, you need to bring your concerns to your borrower’s attention. Your initial discussions might include short-term suggestions for helping the borrower through the choppy waters to ensure the best possible outcome, keeping in mind conditions of the loan agreement. If, after a period of time, the situation does not appear to be turning around for the better, conversations with the borrower/owner might need to introduce the possibility of a company sale.

The process of selling a company in distress is a drastic one and can be frought with issues of potential lender liability.

While the fundamentals of buying and selling any company are similar regardless of the organization’s financial condition, selling a troubled company is different. Many considerations come into play for lenders — and, they aren’t necessarily financial ones.

For example, the key stakeholders of a distressed business—owners, shareholders, employees, and vendors--may have conflicting concerns and objectives. Individual economic interests and expectations in light of economic reality can differ widely.

Owners are likely focused on their personal exposure — their financial investment in the company is at risk, and they may be on the hook for personal guaranties. Large shareholders may be concerned about their reputation within the community. Senior managers are likely sensitive about their community reputations, too, with the added stress of wondering whether or not there will be a place for them in the management team on the other side of the sale. Of course, employees want assurance that their jobs will be preserved. (And, as you know, retention of a skilled workforce can be a huge asset to a prospective buyer.)

Given that Boards of Directors are often comprised of large shareholders, the board of this company may have great difficulty dealing with the fact that any financial investment they have in the company could be at risk if they, too, start to see the company entering a period of transition.

Lenders must take all of this into consideration, given their goals of insuring that the company’s assets meet the principal of the loan. In this situation, the adage “don’t loan money to a company you don’t want to manage” suddenly becomes the lenders’ reality.

Frequently, this is the point where the outside expertise of consultants familiar with the issues involved with transitional companies are called in to assess a situation, identify options for resolution, manage the relationships, sort conflicting concerns, and begin the work of identifying prospective buyers.

But, are there alternatives to this scenario? Let’s take a step back.

Chances are lenders sense trouble may be brewing on certain accounts well before they considered the need for a third-party perspective. While it may seem premature or feel like an over-reaction, those early warning “tingles” could be the perfect time to engage the opinion of an objective third party. In fact, this is precisely when an objective, outside assessment can be of most value. Prevention is better than a cure. Those in the business of helping companies in transition and their lenders achieve the best possible outcomes know that the most effective solutions are often those that can be applied in a preventive capacity.

A skilled, objective outsider can ask the tough questions, quickly assess the situation, help key stakeholders understand their options and their leverage in relation to other stakeholders, recommend solutions that serve the best interests of all parties involved and, in the end, preserve the lender-borrower relationship.

Another important contribution that an outside expert in corporate transformation can make at this point is to determine the climate of internal relations at the company. While lenders may have a gnawing thought that their borrowers are entering a transition, the people with boots on the ground — principally key employees — may be way ahead of the knowledge curve. Employees concerned about their long-term prospects at the company may in fact be preparing to leave, which could have significant implications on company operations. The quarterly reports lenders have been receiving don’t reflect the up-to-the-second data about which internal personnel may already be keenly aware.

This is a time where outside expertise can address these issues in a preventive fashion before they threaten a business.

Lenders know that a bad loan can go south far faster than appropriate business responses can be arranged. At times, a wiser, more proactive and financially sound alternative is the early intervention of an experienced third party to address existing issues in order to maximize value and assets for all key stakeholders, including lenders, boards, vendors, customers, investors and employees.

Peter L. Tourtellot
Principal | Anderson Bauman Tourtellot Vos & Company
Peter Tourtellot is a founding principal of Anderson Bauman Tourtellot Vos & Company, a corporate revitalization company that works with companies in more than 40 industries throughout the United States. Founded in 1989, ABTV brings successful outcomes to companies in distress.

In his capacity as a turnaround professional, Tourtellot has served as interim CEO and president of companies in a wide variety of industry sectors, as well as a consultant to many others.

A leader in the development of the turnaround management profession, he is a past president and chairman of the Turnaround Management Association and a past president and chair of its Carolinas chapter. He has served as chairman of the association’s Certification Oversight Committee, a position that was created upon the merger of the Association of Certified Turnaround Professionals into the Turnaround Management Association in January 2008. He also serves as chair of the academic committee for the Carolinas Chapter of the TMA.

Tourtellot is a past president and chairman of the Association of Certified Turnaround Professionals and served as vice president of education and a member of their board of directors prior to the merger.

Tourtellot is a member of the advisory board for the Love School of Business at Elon University where he served as chairman from 2003 until 2010.
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