Sale of Assets to Resolve a Liquidity Crisis – and Potentially Avoid Bankruptcy.
The sale of assets (both core and non-core) is long-established mechanism for Company in the midst of a liquidity crisis to avoid a bankruptcy filing. Of course, in considering this option, it is very important that the short-term benefit (cash infusion) does not jeopardize the long-term viability of the company.
Option 1. Sale of Non-Core Assets.
A company looking to generate cash should first consider the sale of non-core assets. After all, the asset or division is not “mission critical” and a spin off will not substantially undermine the enterprise value of the organization, then by all means a sale should be considered. The downside, of course, is that the sale of a non-core asset may not yield sufficient cash to survive the crunch, especially since non-core assets are typically ignored and under-funded (and, as a result, typically “stressed” from a valuation standpoint). Therefore, a careful analysis must be considered to make sure the company can live to fight another day and is not simply delaying the inevitable.
Another obvious and important consideration in connection with the sale of an on-core asset is making sure the asset is un-encumbered (or over-secured from the Lender’s perspective), which is rarely the case for company suffering from a liquidity crises. A lender, of course, is generally not willing to lose collateral or take a haircut on its position outside of formal bankruptcy context or bankruptcy-imminent workout.
Option 2. Sale of Core Assets.
This is obviously a risky maneuver that should be carefully considered by Management. After all, if the asset is critical to the business, then you cannot swap the asset for cash unless you have a realistic probably of using some of the proceeds to acquire replacement assets (at lower cost) that will be accretive to revenue. To that end, management should consider how long it would take to acquire and integrate the replacement assets as part of reshaped and more streamlined business plan. Of course, the proceeds must be sufficient to clear up short-term obligations and provide working capital through this transition period. Otherwise, the burn-rate will continue at some level and the company will eventually die a slow death.
Option 3. Sale Lease-Back.
In some cases, assets may have substantial equity, but they are so important to the business that the company simply cannot afford to unload them. In that case, there are two options to consider: (a) borrowing against the asset (which is rarely feasible for a cash-starved company due to liquidity and other financial ratios that would be required in underwriting or baked into the loan agreement); or (b) doing a sale-leaseback transaction. In a sale and leaseback transaction, the company can convert its equity into cash, while preserving its right to continue utilizing the asset under the leaseback arrangement. This option is similar to a refinance (in that it monetizes equity), although in this case the equity loss is permanent and cannot be restored absent later procurement of a replacement asset at a discounted price.
Option 4. The Last Resort: Sale of the Company
This is often the measure of last resort to avoid bankruptcy as a result of a liquidity crisis. Often, a cash-starved company will have already hired an investment bank or placement agent in an attempt to raise equity. However, as part of diligence, equity investors typically sense the urgency of the situation, and the distressed nature of the company otherwise becomes readily apparent through customary due diligence and financial review. At this point, equity is not going to place at its money at the bottom of the capital stack unless they can acquire the company (or controlling stake in it)– in order to dictate the turnaround effort.
Furthermore, the delay caused by the optimism of management in holding out for an equity injection often means that a sale of the company to a distressed investor becomes the only option. Of course, company turnarounds involve substantial risk and sophisticated firm may even require that the company go into bankruptcy first to conduct a “363 sales” or “plan sale” in order to wash the acquired assets of unwanted liens, claims, or other thorny problems. Or, the equity investor may seek to acquire the senior debt, which is often the fast way to purchase assets in a bankruptcy-favored position in case the turn-around effort is not successful.
In any event, if a sale of the company is the only feasible option to avoid a backslide into bankruptcy, this process must be initiated as soon as possible (in most cases, long before management is ready to put the company on the block). This allows the transaction to move at a reasonable pace (quick sales generally drive the price lower) and also fosters a more comprehensive and robust marketing effort (leading to a better price and a less painful exit for the owners).