A debt and/or equity transaction is often the best solution for turning around a company’s fortunes. If well managed it can be a panacea to the ills of an organisation, providing financial certainty which would not have otherwise been achievable except through a long running trade out and restructuring.
On the flipside, there are strategic pitfalls in potential transactions, for instance they may be:
- Too late to be considered/pursued by a distressed entity.
- Complacently assumed by the directors to be easily/readily available.
- Undertaken with the wrong parties resulting in limited synergies and a clash of management culture and objectives.
The smart play (as always) is to maintain options to achieve a turnaround solution including through developing early and maintaining opportunities for a transaction while looking for the “right” parties to transact with. Here are some tips to keep in mind in relation to achieving a satisfactory transaction in a turnaround.
- Anticipate the likely profile of the investor or financier as this will direct your efforts for finding a transaction partner. For instance your business may be underperforming because of having too larger head office costs due to a lack of economies of scale, this would make the logical investor a trade buyer because who will be able to absorb these costs.
- Don’t be a desperate vendor due to a cash crisis or solvency issues. Purchasers/investors “smell” this desperation making the company unattractive due to the uncertainty created because to the financial position of the company.
- Stabilise any unknown liability or contractual issues. For instance, the uncertainty created by being in the process of negotiating a repayment arrangement with the Taxation Office, may put off a financier. Lock down these issues and therefore increase the confidence of your transaction partners.
- Avoid (if possible) having a requirement for the immediate funding of operations. An investor or debt provider does not want to have to write a cheque for the acquisition or refinance and then another cheque to allow the company to continue to trade.
- Attempt to maintain a competitive process, even if your alternative purchasers/investors are a less desirable or likely transactional partner. Turnaround transactions have relatively lower likelihood of occurring and maintaining as many parties in a competitive process for as long as possible may be the best way to achieve a transaction on optimal terms.
- Have due diligence information readily available in an easy to use and understand format. You have to make it easy for the purchaser or financier and don’t give them an excuse to walk away.
- Obtain “buy in” early on from existing debt and equity providers, A transaction may only be possible with for instance equity providers agreeing to a dilution of their interest.
- Ensure that the return and repayment expectations of the new investor/financier are reasonable, achievable and in line with the expectations of other financial stakeholders.
- Anticipate the desired and potential exit routes of any transaction partner and consider whether you want or are able to provide these eg a trade buyer may want to hold the position long term, private equity would have a timeline of (say) 5 years.
- Make sure the strategic (not just financial) logic of the deal stacks up. A transaction may solve the immediate liquidity problems of the company but create a bigger problem because there is disagreement and dysfunction at a board/management level.
- Beware of the lack of independence of certain advisers, their goal (because of an incentive fee structure) may be to achieve a transaction which is not necessarily aligned with what is best for the business.
Finally, the management time commitment for a transaction is significant and must be balanced against the requirements of day to day operations. In other words, don’t too heavily commit to a transaction as you don’t want to allow trading to suffer which will decrease the likelihood of a turnaround occurring, through a transaction or otherwise.