PODCAST | How Turnaround Specialists Make Distressed Businesses Valuable [Part 2]

Published on: 03/04/2019 By: Gorfine, Schiller & Gardyn

In part two of the GSG and Dorset Partners, LLC podcast series, Chuck Faunce and Jeff Sands discuss turnaround scenarios, the distressed exit “salvation” process, friendly foreclosures and more.

The first turnaround scenario involves transitioning a high volume restaurant with high name recognition from the first generation to second. In this scenario, emotions took over, as the second generation didn’t want to evolve the business for fear of hurting the first generation founders’ feelings.

This resulted in an outdated business model that yields significant annual losses. Now that the first generation has passed, the challenge is to figure out whether the business is too far gone to save or what strategies to pursue if it’s not.

The second scenario involves a debt financed buyout. A consistently profitable family owned food flavoring manufacturer repeatedly turned down lucrative third party offers to keep the business in the family.  The two founders are getting older, and one is ready to be bought out and retire. The business is going to take on a significant amount of debt to fund the buyout.

Beyond the debt, this owner’s exit removes critical talent and institutional memory from the business. The complication is that if multiples, cash flow or both decrease, while there still may be enough value from a subsequent transaction to pay off the debt, that may leave the remaining owner without a significant amount of equity value when he’s ready to exit.

For baby boomer entrepreneurs who want to exit their business but haven’t effectively planned to do so, the “salvation” process stacks exit targets from best to worst outcomes.

The best target involves buying enough time to avoid a distressed sale. Below that would be an emergency sales process involving strategic buyers at first and expanding to financial buyers if necessary.

If all else fails, a friendly foreclosure provides the entrepreneur a release from the bank in exchange for compliance through the auction process to minimize creditors’ losses and hopefully avoid bankruptcy, litigation, and other arguments over the business.

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