By Dennis Kebrdle

As some recent receivership work concluded, we wanted to note to our friends and colleagues what is becoming evident to us here at Chikol. In the latest circumstance, the business was sold in a stock buy, with ownership retaining a percentage in the new company. This is a different transaction from what was expected and resulted in all creditors are being paid in full and the new company is investing in expanding the business.

Let me repeat this: It is the first time we’ve had a stock sale in a receivership – EVER!! It marks a shift in thinking about the possibilities in receiverships and distress situations.

This transaction is an example of where we believe the bankruptcy/receivership world is returning to during this economic cycle. We are re-entering the 1980’s, when working with and buying damaged companies was the norm (rather than forced asset sales). The market dynamics are reminiscent of that period, allowing parties to recover value for creditors, returning to the “operational value added” approach used 35 years ago! Simply selling the assets doesn’t come close today—excessive inventories with high operating costs abound—just like back in the 1980’s! The day is now for new and old ideas.

In the Grabill Bankruptcy, we all learned that buyers were looking to “step into” operations they could add to and grow—just like any company they wanted to buy. The key then and today, is to present a company that just needs a wallet to win. Many of the companies we are all working with have been deemed insolvent, are subjects of poor operational execution and in a tight market for small- to medium-sized operations and balance sheets. The fact is that there is now success in the sales of “insolvent” borrowers, where stopping losses and showing that profitability is there for the taking. That is, if you’re willing to pay for it!

Factors for success may include having to pay COD/CIA for materials purchased and spending material sums on capital improvements

DURING THE RECEIVERSHIP. Experience shows us all that by illustrating the future profit potential of the noted company during the receivership, we can demonstrate to prospective buyers the value and the future potential of the operation.

The operational approach of running the business as Receiver/CRO/Trustee as if owned by the consultants appears to be successful again. We recommend this shift in focus and approach. Running or influencing the company as change agents and as if owned by the consultants make it worth more for everyone. This is successful many times as the turnaround process often opens the door of enhanced information for prospective buyers/investors. By approaching the situation as if the debt was still costing 17%, like in 1988, the decisions illustrated show enhanced value at today’s debt costs—but with amounts harder to access!

There is nothing to enhance enterprise value like an upward trend of EBITDA in the face of past poor performance. It shows prospective buyers that the company and management, with the right support and clarity of direction, is worth the price and also presents the “opportunity” for more EBITDA right around the corner. When one demonstrates these facts with an “insolvent” company in bankruptcy or receivership, all can see the opportunity available for a bargain purchase.

This leads to an age-old axiom – buy it before the competition does!

Money costs less than in the 1980’s. But as hard as it is to get it, the dynamic is the same 35 years later!! We’re right back there, so let’s act as we did then–to win!

As published in the TMA Turnaround Times Volume 6. Issue 4. September 2019