24 Feb 2011
By Wright Communications
A question often asked of us during the current market downturn is: 'where are all the distressed business opportunities?' It is a good question because there are certainly very few businesses being marketed by brokers at present. Those firms that are up for sale are, in the main, smaller, less mature businesses which would always struggle in the challenging economic climate we find ourselves in.
The distressed opportunities that qualified, experienced purchasers are looking for are quality businesses, which may be struggling to keep afloat solely because of the debt levels they were saddled with going into the recession. You may recall that, in those halcyon days, the big four (Australian) banks were fighting each other to lend money to business owners and purchasers all throughout the decade until the tap was turned off in spectacular fashion in early 2009.
If you purchased a business, or borrowed for expansion in late 2007 or 2008, your business would almost certainly instantly break the covenants you agreed to when you took on the loan. Now - in most cases - there would be very little wrong with the business at all, but the owner would have to focus on how s/he can hold off their bank long enough to ride out the recession. His/her eye would not be focused on developing the business, but rather on creating any number of reports each week to satisfy the voracious bank.
The lenders, in this type of environment, are likely to
overreact to any cashflow problems, however short-term, and may
well force the sale or liquidation of an otherwise perfectly sound
How did we get here? Because of the competition between the banks since the turn of the millennium, and the near two decades of boom times before and after then, the banks were often lending 100% of the purchase price of a business and, via debtor finance packages, any working capital needed as well.
Because money was very easy to get, and cheap, there was real
competition between buyers and this drove up the business sale
price being asked and achieved. So businesses were being sold to
purchasers at elevated prices and, in a lot of cases, up to and
over 100% financed; it doesn't take much of a downturn for firms in
this situation to very quickly begin to sink under their debt
To make matters worse, the global recession originated with the banks and their frankly dodgy lending practices. Lenders were quick to shut up shop, leaving their credit departments to again rule the roost to scale back all previously agreed covenants - causing lots of business owners throughout the world to lose significant amounts of sleep and hair.
In many cases there was nothing fundamentally wrong with these businesses; they just carried too much debt.
We have, over the last two years, tried to make contact with the
troubleshooter who sits between the shop window and the bank's
dreaded collections department. We have offered the bank our
expertise in introducing these troubled business owners to
experienced purchasers, who have either the cash or equity to
buy-in or buy-out the business owner well before s/he loses
It may not surprise you to learn that these intermediaries are not interested. The banks would rather pass the perfectly good business on to the blood suckers, receivers and liquidators to bleed the carcass dry and let an otherwise solid business bite the dust.
Why would they do this? Maybe it is just the tried and true method which covers the banker's posterior? Even by the stage it gets to the receivers and liquidators, there would still be something to salvage if they cared for anything but their billable hours.
A forced sale almost always leads to a destruction of value. A good business broker will work to optimise the value of your business.
I note that the government is currently looking at the issue of those who currently have the responsibility for liquidating businesses. Its proposed Insolvency Practitioners Bill would allow the registrar of companies to ban those deemed unfit to carry out liquidations, voluntary administrations and receiverships. I should also say that I have dealt with a couple of very decent receivers/liquidators over recent times, but they are in the great minority if our experience is anything to go by.
If you talk to any experienced business broker who has had
dealings with the liquidators and their ilk, they have been told
very succinctly to mind their own business. That's even when the
brokers want to discuss a business that they had successfully sold
in the past, and could help sell again. The liquidators point out
they have been appointed by the first secured creditor, namely the
So another perfectly good business has gone, the owners' lives are ruined and, in most cases, the only people to be paid are the liquidators, the receivers and those at the bank. It would be interesting to quantify this destruction of wealth to the overall domestic economy.
Wouldn't it be sensible to first gauge if there is an appetite for the business in the market before it is passed onto these organisations? It not only makes logical sense, but moral sense as well.
We have numerous cashed up buyers that would step into the breach and buy these businesses. The current owners wouldn't lose their shirts; the banks would, in most cases, limit their losses and alleviate the pressure on their reinsurers by having the business back within acceptable covenants.
Not all businesses will be saleable, but let's try to save the ones that can be sold.
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