NEWS & INSIGHTS
Spotlight on sales
What should Receivers and VA’s commercially consider when structuring sale processes, to both meet the requirements of the law and get timely, valuable and risk-free outcomes?
Selling a business in a distressed context requires careful consideration of a range of factors. Some stakeholders want to see you do well and deliver value, others hope for sub-optimal outcomes. But, what should Receivers and VA’s commercially consider when structuring sale processes, to both meet the requirements of the law and get timely, valuable and risk-free outcomes?
Sale processes for distressed business require both attention to the law, and an eye to the reality of selling often impaired businesses and assets under pressure and in real time.
Receiver's Power of Sale
A Receiver’s principal obligation is not to save the company, but to deal with the company’s assets in a manner to meet the claims of the appointing secured lender. Of course, often that will involve trading and selling the Company’s business and assets.
The Corporations Act set out the Receivers power of sale, and section 420A imposes a duty on the receiver to take "all reasonable care" to sell a company's property “for not less than market value if, when it is sold, it has a market value; or the best price that is reasonably obtainable having regard to the circumstances” etc. The cases support the contention that it is the process followed by the Receiver, and whether that is what a reasonable and prudent person would do, rather than the ultimate price obtained, that is relevant. Things the cases have regard to include:
- Conducting a comprehensive sale process involving indicative offer and final offer phases;
- Obtaining valuations and achieving a sale price in line with those;
- Seeking out specific purchasers where there is a specialist market for the business or assets;
- Obtaining the advice of lawyers and experts; and of course
- Having regard to the Receiver's own knowledge and experience.
Voluntary Administrator's (Administrator) Power of Sale
An Administrators’ powers are different. Section 437A(1)(c) sets out the Administrator’s power to "terminate or dispose of all or part of [the company's] business, and [to] dispose of any of [the company's] property."
Again, the cases highlight a range of issues for the Administrator, principally the duty to have regard to the interests of all creditors of the company, where an Administrator is entitled to account for a wide range of considerations. They must have regard to the objects of Part 5.3A : including that if it is not possible for the company or its business to continue in existence, then “to provide for the property of the company to be administered in a way that results in a better return for creditors than would result from an immediate winding up”. This can include Administrators selling businesses or assets ahead of the Statutory Meetings of creditors where the future of the Company is determined.
Commercial Considerations
The Law provides a measurable defence to claims a Receiver or Administrator might face. But that is only the beginning of the story. The law can however, struggle to articulate (and quite reasonably so) how the Controller commercially exercises his knowledge and experience, not only to address the defensive requirements of the Law, but to actually run positive and value enhancing sale processes that deliver real solutions for employees, creditors and owners.
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What goes into a sale
Each sale process is different and is tailored having regard to expert advice, industry specific issues, asset specific issues and the market for the asset. That said, in our experience sale processes that add and maximise value typically involve:
- Appropriate advertising that reaches all potential interested parties. The advertising channels should fit the asset. “Marketing” might include reaching out directly to specific known potential acquirers, particularly where assets are more specialised and have “niche” market positions
- A clear sale process and timeline. Communicating a clear timeline to interested parties provides some urgency to the process, avoids “drift” and invites parties to put their best foot forward
- Appropriate provision of information. Subject to the complexity of the business or asset, the preparation of an information memorandum and / or well-ordered data room will be appropriate. Many data rooms provide data on interested party activity that can assist in gauging the interest of participants
- The retention of appropriate sales agents and experts. These parties not only act on a sale bit can also advise how to best present or improve the asset.
- Consideration of the realisation strategy and asset specific factors. Is a trading business being sold and is there funding to allow the business to continue to trade. Are there factors that might inhibit a sale. What stakeholder support will be critical (e.g. key employees, landlords, licences, regulatory authorities).
From our experience
From Wexted’s wide experiences, we can make a series of commercial observations about things to consider, when selling a viable business as a going concern:
| ISSUE | COMMENTARY |
| Trade on decision | The decision to trade can be self-evident, as the only prospect of real intangible value above asset pricing is the sale of a going concern. But are the trading risks well understood and articulated? If there are projected trading losses, but the process is still considered viable, has that been properly assessed and documented? Are there sufficient funds to trade the business? |
| Improving the business | Are there opportunities to improve the business via restructuring or cost outs, strategic opportunities or stakeholder management? While a controller does not have an obligation to improve a business or asset, improvement opportunities may be available. |
| Proactive advisory strategy | The Legal and Advisory strategy needs to be determined early. Is a specialist advisor with specific market expertise warranted, or can the process be run in house? Is the market such that you need an investment bank or Industry specialist M&A Advisor to access buyers credibly? |
| Structural considerations | Are there issues embedded in the business that require a specific approach to the campaign, such as regulatory approvals or third party contracts, or IP that is difficult to separate from the underlying corporate structures? Do the creditor dynamics and buyer characteristics support a structured sale? |
| Previous campaigns | Quite often there will have been pre-appointment campaigns, will these impact the credibility of a new campaign? If so, was the information delivered to buyers a complete picture of the business? Does the business need breathing space to recover before a new campaign? |
| Backing of the business | Does the process have the support of line management? Do they see a transaction as an opportunity for a new (and solvent) beginning? Are there redundancy and other factors that will influence their motivations? Do senior staff need to be incentivised to stay and is the cost benefit of that issue understood? |
| Success and market credibility | Can a successful transaction for value be defined? Is there a basis for a realistic valuation of the business, so that the Receivers can approach the market as willing and credible sellers? Will the buyer market be influenced or limited by offers being delivered by ‘insiders’ such as a Lending Syndicate, who have complete bid transparency? |
| Tell the story | Is there a compelling and measured story for the reasons for failure, and will buyers be able to see a business that can be profitable if freed from its legacy liability, unprofitable contracts and other issues? Can free cashflow in the business be articulated clearly? Can the reasons for failure or insolvency of the business be rationalised and quarterised from business operations? |
| Financial Modelling | Is there a properly sensitised and well prepared business forecast that can be presented and delivered to buyers that makes the bid process simple, and makes the financial Q&A focussed? |
| Have or find a great CEO | Is there an internal leader who can articulate the vision for the organisation during and following the sale? Will buyers be able to rely on that person during the post-sale transition? |
| Clear supplier position | Does the business have the support of its suppliers and customers during the sale? Is there the prospect of buyers making contact with these parties (notwithstanding confidentiality provisions, etc). Is there a strategy for providing buyer re-assurance over major contracts? |
| Know what the IP is worth | Has a value been established for the Intellectual Property in the business that can be used as a credible value benchmark? Can that valuation be shared with buyers where necessary? |
| Research the buyer market broadly | Has a broad and creative approach been applied to the buyer market for the business? Does it factor in trade, financial and other buyers? Are there allied or supplier/ customer businesses who see an opportunity for horizontal or vertical integration? Has this research been properly documented and acted upon? |
| Credible dataroom and management presentation | Can the Controller and CEO explain the business plan to buyers who know the market? Can the business positives and advantages to buyers be well articulated? Does that strategy require buyer-by-buyer considerations (if for example there is a dual track process for trade and financial markets?) |
| Crisp responses to due diligence | Is there a clear and focussed dataroom documentation and response strategy? Has the underlying buyer Q&A been appropriately predicted and managed to in advance? Are Commercial Updates provided regularly? |
| Hostility in the final stages | What factors will create tension amongst shortlisted bidders? Are the deal breakers and timescales for buyers well-articulated and clear? Are there sufficient check and balances to maintain buyer tension throughout the process? |
| Transitional Control | Will the buyer request access to or licensing of the business before completion? Can that request be justified and acted upon? What controls and guarantees need to be put in place? |
| Understand the working capital adjustments | Is the impact of working capital in the business understood and well-articulated? Are completion processes clear? Does the sale structuring allow for flexibility in management of working capital and Controller’s liabilities? |
| Failure contingency plan | If the process fails to achieve a price enabling a transaction, is there a contingency plan to maintain going concern value? |
Summing up
The impact of the sale decisions on directors, shareholders, employees and creditors is considerable. As such, the obligations of a Controller when dealing with a company’s assets are subject to significant and appropriate legal controls.
Having an appreciation of the requirements of the Law is critical to running a risk free strategy for defensive purposes. There are a range of important, but reasonably self-evident decisions to have regard to, in order to provide that protection.
However, the manner in which the Controller uses their knowledge and experience to deliver superior value and outcomes, is the issue that can make the difference between processes that have been run prescriptively well, and processes that generate strong and meaningful outcomes allowing business and employment continuity.
Find out more about author and Wexted partner Chris Johnson
Learn more about Wexted's receivership services
Published 6th December 2024
