How to Sell a Business in 3 Days

We recently did some debt restructuring work with a business owner who had a serious amount of problematic debt... 3.5x free cash flow with nearly half due within 3 months. Here's what happened.

This was a service-based business with a vertical market focus and specialized services.

Unfortunately, through a series of investments that did not pay off, the owner found himself in a tricky situation.

We started talking at three days to midnight as part of a last ditch effort to find a restructuring solution before zero liquidity day arrived when the next payroll was scheduled.

What happened?

Ultimately, there was a fire sale of the business over the weekend. After two days of rapid due diligence and negotiations, the majority of assets were sold off at a 0.7x one year cashflows with an earnout structure of another 0.5x contingent on doubling free cash flow within six months.

And with cash from the asset sale, enough runway was secured to give breathing room for a difficult-but-not-impossible turnaround.

So, how did we handle this?

First, we floated an acquisition deal to contacts in our network who were potential buyers. We had just received the high level TTM P&L numbers from the owner, so we used that as a starting point. At first look, it seemed like a pretty good value deal for the right kind of buyer.

Second, we triaged the books knowing speed was of the essence to better understand the financial position of the business. Which was very important because the books were a bit of a mess, and TTM P&L numbers were pretty far off from present-day reality. Which helped guide decision making through the weekend on what the best path forward, was. At this point contacts in our network declined the deal - understandably so - but the owner had found a buyer that was serious, had the cash, and wanted to make a deal happen.

Third, we looked into the debt terms to better understand how to think about the debt structure. There was a rough mix of short term receivables agreements, bank lines of credit, charge cards, credit cards, and private investments.

Fourth, we separated out the debt into 4 tranches based on priority of payment:

• Group A included the highest risk receivables agreements and a private investment with a strategic investor that precluded future business referrals.
• Group B included revolving credit facilities and credit cards with high interest rates.
• Group C included lower interest and lower risk loans.
• Group D included private investments with no interest and no mandatory payments.

Fifth, we looked at strategic options for sources of cash in a 13 week forward cashflow plan, options for renegotiating timing & minimums on upcoming mandatory debt payments, and best courses of action for bringing in new revenue across the current sales pipeline and earnout agreements with the acquirer of the business assets.

There's still a lot of leverage in the business, and a lot of risk. But, there is now a path forward and enough runway to tackle the next phase of restructuring.

There are some important lessons to be learned here

1. If we had spoken with the business owner six months ago, we could have mitigated this entire situation and stemmed the bleeding before it was too late, preventing the fire sale of assets. Proper working capital controls, cashflow planning, accounting systems, and decision making strategy could have managed the ultimate risk of landing in negative equity territory.
2. It's important to understand proper timing of money coming in and out of the business. Pre-paid cash up front for a 12 month contract helps with paying for things today. But, it carries an obligation to service that revenue over the next 12 months, which has an associated cost of service in the form of payroll, software, and other operating expenses. Spending it today like it's all 'profit' after monthly operating costs is putting yourself further in the hole down the line.
3. Don't overbet on new revenue to carry your business. The owner is very good at sales, so he looked to that as a lever to solve financial challenges. But deals are not done until they're done, and not every deal closes.
4. Don't get too comfortable with your retention. There were large clients from the prior year who had churned, significantly impacting free cash flow. Setting aside your own ability to offer good service & products to customers - which is also not a given - there are still macroeconomic external factors, like rising interest rates, that can impact your business. Dismissing those factors, not thinking about them, or just plain betting against them can be catastrophic if you carry a significant amount of leverage.

And lastly, if you want to sell a business, definitely definitely definitely do not wait until a week before your zero liquidity day and try to do it over a weekend. As evidenced, it can be done, but you give up a lot of negotiating leverage as you would probably expect.