In certain situations, the sale of an operating entity as a going concern in a receivership proceeding is a viable alternative to seeking relief under the Bankruptcy Code. Receivership going-concern sales may be especially appropriate in complex situations where enterprise value is declining, but the company is not hopelessly insolvent. This article briefly highlights those conditions, factors, situations and circumstances that may contribute to or impede a successful going-concern transaction within a court-supervised commercial receivership.
Type and Purpose of Receivership
The factors outlined in this article are derived from IronHorse LLC's recent experience in facilitating two very different going-concern sales.
The first sale involved a company that was a distressed, underperforming specialty wholesale distributor in transition within a very robust, healthy and growing industry and market. This entity had roughly $30 million in annual revenue, low customer or key product concentration risk and intangible value derived from its brands, strong executive team, organizational capability and distribution network. The owner (and founder) was highly supportive, open and healthy, but ready to exit the business. There was a single secured lender with a crosscollateralized line of credit, equipment term and real estate facilities. The owner and the lender maintained close and frequent contact, and the company had a history of timely and credible financial reporting.
The second sale involved a company in a much different situation. This company was a badly impaired commodity manufacturer experiencing a protracted period of decline in a very unattractive industry. The industry generally experienced very high rates of product obsolescence, business failure and entity contraction. This company suffered from a very nasty and prolonged dispute between the co-equal owners dating back five or more years. Resulting litigation had reached an impasse, and each party ultimately agreed to the appointment of a receiver. The single secured lender, who was prepared to foreclose and liquidate the collateral, provided very stringent, "qualified" support. IronHorse LLC was appointed as the receiver, and the court allowed for a timeframe of 45 days to close a going-concern sale, otherwise the company would be liquidated.
The facts of the second situation posed substantial hurdles to conducting a thorough solicitation and sale process. The perception of fairness in the sale process was of particular concern, especially due to the preexisting, protracted and highly contentious nature of the ownership dispute, the existence of several dozen trade creditors, substantial balances of delinquent/unpaid taxes of various types, the estate's administrative insolvency, and the abbreviated sale timeline (which ultimately resulted in an insider sale transaction.)
An analysis of the creditor mix, make-up and history is essential in any turnaround engagement, but especially so where a company explores alternative solutions utilizing state receivership laws. Important creditor-related considerations include:
In addition, a secured lender's willingness to support a process to solicit and secure going-concern interest depends largely on:
Although there may be a desire to investigate potential related party transactions and other state law claims, that process has to be funded, usually by the secured lender. In the event of an administratively insolvent receivership estate, however, the secured lender may not offer up the funding. This is particularly the case when the secured lender desires an expeditious conclusion to the receivership in an effort to minimize the possibility of adverse actions by trade creditors and other parties in interest.
Critical Factors Conducive to a Successful Transaction/Outcome
From the two receivership experiences cited above, we have compiled the following list of factors that may increase the likelihood of a successful going-concern enterprise transaction and potential pitfalls in a receivership proceeding.
Factors potentially increasing success:
Potential pitfalls in receivership proceedings:
Going-concern enterprise transactions within receivership are not all that common and should be considered by a thorough analysis of the particular facts, risks and other factors on a case by case basis. Those primary factors that are conducive to a successful sale under Section 363 of the bankruptcy code are typically relevant to a sale within a court-supervised receivership as well. As more states such as Missouri attempt to pass legislation providing detailed regulations, requirements and statute governing receiverships, it is likely we may experience an increase in the volume of these transactions given the latitude, flexibility and speed of process available within them.
Tony Wayne, CPA, CFF, CVA, CIRA, is a Certified Public Accountant with over 25 years of private industry senior operations experience. After a diverse career spanning 15 years in Big 8 public accounting/consulting and private industry, Mr. Wayne founded IronHorse in 1998 with an emphasis on complex turnarounds and restructuring consulting, crisis management, advisory services, CFO services, and litigation support. IronHorse is an ideal solutions resource for the closely held, family owned middle, or small-market industrial firms in transition serving a six-state region including Nebraska, Iowa, Kansas, Missouri, Oklahoma and Arkansas.
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