Herman: John L. Herman Jr., Author

Buying a troubled company

There are different methods to buying a troubled company depending on the size of the operation. This post will concentrate on the “big boys”, companies with assets in excess of one million dollars. Despite those real estate riches programs that suggest you can buy anything for no money down…that’s not reality when real assets are concerned.

To understand how to buy this type of business…you need to understand what status it is now in and who is really calling the shots. The owner bought or built a business, hotel, manufacturing company, or supply house either over a long period of time, or he just overpaid not that long ago and he can’t service the debt. Every business has a cash flow…money coming in…and the cost of goods sold, or the cost of people to provide services has to be paid almost immediately or the vendors will stop shipping you goods or the people will stop working. Heat power and light have to be paid or they will be cut off. Taxes, insurance, and those high advertising costs. But each category can be shaved a bit by not paying in full, or not paying at all for a month or so and soon the business starts to owe a lot of secured (banker) and unsecured (vendors) debt. In effect those providing your business with credit have been funding your losses. Because you believe the big payday is just about to happen and then you can catch up. Well, unlike Uncle Sam who creates debt and then just prints more money, one day the piper calls and you can’t pay him.

At a certain point in time the suppliers stop selling you unless you pay cash. You try another vendor hoping for more credit. The new guy needs the business so he takes a risk on you…his mistake that will cost him his business one day…and over a period of several months you owe quite a bit of dough. And by now, the banker has seen enough. His concern is simple. Give him his interest, his fees, and his principal back and he is a happy guy. When he sees your statements showing heavy losses and large unsecured debt he starts thinking you are no longer a good customer, because if he has to put you in the “workout” department his bank has to change reserves. Bankers would rather change jockeys at that point and keep the loan as viable. Unsecured creditors may be sunk.

I worked with over 300 companies losing money…half of which filed Chapter 11…the other half could have but didn’t. There are so many different kinds of sales of these companies it will require many postings to explain them. Article 9 Foreclosures, Sales for the Benefit of Creditors, Chapter 11 / 360 sales. But how do you buy one?

You start by talking to the banker. He is the guy who holds the keys. Will he sell you his loan? Will he help oust the current owner? If you can keep that loan viable you bet your ass he will. But what about those unsecured creditors…won’t you have to throw them money…only if there is someone else out there willing to do so. In today’s credit environment there were many houses sold to non-credit worthy buyers. So many that the banks know they will lose money on a foreclosure sale of that house. But the non-credit worthy buyer also got cable television or satellite service and yesterday in the stock market one major provider admitted that people abandoning their houses owe millions to cable companies that will never be paid back. Companies are the same. Vendors eager to build new clients offer credit hoping to expand sales and increase profits. They often bet on the wrong horse.

To buy a company with a million dollars in assets , just keep pounding on the banker. While you want the owner to sell to you, keep in mind he is losing everything and unless you want him around (huge mistake) he has no motivation to help you. And since the banker is trying to get the most for his loan…he is talking to anyone like you to be sure he is getting the best offer. That is where my firm excelled. We fronted the deals and talked to all players. So look for ads that Brokers offer troubled companies for sale in such as the Wall Street Journal. Get on mailing lists for Brokers who specialize in these deals. Do some dry runs to learn the sales process. Go to bankruptcy hearings when a sale is being Motioned for Approval.

There are a million more details you will need to know…but this heads you in the right direction. The City of Baltimore put up the Firefighters pension plan money to the tune of 1.5 million dollars to renovate a property that became a Bed & Breakfast and Restaurant. When that first owner went bankrupt the next owner paid $ 400,000 in court. His debt service advantage alone made him profitable. He got 1.1 million in renovations for free. Ahh, troubled deals…they still make my heart flutter.

• Posted: 13 November 2007
• Comments: 1
• Category: Starting a business

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