Clear Rock
Friday, 21 November 2008

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5 Key Points About Selling an Unprofitable Company

We often get inquiries regarding selling a company that is in financial trouble, unprofitable, or "distressed."  In many cases a company has seen sales fall off, profitability erode, or both.  Is such a company sellable?  That depends. 


Is the Company Brand New?
If your company is failing and it is a new business - i.e. less than a year or two old - your options are severely limited.  You will be hard pressed to find someone that will "buy your troubles."  After all, why would they want to?  Without very clear upside for them, there is absolutely no reason to assume the risk. 

And if they do assume the risk, don't expect to cover all the money / capital you have sunk into the business.  To cover their risk they will be looking for a steep discount- perhaps up to 80% on what you have invested. 

What Caused Your Business to Decline?
Is your business in decline because your market has evaporated?  If so, you'll have a hard time convincing someone that your company is worth an investment. 

But if your business is down because of something that is fixable, then you have a business that can be marketed and sold.  Companies that need capital investment, that are scalable, that need better management, etc are ideal candidates for a distressed sale. Further, if you have strong gross margins but high overhead costs, you are an ideal candidate.

Is There an Ideal Size for Selling a Troubled Company?
There certainly is a floor to how big a company should be.  In general, if your company is not producing at least $500k in revenues, your chances are slim.  Ideally, you should be at least at the $1m mark.  The reason behind this is again risk / reward.  For someone to take a risk on your failing company, they have to see that there is significant upside to the market, the company, and their earnings potential.

How Much Is Your Company Worth?
If you are losing money, you can expect that your company is worth close to the fair market value of your assets.  Do not expect someone to pay a big premium - if you are realistic, you should be looking to get out and cover your debts, not turn a profit.  If there is a premium, it will likely be paid out of future profits and based on the performance of the company in the future.  It will not be paid at closing.

What Fees Should I Expect?
Do not expect to find a competent adviser to work with you on a contingent basis if your company is failing, distressed, or unprofitable.  Distressed sales are harder than selling a normal business - and riskier.  No competent adviser will bear the risk of your transaction on a contingent (ie commission only) basis.  A competent adviser will charge you both a monthly fee and then a success fee at closing. 

This is the model that Clear Rock employs.  We do work with distressed companies.  We charge a fixed monthly fee and a success fee at closing.