Alternative to Liquidation

Situation

Five years ago, a private equity fund invested in a company that was failing by 2011. At investment time, the company was valued at $10 million with the likelihood of substantial growth and increased profitability. Recession, technology changes and significant competition from larger, better capitalized competitors caused sales to slip to less than $5 million annually. Based on significant losses, the investors and officers decided to "throw in the towel" via liquidation. Platinum Group was retained to help assess liquidation strategies.

Challenges

• Previous efforts to sell or merge the company had failed.
• The company had no EBITDA and had lost nearly $500,000 from operations in the past two years.
• Regular investment bankers would not get involved due to limited EBITDA and a perceived lack of value.
• The net value of the company from an orderly liquidation and auction was negligible. The investors had resigned themselves to a write-off.

Response

With the help of the company’s officers and investors, Platinum Group prepared: (1) a list of target companies that operated generally in the same market space; and, (2) an offering memorandum that described the company’s operations and value proposition. Platinum contacted the president of each target and garnered interest by six out of 10 targets. The confidential process culled the field down to four targets. Once the most likely prospect heard that this company was for sale — with four large competitors giving serious review of an
acquisition — it delivered a Letter of Intent to Platinum within two days. Platinum completed this successful transaction on behalf the private equity fund.

Results

The offering price was almost 10 times liquidation value for about half of the company’s equipment, a customer list and non-compete agreements from the officers. The company’s president was hired on a consulting basis to help the orderly transition of good customers to the acquiring company.

This case illustrates the value of using creative, experienced third-party representation when considering options in a wind-down or liquidation situation. In this case, the company had intrinsic value well beyond the EBITDA multiple. This value contributed to a buyer paying more than expected for a financially troubled business. Rather than “throwing in the towel,” Platinum was able to bring significant value to a distressed situation. Platinum completed the work for a modest retainer plus success fees.