There are many current negative economic indicators that would suggest that in the near future there likely will be an increasing number of distressed companies.
Particularly, as the Central Bank appears to be ready to continue to increase interest rates until the current surge in inflation subsides.
These among other factors will most likely result in an increasing number of Receiverships either through Assignment for the Benefit of Creditors, or Receiverships forced by third parties, by lenders or other creditors.
Revitalization Partners (RP) has certainly seen an increase of late, in the number of inquiries and activity related to receiverships, so we thought we would share a story periodically based upon our experience serving as court-appointed receivers.
CONSISTENT CASH FLOW ISSUES …
RP was engaged by an internationally based secured lender to work with one of their borrowers that was experiencing consistent cash flow issues and had borrowings on their line of credit that was maxed at their credit line limit.
We met with the borrower and conducted a thorough analysis of their cash flow situation.
It became apparent after completing the analysis, that the owner of the business was making loans to himself by drawing down on the bank credit line.
Upon finding this issue, we confronted the owner and he confirmed that he was in fact initiating those loans and that he felt it was appropriate.
We immediately contacted the lender and advised them of the situation and recommended that they initiate an emergency receivership to allow a neutral third party to take control of the company and its assets.
They agreed with our recommendation and asked RP to serve as the receiver and to further investigate our findings of potential fraud.
CASH FLOW POSITIVE IN A FEW MONTHS …
The receivership was approved by the court and RP immediately took control of the business. The objective was to investigate our initial findings and to quantify the amount of possible fraud that took place. The owner was immediately terminated.
We took control of the operations of the business and worked with the management team to streamline operations, reduce inventory and improve the operating cash flow of the business.
We were able to accomplish the goal of improving cash flow to a level where the company was cash flow positive within a period of several months. We also identified a member of the management team that had the ability to manage operations and moved them into a general manager position, reporting to the receiver.
We were able to work with the new general manager and make further improvements to the business.
MILLIONS IN FRAUDULENT LOANS …
Concurrent with our work to improve cash flow, we launched an investigation into the scope of the alleged fraud and found that the former owner had in fact taken millions in undocumented loans from the company.
In conducting further research, we learned that the former owner had used the funds to upgrade his residence, purchase cars, boats, and had made an investment in an illegal business operation.
All while having cut wages for his employees to “save money to preserve the business”.
After documenting this information, we conveyed it to the lender to determine what action they would like to pursue.
A GOING CONCERN …
After operating the business at a profitable level for about a year, RP decided to sell the assets of the business as a going concern.
We marketed the assets of the company through a number of channels, including businesses that we had prior relationships with from past engagements.
After marketing the business for several months, we identified a company we had a past relationship with, as the best and highest bidder.
They were in the same industry and wanted to expand their operations to the west coast and Hawaii. The sole issue delaying the sale was that the company in receivership had a union and the purchaser would not allow a union in any of their divisions.
After negotiating a financial and claim arrangement with the union, we believed that we had a transaction that we felt was in the best interest of the creditors and closed the transaction at a price well above liquidation value.
As part of the process, we were able to pay the secured lender in full and return some portion of the funds to the unsecured creditors.
After working through this complicated process, we were able to negotiate the sale to the satisfaction of the secured lender, the union, and the employees of the company while selling the assets of the company at a going concern value and did so at a level that maximized the value of the estate for the creditors.
Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.
