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Liquidations Finding Value Creates Success

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Saying "liquidation" and "success" in the same breath may sound like an oxymoron, but the two concepts can coexist. In two recent engagements, our firm was retained by lenders to manage their positions in liquidations for businesses considered to be non-viable and irretrievably lost, but our clients recovered 100 percent of their loan balances. In both cases, the principal approximated $30 million; in one instance, the recovery took only 13 weeks, while the other took 24.

To turn these situations into successes, the consultant managing the liquidation must recognize opportunities to align the various stakeholders to maximize recovery and minimize expenses within an acceptable timeframe. It's important to remember that everybody is a potential buyer of certain asset categories; there's an old adage that "life is leverage," and we would add that "time will take that leverage away."

Liquidations need to be conducted in an orderly manner to maximize the return on sales, but as quickly as possible to minimize expenses. Sometimes, to maximize realization, expenses exceed proceeds for the few initial weeks, making lenders very uncomfortable as their loan exposure temporarily increases. Because proceeds from sales that are burned up in operating expenses can devalue the process, lenders and other creditors need constant communication on the progress. While risk in liquidations cannot be entirely avoided, it can be mitigated by utilizing precise timetables, milestones, headcounts and other quantifiable goals that are tied to the cash budget so that they can be measured, tracked and controlled.

There are two basic tools the liquidation manager employs throughout the process: the liquidation analysis and the cash budget. These schedules, which need frequent updates as values change, are typically done in balance-sheet format. The liquidation analysis examines what each category of assets should bring: fewer liquidation expenses. It also notes what is owed to creditors in order of priority. The cash budget serves as a roadmap—a scorecard—for the entire process. It should match the liquidation analysis and show, week by week, how the liquidation is proceeding.

Early in each of our two cases, we determined the company had a good core of sales and financial people to carry out the liquidation. This reduced the need to add more expensive consulting resources and saved costs. A strategic plan was developed for recovery of each asset category. The cornerstone of the plan was a retention incentive plan that covered all employees who would be necessary to maximize value in the liquidation process—not just top management and the sales force, but all employees, down to the loading dock. These stakeholders understood their product and why customers needed it, and had relationships with potential buyers and creditors. One caution is that top management's "frame of mind" is critical. When senior management is at odds with the fundamental concept of liquidation, they must be taken out of the process quickly.

The accounts-receivable collection plan utilized the employees, such as customer service reps and salespeople, who maintained the relationships with the customers. They were critical to collecting from the largest accounts, which are typically the single-largest value category. A systematic call program allowed them to make compromises on offsets and charge-backs and settle these disputes quickly with appropriate oversight and control. Those accounts determined to be "hardcore no-pays" were promptly turned over to an agency.

A strategic plan for selling inventory to key customers was developed, and sales-incentive plans for customers and employees were instituted. Of course, we had to know the composition of the inventory and historical customer purchases, including seasonal factors. Customers were not allowed to cherry-pick the inventory: They had to take the good with the bad. In one instance, we were able to sell off the vast majority of the bad inventory in one transaction at a "blended" price of $0.15 on the dollar. This may seem low, but a large portion of the inventory in this case was obsolete and virtually worthless, so if the customer had been allowed to cherry-pick, realization would have been far less. To qualify for this low price, the buyer had to reimburse the company for labor costs and use its own freight carriers.

To sell inventory, there must be a strong incentive plan for the customers. To achieve maximum value for the estate and avoid criticism from the creditors' committee, one needs to demonstrate that many products can command a sales price good enough to offset the remaining low-value inventory. Accomplishing this is quite simple: Appeal to the customers' greed by knowing what they bought over the last year and what they paid, and then striking a deal that motivates them to buy now. Give the sales force enough leeway to get the deals done, and then get out of their way. We find that giving a decent discount allows one to get the customers to buy some of the harder-to-move goods and gets them to pay in a relatively short (one- to two-week) timeframe. Of course, they also need to pay their pre-liquidation accounts receivable balance.

Freight can't be overlooked. In both of our cases, the companies were distributors. When they filed chapter 11, the carriers became unsecured creditors. There were a number of instances where the carriers would not ship for us, even if freight was prepaid. So what does one do then? Simple: Find alternative carriers that will take cash up front, or have the customers handle their own freight and shipping costs.

By asking the right questions and being resourceful, the liquidation manager may uncover or create unique strips of value among overlooked or indistinct assets. In a recent manufacturing case involving various niche products, we partitioned the assets by product line and found buyers for asset packages that included machinery, dies, engineering drawings, contracts and customer lists. This resulted in a far higher value than selling any individual asset or all of the categories in one lot.

Intellectual property assets can be particularly difficult to identify and market; however, they can have great potential value to "competitors." These assets may include trade names, patents, licenses, franchises, contract rights and rights to territories. Many intellectual assets have expiration dates, so time is of the essence in finding buyers. Often, a foreign buyer will pay a premium for an asset package or for U.S.-based rights as an entrée to U.S. markets.

In addition, there may be value in other non-recorded assets such as bankruptcy claims, lawsuits, pollution credits and other rights.

Ultimate success really depends on the liquidation manager's leadership, as well as the incentive plan for the sales force, key executives and the entire workforce. While a portion of the business may be sold as a going-concern, most people will lose their jobs when the liquidation is completed. The goal is to keep a core team that will stay focused instead of looking for new work. Because we have learned that well-treated employees will stay, the retention plans we used rewarded good results with good incentive pay. The other key in dealing with personnel is being honest with them. Tell them the timeframe of the liquidation, how long they will be involved and what's expected of them.

Every liquidation has a window of opportunity where one can realize maximum value for the assets before the customer base finds new sources of supply. At that point, leverage is greatly diminished—and with that, recovery value plummets. Accordingly, one can capitalize on the window simply by having a well-developed and focused plan and motivated workforce, and by finding hidden value

Journal Date: 
Monday, December 1, 2003

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