A Restaurant Chain Went Looking for Fast Service
With the spurt in the number of distressed companies, it follows that many turnaround and merger and acquisition professionals are spending more time trying to sell underperforming and troubled companies. Because today’s market clearly favors buyers, the real challenge of course, given the typical seller viability and liquidity issues, is to maximize value. Morris·Anderson faced such a daunting task recently, and in a 60-day period honed its Quick Sale skills and achieved a very satisfactory result to boot.
On September 18, 2001, M·A&A was asked to market a $20 million theme restaurant chain that included 3 big restaurants in 3 different states. One restaurant was still in startup mode, one was in early turnaround mode and one was very profitable. The company had gone through almost $40 million of capital in its 3½-year life and had yet to generate any profits in the aggregate. Furthermore, the recession and the events of September 11th had hurt sales volume and cash flow significantly.
The request to sell the chain followed on the heels of an M·A&A viability and situational analysis which showed the chain to be insolvent and running out of cash within 60 days. Not surprisingly, management was receiving loan payoff and other demands from its senior lender.
What follows are the steps taken by Morris·Anderson and the time frames in which the steps were completed.
Step 1 – Determine the Likely Buyers
Prospective buyer names came from multiple sources: the officers and directors, companies or individuals known to M·A&A as buyers of distressed companies, and industry listings of chain restaurant owners that were stratified by size and geography. Simultaneously, M·A&A put together a two-page “blind summary” describing the company in general terms and providing basic financial information. At the end of day 2, M·A&A had e-mailed or faxed over 300 blind summaries with a simple Confidentiality Agreement attached. Over the next three weeks, M·A&A received back ten executed confidentiality agreements.
Certain officers and directors were determined to be potential
buyers themselves. M·A&A segregated the sale
process as between insiders and outsiders.
This was done by assigning a separate M·A&A
point person for the outsiders versus the insiders. This helped preserve the integrity of the
“arms-length” sale process.
Step 2 – Assemble and Distribute a Data Book
M·A&A assembled and reproduced the Data Book within 2 days. The book utilized the narrative and the financial projections already available that M·A&A had reviewed, modified and confirmed as part of the initial analysis. Additionally, typical due diligence material was included such as asset lists, tax returns, etc. When books were distributed, a “drop dead” bid date was communicated.
Step 3 – Proactively Contact Prospective Buyers
A prospective buyer was defined as anyone who had signed the Confidentiality Agreement and received the Data Book, or who M·A&A nevertheless believed to be a highly likely bidder. Face-to-face meetings were arranged. It is a very busy world and M·A&A has found that you need to “help” prospective buyers invest the time necessary to evaluate the purchase of the seller, especially in the Quick Sale mode that M·A&A had established.
The objective of the close personal attention, in addition to expediting and fostering the process, was to find and encourage a “stalking horse” bidder who was willing to bid at an amount in excess of the chain’s orderly liquidation value.
Step 4 – Negotiate a Term Sheet
A “stalking horse” bid from an officer was received within 2 weeks at a value of $8.3 million, which was enough to pay the senior secured lender in full, pay one-third of the junior secured lender and cover employee payroll and most benefit liabilities.
In addition to the traditional terms of sale found in a term sheet, M·A&A and counsel, with the agreement of the Board, had considered the appropriate means of selling the business. It was decided that among the options, a §363 bankruptcy sale made the most sense. A deal was negotiated with the “stalking horse” bidder which was subject to a §363 auction procedure. With the stalking horse bidder, the auction procedure was set up with a very short, under 30 days, time line as cash and hence viability continued to be near-term concerns.
The approved auction process required that each bidder submit bids in conformity with an agreed format. This process minimized apples versus oranges bids that would have been difficult to compare as to value.
Step 5 – Execute the Sale Plan
An Asset Purchase Agreement was negotiated, as well as a §363 bankruptcy sale bid procedure and a small DIP loan facility with the stalking horse bidder. The company filed for Chapter 11 protection on October 4. At the October 5 first day hearing, less than 3 weeks after September 18, the day the marketing and sale engagement started, the judge agreed to an auction date of October 30 due to the emergency nature of the case (the company would have been out of cash but for a M·A&A negotiated short-term DIP loan intended to “bridge” the company to a Quick Sale).
Over the next 3 weeks, in addition to facilitating work on pre-closing tasks with the stalking horse bidder, M·A&A focused primarily on three additional buyer groups in hopes of getting a higher and better offer. All of these buyer groups entered into the ultimate dynamics of the auction. At the actual auction, the company’s major unsecured creditor who has a unique dining promotion and restaurant financing business, put in a whopping $3 million overbid and raised the bar to $11.4 million. This prompted the stalking horse to raise his bid by nearly $2 million. Ultimately, the company accepted the unsecured creditor’s bid and closed the sale on November 19th, just 61 days after the M·A&A sale process started. The results:
- Senior secured creditor paid in full
- Junior secured creditor paid in full
- Employee claims and most benefit claims paid in full
- Customer claims paid in full
- Administratively solvent estate
- Likely double digit dividend to unsecured creditors
The orderly liquidation value of this restaurant chain’s hard assets was estimated to be under $1 million. The stand-alone going concern value of the one very profitable restaurant was estimated to be $4 or $5 million. This compared to the actual value of the final asset sale at $11.4 million, which represented almost a 40% improvement to the stalking horse bid.
Step 6 – Maintain Detailed Records
Detailed records of all prospects contacted, responses to those contacts, additional information requested and provided, meetings, etc. were maintained. Those records were made available to all parties having sale approval rights and fiduciary responsibilities in allowing a sale to go through. Additionally, a summary of that information was provided periodically to those parties as well as the Court throughout the process. M·A&A’s experience is that a properly documented marketing and sale process is critical toward ensuring that any possible objections to a proposed sale, especially in a court supervised §363 bankruptcy sale, can be handled with strong evidence of a thorough marketing process combined with an arms-length sale process having the clear objective of achieving the “highest and best offer.”
It is Morris·Anderson’s view that many more distressed companies can be sold at much higher values if a hands-on turnaround consultant or other professional using a Quick Sale Process were engaged. M·A&A is fortunate to have been able to refine its Quick Sale Process, which means one stop shopping (i.e., workout services and quick sales) for our clients and referral sources.← News & Insights