EXPLAINER | Selling a business in distress

It's unlikely that any business sector has been unaffected by the coronavirus pandemic and resultant national lockdown, and many business owners are finding themselves in uncertain financial waters - or even faced with the reality of having to sell their distressed business.

But practical considerations for the disposal of a distressed company are slightly different from disposals in ordinary trading circumstances, explains Candice Meyer, a partner at law firm Webber Wentzel.

For example, a distressed sale or dilution of equity typically includes very short periods for the negotiation and conclusion of the transaction to raise the necessary capital quickly. Furthermore, the scope and extent of due diligence and management interviews is limited.

"Time constraints and market practice dictate that representations, warranties, covenants, and indemnities are likely to be significantly limited," says Meyer.

"Only very limited and essential conditions precedent for the effectiveness of the transaction are likely to be accepted, given the urgency and the critical need for a successful restructuring."

The risks for the buyer are high as a result, but this heightened risk is typically compensated by payment of a lower price for the shares or business.

Starting point

Kylene Weyers, a senior associate in dispute resolution at law firm at Cliffe Dekker Hofmeyr, suggests an essential starting point is to ask whether your business is already in financial distress and if this was already the case before the virus hit the country.

"Many business owners in financial stress are in denial. Rather admit to yourself that the business may be in trouble and something may have to be done. Look your situation squarely in the face rather than putting your head in the sand," she suggests.

Furthermore, she says, ensure that your books and records are up to date so that you can determine your business' financial state. You need to know who your creditors are and when amounts are due. 

You should also know who your debtors are and when they can pay you.

"Do a solvency test to see if your business is in financial distress. The fairly valued assets should equal or exceed the fairly valued liabilities and you should be able to pay debts as they become due," says Weyers.

In the current economic conditions, solvency tests must be applied especially prudently, in her view. If you determine that your business is not solvent, you need to take steps to restructure.

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