It is very difficult when your business is already distressed to conclude a transaction with an investor to provide enough capital to settle the existing pressing liabilities, as well as providing working capital for future trade at an acceptable price.
Typically an investor seeks a reasonable return, but in this case, the price for the investment is determined by what the business needs rather than the desired return for the investor. The alternative available to you is to place the business in business rescue and to appoint a competent practitioner. He will be able to use the various options available to him in law to fashion a transaction that works for creditors, shareholders, and the investor.
Investing in a business where the business rescue plan has been drafted by a competent practitioner means that only limited due diligence is required, as the business rescue plan provides :
- that the creditors participate in the proceedings, and the plan incorporates mechanisms allowing for late claims and deals with contingent liabilities which may relate to transactions which occurred prior to the commencement of business rescue;
- that all or some of the staff may be retrenched depending on the viability of the business or nature of the proposed transaction;
- for dealing with ongoing contracts and what appropriate settlements can be created for creditors;
- a binding agreement for the company and all the Affected parties, where the courts cannot interfere in decisions of the Affected parties as set out in an approved plan;
- that the value of the assets can be verified and adjusted based on the reality of what value the market will bear for these assets as part of the future accounting records;
- that the investor can choose to acquire the entire issued share capital or part thereof; the business rescue plan will reflect what is owing to SARS and what losses exist on the effective date of the plan.
Investing in or acquiring assets from a distressed business can be very risky for the investor, unless such a transaction occurs as a part of a business rescue plan as contemplated in Section 134(1) of the Act. Acquiring assets or investing in a distressed business, other than in business rescue, runs the risk of that business subsequently being placed in liquidation. A liquidator may simply set the transaction aside, claim the assets back, and tell the investor to form a part of the concurrent creditors and submit a claim against the assets. A liquidator may do so for a period of up to two years after the transaction. His motivation may not be aligned with the interests of the affected parties, as he makes his fees from realising assets.
An investor will be able to participate in one of the following ways:
- Acquire the business as a going concern where the business and staff are transferred;
- Invest in the shareholding of the business and retain the existing management by acquiring a majority or minority stake in the business;
- Acquire only the assets of the company in part or as a whole.
So, if you are in a discussion with an investor who is interested in investing in your business, place your business in business rescue and appoint a competent practitioner who will assist you in creating a transaction that is suitable for both the investor and the business.
A competent practitioner will find a balance between how to use the funds provided by the investor or buyer and the needs of the distressed business. The needs of a distressed business are usually focused on the lack of available capital, or a declining client-base, or a shrinking market. A lack of capital refers to the inability to pay creditors and acquire working capital for future growth in the business. Under these conditions, the funds will be used to (i) settle the creditors, and (ii) as working capital to be invested in the future growth of the business.
A competent practitioner requires an in-depth knowledge of finance, tax, corporate and labour law, accounting, and a good understanding of mergers and acquisitions to be able to fashion these types of transactions.
Even if you don’t have a specific investor in mind to invest in your business, it would be wise to contact a competent practitioner who can advise you on what can be achieved with your business. Such a discussion will give you an idea of what the practitioner can do to help you save your business.