Applying M&A rigor when winding down a business

By: Rich Infantino, Erwin Lopez

Any number of situations can result in a company’s need for winding down a business—and sometimes there is no real prospect of finding a buyer. A new strategy may be the cause, a regulatory change, a political or industry shift, technological shifts, or simply the deterioration of the business such that losses are persistent and growing. The result is the same: If it can’t be fixed, funded, or sold, it may be time to start the corporate wind down process.

When selling is not an option, there’s a potential risk that the parent company may not believe there is much to be gained—and may move slowly toward the wind down process, giving the matter less attention than it deserves. And yet, “nothing to gain” does not mean there is nothing to lose. The value of assets may continue to erode, losses may continue to bleed the parent company, and there may be damage to the core business of growing concern.

This is why leadership should consider bringing the same discipline and urgency to winding down a business that they would bring to a more advantageous M&A situation. The corporate wind down should be treated as a transaction to be worked through with the rigor and speed of a divestiture—even if there won’t be a buyer in the end.

As a starting point, the following three questions can help to organize the process and identify the resources and support needed to make a corporate wind down transaction succeed.

1. What are the pain points?

An early effort to think through potential problem areas is vital. Every company needs to weigh the impacts that winding down a business will have on employees, customers, supply chain and more. Livelihoods can be affected when a business is wound down, and the parent company should recognize the importance of their employees’ perceptions that they have been treated fairly. Client relationships can be damaged, and the customers of an operation a company is winding down are often the same customers the company wants to retain for its operations being preserved. Not only that, depending on the core of the parent company, their operations areas might be impacted by services previously shared with the business that’s winding down.

When we work with a Deloitte client on a corporate wind down, we start with the identification of potential pain points and then move quickly to create a high-level roadmap that addresses those concerns. It’s good to craft your message early. An effective communications effort is key to managing relationships with affected employees and customers. Properly maintaining and reinforcing the company’s controls environment also will be important to protect the reputation of their parent organization.

2. What are your options?

Another question to settle early in the process is whether the wind down should be solvent or insolvent. Putting a business unit into bankruptcy in a particular geography can have advantages, helping to address potential liabilities ranging from balance sheet debts, to litigation, to unfunded pension obligations in an orderly and equitable manner. Deloitte’s scenario analysis for winding down a business can help to address this matter.

An appropriate timeline will need to be set for the process. To do this, a company must understand where any liquidity required will come from—and what the cash flow runway might look like—as the wind down process moves forward.

3. Where is the value?

As we’ve pointed out, opportunities for gain are, by definition, quite limited when a company is at the point of winding down a business. Yet, optimizing value is still a relevant exercise. There may be proceeds from the sale of factories, equipment, inventory, real estate, or intellectual property. There are almost always tax issues to consider and plan for when a business has failed and will be liquidated. And there is much to be gained by getting an operation that is a distraction for management, as well as a drain on cash and profits, out of the way. Sometimes, stopping the bleeding can have the most value.

The urgent task

On occasion, the need to shutter a failed operation sneaks up on a company slowly. Perhaps a failed sale process for a moderately performing business results in deeper losses a few years later, paired with an outlook that suggests the best option is to wind the business down. However, more frequently than not, the need to exit a business comes upon a company almost overnight. This was certainly the case amid the COVID-19 pandemic, which resulted in sudden, dramatic shifts for a number of businesses. More recently, the impacts from the US sanctions on Russia have made some companies reconsider any entanglements or operations in that troubled region, as well.

What matters most when a wind down situation occurs is that company leadership acts decisively, employing both urgency and rigor. Their goal should be to make sure operations are wound down as quickly as possible while protecting the parent company, preserving value, and upholding previously agreed-upon obligations.

Questions or comments on this blog post? Reach out at our contact information below. We’d love to hear more from you on your own wind down strategies and insights

Rich Infantino
Managing Director, Corporate Restructuring | Deloitte Risk and Financial Advisory
rinfantino@deloitte.com
215 246 2360

Erwin Lopez
Senior Manager, M&A and Restructuring | Deloitte Consulting
erwilopez@deloitte.com
469 417 2249

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