By Ian Lim
Becoming insolvent can feel like you’ve failed and it’s never nice to fail. But if it’s done right, insolvency, liquidation and receivership can be the start of something new.
Companies engage with EverEdge for a variety of excellent reasons: to help with valuations, provide models for restructuring, assist with a capital event or perhaps to get clever advice on commercialisation.
However, receivers tend to approach EverEdge for one thing: to help squeeze the most value out of a failed company. That’s their job and they are often very good at it.
After a business fails, there is always a crowd of creditors hoping to claw back lost capital to make their end as whole as possible before washing their hands of the enterprise. Unfortunately, the pie is never big enough to go around. The receivers try their best, but they can’t please everyone.
When a receiver looks at a company from the outside, they see the obvious assets like cash, property, equipment, stock and other tangibles. These have clear price tags and although I’m being a bit cartoonish, it is relatively easy to divide whatever remains of these assets and hand them out based on creditor priority.
Yet receivers often miss the intangible assets hidden inside even the worst-performing companies. The central problem is that receivers don’t know how to ask the right questions to put a price tag on everything you can’t drop on your foot:
- What is it about the company that was valuable in the first place?
- Why did customers buy its products or services?
- Who among the key staff had the best industry connections?
- What data did the company have on its target demographic?
- How did it invent its initial product or service in the first place?
These questions are critical when trying to figure out if a failed company might still hold value that could be sold to keen buyers or unlocked to keep the dream alive in a new way.
Resurrection is especially poignant right now.
While March is historically a busy month for bankruptcies, 2023’s total number of failed companies appears much higher than the same period in previous years, largely due to the lingering effects of Covid-19 and the impact of government fiscal responses to that crisis.
Australia counted 828 insolvencies in March, up from 359 in January and 692 in February, according to the Australian Securities and Investments Commission. In March last year, there were 464 insolvencies.
In New Zealand, March figures from the Restructuring Insolvency and Turnaround Association New Zealand (RITANZ) show year-to-date liquidations totalled 308 for the first quarter of the year – higher than the same period in each of the previous two years.
In the US, commercial bankruptcy filings hit 2305 in March, up 24% from the same month a year ago. Of those, Chapter 11 filings numbered 548, up 79% from March 2022.
And in Singapore, data from the Ministry of Law also showed that 25 companies were wound up in March, bringing the total for the quarter to 54, higher than the 40 cases in the final three months of 2022.
These figures prove the old adage: in good times, sales hide all evils. But as tough times arrive (as they always do), many companies that were walking a tightrope in the good times may not survive.
In a way, mild economic downturns such as the present situation can be a good thing since they flush out the cowboys and any company that might have been underquoting. Downturns also encourage strong companies to reallocate resources from unproductive to productive assets.
Yet just because a business fails, that doesn’t mean the situation is hopeless.
Even when a company goes into receivership, it may still carry a lot of value. Consider the below:
- Intellectual property: Patents, trademarks, copyrights and trade secrets can all be valuable assets. If the company’s intellectual property is unique and has market value, it could be sold to generate revenue for the company’s creditors.
- Brand value: If the company has a strong brand with a loyal customer base, the receiver could sell the brand to another company, which could then continue to operate the business.
- Goodwill: This is the value of a company’s reputation and customer relationships that contribute to its overall value.
- Contracts: A company’s agreements with suppliers, customers or employees can also be valuable assets since they can be sold to another company or renegotiated to generate revenue.
- Software and technology: If a company has developed proprietary technology, this can be highly valuable if licensed or sold.
- Customer data: A company’s data can also be valuable, especially if it is well-segmented and organised. This data can be sold to another company or used to generate revenue through targeted marketing.
Of course, the value of a failed company’s intangible assets depends on the specific circumstances, market and overall timing of when the company went into receivership. The receiver will also need to assess the value of each asset and determine the best way to sell it. It helps no one to simply lump it all into the amorphous box of “goodwill.”
Valuing an asset or company during an insolvency situation can be relatively tricky because there are many contextual factors to consider such as the timing of the valuation, legal/regulatory situation, debt obligations, evaluation of business operations and viability. All of this is important to see if there is a possibility for recovery and turnaround.
It’s also worth deciding early on whether the company is going through an orderly liquidation or if it is a forced liquidation. The answer may limit the ability to optimally maximise the value of any assets.
But if this process is done right, receivers may spot a few interesting ways to spin out a fresh company that leverages the same market opportunity, just in a more appropriate way.
If there is a path forward, the following steps are a good starting point for getting the train moving:
- Identify the assets: The first step in redeploying a company’s intangible assets is to learn what they are. This requires honesty and clear thinking;
- Evaluate the value: Once the intangible assets have been identified, it’s important to evaluate their value to determine which assets should be prioritised for redeployment and which may not be worth the effort;
- Create a plan: The receiver should create a plan for redeploying the intangible assets. This may involve selling them to another company, licensing the assets to third parties, or using them to generate revenue in-house. Any plan should include a timeline, budget and expected resources required;
- Execute the plan: This may involve negotiating new contracts, marketing the assets, or even developing new products or services based on the assets. It’s essentially the germination of a new company with a market-ready idea.
One example of a company that began to fail but managed to salvage its intangible assets and create a successful company is Hewlett-Packard (HP) and its spin-off, Agilent Technologies.
In the early 2000s, HP was struggling with declining sales and poor financial performance. The company had a reputation for innovation and excellence, but it couldn’t keep up with newer players like Dell and Lenovo.
In 1999, HP decided to carve out its test and measurement division into a separate company called Agilent Technologies. This division had a strong portfolio of intangible assets, including patents, trademarks and proprietary technology, but at the time it wasn’t performing as well as other divisions within HP. It was given a chance to stand on its own.
Agilent became a leader in the test and measurement industry and today has a market capitalisation of $US40 billion. The spin-off’s success helped to offset some of the losses HP had experienced in its other divisions and ultimately lifted the parent company back to being a serious player in the computing world.
This is a great example of why business failure doesn’t have to be the end of the world.
The lesson is that every company has hidden intangible treasures which means, if you play your cards right, insolvency could be the start of something potentially lucrative.