A client was referred to us by a lender in the “managed asset” area of a local bank. The marching orders were to identify areas suitable for cost reduction and to assist management to develop a strategy to become consistently profitable. These objectives were accomplished in short order, but it became evident that the debt the business had incurred was more than it could realistically support if it were to become self sufficient.
In light of these factors, we examined the net liquidation value of the primary assets of the business and determined that their value was substantially less than might be obtained in a sale of those assets. Having worked for the FDIC and being familiar with the credit quality standards being imposed on member banks, we asked the lender what he felt might be an appropriate amount to agree upon if he were to walk away from the credit. After consultation with his colleagues, he informed us that he would accept approximately one half of what was owed. With those marching orders, we sought out a lender that would consider the retention of jobs and the prospect of future success as a more compelling factor to lending than more standard criteria then in evidence. We were able to secure most of the financing necessary from a quasi-public lender that had a much stronger public purpose in its charter and the balance was obtained be securing an equity loan on the home of the principal shareholders.
The result was the elimination of a crushing level of debt that was unsustainable and the insertion of a low interest source of capital that served as the catalyst for a more manageable cost structure. In the process, the tax implication on the forgiveness of debt was offset from a tax perspective by the cumulative tax losses earlier sustained. We were also able to secure a federal grant to support the sales initiatives contemplated at the onset of the engagement. The business is currently debt free and looking forward to developing a strategy to transfer ownership to the next generation of the family.