Know When to Exit, Do Not Be the ‘Living Dead’

By: Mike Teng
Submitted: 2007-01-17 15:36:29
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Within the corporate world, there are the ‘living dead’, which are the sick companies that go on a wretched existence, without any hope of turnaround. These companies need a miracle such as a resurrection from the dead. Many of these companies need a change of DNA or business models. They are technically commercially insolvent and the owners will face the fate of bankruptcy if they close down the operations. Therefore, these ‘living dead’ just hang around, waiting for the death sentence. For some, the death sentence may take years before the owners decided not to throw in good money anymore to chase after bad money. For others, the bubble keeps getting bigger such as the construction companies in Singapore that continue to clinch loss-making projects to cover up for the earlier losses.

Some of these ‘living dead’ are large companies with huge amounts of bank debts. However, the banks are unwilling to wind up these companies, as some one said: When you owe the bank lots of money, you owe the bank.” These banks may go under together with these “living dead’. Therefore, these living dead are allowed to survive in the short term. An example is Donald Trump’s corporate empire that went into massive financial difficulties in the 1980s. He owed the banks a lot of money then and the banks were unable to press the trigger to stop the flow of credit as they would be dragged down with him

If companies are caught in such situations, the owners have to take some tough decisions to get out of this quandary. It is important to know when to exit. An optimised exit is one of getting out of non-core or under performing businesses, where there is a loss of confidence in the management and further losses and declining profitability are expected. Removing such under-performing assets can free up capital for investments in the core businesses

If you are able to optimise your exit, then it is no longer perceived as organisational failure but rather unlocking of your values. Optimised exits should be made strategically rather than be done out of desperation. This is because when it is done out of desperation and panic, quite often the value of the company is diminished. Successful exits require a lot of planning and can maximise shareholder’s value, minimise cost, liability and disruption as well as enhance the value of the enterprise.

Optimised exit is necessary for many ‘living dead’. For some it may mean cleaning the “deck” prior to an acquisition or integrating a large acquisition that included non-core or unprofitable assets. For others, the business model needs to be revamped with the market changes. The management needs to be able to bail the company out of the dire situation and scarce resources need to be re-deployed elsewhere for better returns. For some others, it may be a case of the shareholders and owners getting tired of the business and deciding to move on to do something else.

There are various channels to bail the company out. One way is to sell the business as an ongoing concern. Another way is to attempt to turn around the company from financial losses before disposal. If the company has a grim chance of turning around, it is better to close the company immediately, cut losses and move on. There is nothing to be ashamed about with your company going bust. Many successful entrepreneurs suffered failures in their earlier ventures. They are able to make subsequent comebacks. It is better to bite the bullet, avoid bankruptcy and recoup the losses and to fight another day than to be totally dragged down to the bottom because of trying to save a hapless situation.

Usually, it is difficult to get a good price or premium when selling a troubled company. Many acquirers try to avoid buying a loss-making enterprise like a plague. They will find it extremely difficult to convince their shareholders to undertake the risks of acquiring a loss-making enterprise. For instance in China, some loss-making and state-owned enterprises are offered for sale at one dollar without acquiring the past liabilities. Yet, there are few takers. You never know the full liabilities that you can be buying into. In Singapore, some businesses are conducted at a loss. The high rental overheads, expensive manpower staffing, etc, have eroded all the profits. However, many entrepreneurs felt trapped and reluctant to shut down their business as they will have to proceed with bankruptcy procedures immediately. However, any delay in closing down such businesses can dash any hope of recouping the losses.

There are some points to consider before you embark on saving the company. Is it worth the pain and effort? Do you want to keep it going by throwing good money to chase after bad money? Therefore one needs to ask whether one’s company is worth more dead than alive? If it is much like a vampire, neither dead nor alive but living on the nutrients and sustenance of the living blood, then it is time to drive a stake through the heart and relieve the misery of the ‘living dead’. It is worth more to be dead than alive.

Article source: Expert Articles