We were recently engaged by a medical services company, a substantial business that was looking at listing in the new year.
This has been described as a horror story, as the damage that was caused was substantial and the signs were there for a long time. Unfortunately, the constant hope of a turnaround blinded individual business owners to the numerous red flags.
The business was a consolidator of medical businesses, the primary business was almost an investment company in terms of how it operated, with the acquired businesses having a level of autonomy (or so it seemed).
The owners of the medical businesses had raised tens of millions of dollars in both debt and equity. These stakeholders were being the told the story of the imminent listing of the primary business, that any additional capital raising was either for acquisition or growth and that any small blip was just that.
Understanding the forward facing aspect of the business, it was a great business model and there were plenty of complimentary businesses that would thrive under this style of consolidation.
On day one something was not quite right, what was being explained was not the same as the reality of the situation. The core business (being an investment company) didn’t really have a lot of businesses under it and instead was financially stressed, using money from the subsidiary businesses to prop up the head office.
The most recent round of capital raising had fallen through but it was planned to be used to acquire more businesses, and that’s when the penny dropped. The current underlying businesses were financially struggling, drained of cash they were unable to pay rent, staff or even buy stock. The parent company had completely destroyed these businesses. Any capital raising was only to keep the doors open and all that would happen is the money raised would make the problem even worse.
There were the carcasses of several destroyed businesses in their wake, staff had not been paid for weeks, sites had been foreclosed and there was really no future for the business.
Investors had been made significant promises of a present of competent management and a future on the up. The reality was completely different and as the thread unraveled there was a clear detachment between perception and reality.
At first glance this looked like 100% write off for all involved, but then the next layer of problems began….
Ancillary directors and people who sold their business remained exposed to debt as they did not receive releases at the time of sale, leases were not transferred and in one case the staff were left in the old trading business, so unpaid PAYG and late BASs became their responsibility.
All is not what it seems and larger businesses do not necessarily get it any better. For the vendors there was a lack or unwillingness to seek proper advice, assumptions were made that things would be well handled, whereas the opposite was true. Working with one of the business sellers, he was shocked to learn that a personal guarantee was attributed to him as they failed to change the Directors when he sold.
A quick search would have protected some of the business owners and getting clear releases from the parties would have saved a lot of heartache, simple things but totally missed in the hubris of the sale.
Granted we got a quick picture and could understand a lot of it as the business was terminal but there were signs the entire time that could have assisted the stakeholders to protect themselves and limit the damage.
If you’re having issues with a partner firm or parent company, you can give us a call on 1300 023 782 or email us at email@example.com
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