Valuing a Distressed Food Processor: Going Concern vs. Orderly Liquidation
Harvest Table Foods Ltd. is insolvent and in receivership. The receiver has a stalking horse bid of $8.5 million for the business as a going concern, including a 3% break fee and $250,000 expense reimbursement. Management's normalized forecast shows EBITDA of $1.4 million next year, capital expenditures of $350,000, and stable working capital. Healthy food processors trade at 6.5x EBITDA; distressed processors have sold at 4.0x. An orderly liquidation appraisal values equipment at $2.1 million, inventory at $600,000, and receivables at $900,000; leasehold improvements are nil. Wind-down costs are $700,000 and priority claims are $300,000. The company has a $5.8 million secured term loan, $1.2 million of unsecured trade debt, and a $400,000 pension deficiency. A competing bidder has expressed interest but needs four weeks to complete due diligence. The receiver must report to the court on whether the stalking horse bid is fair and whether a sale process is in the best interests of creditors.
1. Calculate the going-concern value range and the liquidation recovery, and compare the outcomes for unsecured creditors.
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Going-concern value: using the EBITDA multiple range, 4.0x × $1.4M = $5.6M, and 6.5x × $1.4M = $9.1M. The $8.5M stalking horse is 6.07x, within the range and closer to the healthy-company end, which is reasonable if the bidder is strategic and the business is stable. Liquidation: equipment $2.1M + inventory $0.6M + receivables $0.9M = $3.6M gross. Subtract wind-down costs $0.7M and priority claims $0.3M = $2.6M net. The secured lender is owed $5.8M, so it absorbs the entire $2.6M and unsecured creditors receive nothing. In a going-concern sale at $8.5M, the secured lender is paid $5.8M, priority claims of $0.3M are paid, and transaction costs might be $0.4M; about $2.0M remains. Unsecured claims are $1.2M trade plus $0.4M pension deficiency = $1.6M, so unsecured creditors could be paid in full, or close to it, before any dispute over the pension claim. Even if the pension deficiency is treated differently, the going-concern sale is clearly better for unsecured creditors. The receiver should present both calculations, state the assumptions, and note that the liquidation value is not a floor for the sale; it is a comparison.
2. Advise the receiver on the break fee and the request for a four-week delay, considering the fiduciary duty and the creditors' interests.
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The break fee is 3% of $8.5M, or $255,000, plus $250,000 expense reimbursement, for a total of $505,000, or about 5.9% of the bid. That is at the high end of what courts typically approve, but it may be justified if the stalking horse has done the work, provided a binding bid, and is necessary to attract a buyer. The receiver should test whether the fee is proportionate and whether it would deter a competing bid. A four-week delay is not automatically in creditors' interests. The receiver should quantify the cost of delay: professional fees, employee attrition, customer defection, and the risk that the stalking horse walks. It should also require the competing bidder to sign a confidentiality agreement, complete diligence quickly, and post a deposit. The best course is usually a short, court-supervised sale process with a firm deadline, not an open-ended delay. If the competing bidder can show a credible higher bid, the receiver can seek a brief extension with a matching or topping requirement. The receiver's duty is to maximize value, but also to act with commercial reasonableness and certainty. It should report to the court on both scenarios and recommend the process that best balances value and risk.