CREATING CASH FROM FORGOTTEN RECEIVABLES FOR A PRIVATE EQUITY FIRM'S ACQUISITION

Highlights:

C&W helped a private equity firm that had just closed an acquisition to generate "found money" from written off receivables that were not factored into the deal price, literally sitting in boxes in the accounting department.

• Receivables were "long gone":

  • Averaged 782 days outstanding

  • Came from a now discontinued operation

  • Previously worked by a strong credit and collections staff

  • No documentation other than a paper copy of the invoices

  • Dormant for more than a year

• Recovery was outstanding, topping 35% of the face value of the receivables

 

Background

Our client had just been purchased out of Chapter 11 bankruptcy by a private equity firm intent on rebuilding the core business. As such, generating cash for working capital was on the top of everyone's mind.

 

During the bankruptcy proceeding, our client had shut down two of its operating divisions and was left with millions of dollars in residual receivables stemming from past work the defunct divisions had performed. Although our client tried to collect these receivables as best they could, they were left with a significant amount of residual receivables that had to be written off as uncollectible. After two years of intense efforts, our client finally closed the book on these receivables just prior to emerging from bankruptcy protection.

 

The private equity firm was aware of this pocket of very old receivables, and saw the potential for generating some cash from this "off-balance sheet asset." However, the management team and the credit and collections department were completely occupied with critical initiatives aimed at rebuilding the core business. Since these old receivables were time consuming and carried a low probability of recovery, the decision was made to outsource the collection activities.

 

Traditional collection agencies had no interest in taking on these collections. The receivables averaged 782 days outstanding. The originating company had been out of business for more than 18 months. The receivables were diffused in a complex maze of organization and customer programs. The only supporting documentation consisted of a box of printed invoices. Most of the employees from the shuttered divisions were no longer with the company, and the computer systems had been shut down. There were several known payment disputes with large customers. And the files had been intensely worked for almost two years.

 

C&W's approach was to first get the receivables organized appropriately. We created a master list of invoices and physically grouped the invoices by customer account. Second, we performed a test collection run on 60 accounts hand selected from a cross section of the receivables to determine the most common obstacles and blockers.

 

In this process, we identified several issues. The main issue was finding the right person at the debtor companies. We adjusted our approach to spend extra time and effort locating the right location and entity to approach for collection. In many cases, it was not easy, but we were able to achieve success. We also learned the main objections and how to best handle them. For example, some debtors stated that the bills could not be paid without PO numbers (which we did not have in our possession). We developed a standard response to such requests: "We both know that this was ordered. If we need to take the time to hunt for the PO number in our archives, we are going to need to collect the full amount and nothing less - otherwise we could discuss a settlement." Based on learning from the test batch, we revised our strategy and proceeded on a systematic collection effort.

 

We also were very careful to approach each situation tactfully. We cleared batches of accounts with our client before beginning collection efforts. In order to provide customers with some context for the efforts, we regularly gave debtors a brief history on the situation. In addition, we were very sensitive to taking a delicate approach to disputes. In sum, we received no substantive complaints from customers.

 

We delivered very strong results for our client. Much to the surprise of the client and the Private Equity firm, we recovered over 35% of the face value of the claims.   This represented a mid six figure contribution to the company - a very pleasant development for everyone involved. As importantly, we were able to generate these results with minimal time and attention from the management team.