Selling the Business Before the Lender Could Sell It For Them

The situation

Reza built his company over twelve years, growing it from a two-person operation into a mid-size distributor of industrial equipment supplying manufacturers across the region. By day he also worked as a sales director for an unrelated company, but the distributorship was his main financial project — he held 75% of the shares and ran daily operations. The remaining 25% belonged to Darius, a university professor who had invested capital early on as a silent partner and had not been involved in the business's operations since.

The company had weathered slow years before, but losing one of its largest supply contracts eighteen months earlier had done real damage. Revenue dropped sharply, payroll and inventory costs did not, and the company fell behind on payments to the bank that held a security interest over its equipment, inventory, and receivables. By the time Reza called Treadstone Law, the bank had sent formal notice that it considered the loan in default and was evaluating its options — which, in plain terms, meant it was deciding whether to appoint someone to seize and sell the company's assets to recover what it was owed.

Darius, for his part, had gone months without a substantive update from Reza about how serious the situation had become. He learned of the bank's default notice secondhand, through a conversation with the company's accountant rather than from Reza directly, and he arrived at the first meeting with our firm more worried about being blindsided again than about the number on the bank's letter. That breakdown in communication between the two shareholders shaped the whole engagement as much as the financial distress did — any solution had to work for two people who, by this point, did not entirely trust each other to look out for the other's interests.

What the numbers actually showed

The instinctive reaction from both owners was to fight the bank's position or try to refinance quickly. Before advising on either, our team recommended an independent business valuation comparing two very different scenarios: what the company's assets would fetch if a receiver seized and auctioned them piecemeal, against what they were worth sold as a working, revenue-generating operation to a buyer who wanted to keep it running.

The gap was stark. A forced liquidation — auctioning equipment, clearing inventory at discount, and letting supply contracts and customer relationships lapse — was estimated to raise roughly $14 million. That would not even cover the roughly $21 million owed to the secured lender, meaning the bank itself would absorb a shortfall, unsecured trade creditors owed a combined $6.2 million would likely see little or nothing, and Darius's 25% equity stake would be wiped out entirely. In an insolvency, equity holders are paid only after secured and unsecured creditors are satisfied in full — and in a shortfall scenario, that line is never reached.

Sold as a going concern, with its contracts, trained staff, and customer relationships intact, the same business was appraised at closer to $38 million. That difference — roughly $24 million — existed only if a sale could be arranged before the lender moved to enforce its security and force a liquidation instead.

We walked both owners through what each scenario meant for their own position specifically, not just for the company as an abstraction. For Reza, a liquidation would still likely leave him personally exposed, since a personal guarantee he had signed years earlier to secure an earlier line of credit meant the bank could pursue him directly for any shortfall the collateral did not cover. For Darius, the liquidation numbers meant something starker: his 25% equity sat below both the secured debt and the unsecured trade creditors in priority, and the valuation showed plainly that there was nothing left for equity once those senior claims were paid, no matter how the loss was allocated between the two of them internally. Neither owner had fully grasped that before seeing the numbers side by side.

What we did

1. Approached the most credible buyer directly. Rather than run a lengthy public sale process the company's cash position could not survive, we identified Elena, the owner of a competing distributor in the same sector who had informally expressed interest in Reza's company over the years. A direct approach to a known, motivated buyer meant weeks of negotiation instead of months of marketing, and it avoided signalling distress to the wider market, which tends to depress offers and spook the very customers and suppliers the company needed to keep on side.
2. Negotiated a forbearance period with the secured lender. We contacted the bank's counsel early, presented the valuation comparison, and asked for a defined window — several weeks — during which the lender would hold off enforcing its security while a sale was pursued. Lenders generally prefer recovering their debt in full through a negotiated sale over the cost, delay, and uncertainty of enforcement, provided they see a credible plan and a hard deadline, so we backed the request with the going-concern appraisal rather than a bare promise that a buyer existed.
3. Structured the deal as an asset sale, not a share sale. Elena's company agreed to buy the equipment, inventory, customer contracts, and goodwill directly from Reza's company, rather than buying its shares. This let the buyer choose which liabilities to take on and left certain smaller, disputed obligations behind with the seller entity to be wound down separately — a structure Elena would accept, but a full share purchase, with all its inherited risk, would not have been.
4. Negotiated a release with the unsecured trade creditors. Full payment to trade creditors was not automatic in an asset sale; it had to be agreed. We worked with the company's accountant to contact the largest unsecured creditors, explain the liquidation alternative candidly, and secure signed releases in exchange for payment from sale proceeds — a condition Elena's company required before closing, since she wanted certainty that no supplier would later claim against the business she was acquiring.
5. Represented both owners in dividing what remained. After the secured lender and trade creditors were paid from the $38 million purchase price, roughly $10.8 million remained for the two shareholders. Reza and Darius did not agree on how to split it, and this became the most contested part of the negotiation, requiring us to separate the questions of what the sale itself required from what the two owners still owed each other as shareholders.
6. Recommended Darius obtain independent advice for the split. Because our firm's mandate was to close the sale on terms that protected the company, its creditors, and both shareholders' interests in the transaction itself, we advised Darius to retain his own counsel specifically for the internal negotiation over the residual proceeds, so that dividing the $10.8 million was not something our firm was seen to be steering in either owner's favour.

The outcome

The sale closed within a compressed timeline that the forbearance agreement made possible. The secured lender was paid its full roughly $21 million. Trade creditors received the full $6.2 million they were owed rather than the fraction they would have recovered in liquidation. Most of the company's staff moved over to Elena's company as part of the transition, and its customer contracts continued uninterrupted — outcomes that simply were not available under a liquidation.

The residual $10.8 million, however, was not split along the original 75/25 ownership line Reza had assumed would apply. Darius, advised separately during this stage of the negotiation, argued that his original investment had been made on the understanding he would share proportionately in any exit, and that a distressed sale forced by circumstances outside his control should not cost him disproportionately. Reza, in turn, pointed out that he had carried the operational and personal financial risk of running the company through its difficult final years, including personal guarantees to the bank that Darius had never signed.

Neither position was without merit, and neither owner had leverage to simply impose a result — the deal needed both shareholders' signatures to close before the forbearance window expired. The negotiated compromise landed close to a 68/32 split rather than 75/25: Darius received roughly $3.5 million against the $2.7 million his original percentage would have produced, and Reza received roughly $7.3 million rather than $8.1 million. Reza also retained sole responsibility for winding down the smaller liabilities left behind in the seller entity, a cost Darius did not share in. Both owners left the transaction with meaningfully less than they might have hoped for at the outset, and both avoided the outcome the valuation made clear was otherwise coming: a forced sale that would have left Darius with nothing and the company's trade creditors badly out of pocket.

Reza's personal guarantee to the bank, the exposure that had worried him from the first meeting, was released as part of the payoff once the secured debt was satisfied in full from the sale proceeds — a detail that mattered as much to him personally as the split of the residual proceeds did. Darius, for his part, said afterward that having his own lawyer at the table for the final negotiation, rather than relying on Reza's characterization of what was fair, was what let him accept a number below his original 25% without feeling he had simply been overridden by the majority owner. That the deal held together through a genuinely adversarial disagreement between the two shareholders, without either side walking away or missing the forbearance deadline, was itself a measure of how well the underlying sale had been structured.

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