An investor strategically exits a losing business with his full investment intact

A Canadian investor had put millions into the startup of a Chilean radio station start up with a wealthy partner. After a year, he didn’t see a way to turn around the operations and stop the losses. He planned on exiting a losing business and walk away from his investment.

We convinced the investor he would be better off to work with the radio station management to value the business and negotiate an exit with his partner by way of a tendered buy/sell arrangement.

Valuation. We visited the radio station, and based on our assessment of the challenging political and economic environment, along with the high working capital requirements of the business, determined there was too high a risk to fund further monies into this investment.

Advice. We recommended the investor put up a further $1.6M required to participate in the Chilean buy/sell negotiation process.  Our client’s adversary was the owner of a bank with a financial empire as well as a significant ego. We were confident he would overvalue the business and end up owning it and paying our client an inflated value for his share, rather than be seen to fail at this venture, which we had valued at nil.

Strategy. We advised our client to bid $1 Chilean peso for the partner’s share, on the basis that if our client’s bid was less than his partner’s bid, our client would “lose”, and our client would receive the partner’s bid amount for his share. Any amount he would receive would be better than the nothing he would get if he walked away. The partner bid $8.1M Canadian for our client’s share, resulting in our client “losing” the bid and selling to his partner for $8.1M.

Sometimes we must give clients alternatives that they don’t wish to hear and provide our recommendations, if we see a strategic upside. In this case, our client took our advice, risked another $1.6M to enter a buy/ sell negotiation and submitted a bid of $100, instead of walking away from a multi-million dollar sunk cost. He ended up successfully exiting a losing business with his original investment intact.