Take the L
Because I like stories about numbers, here’s one: we reviewed a deck recently pitching a PE-owned business that hadn’t made money in five years, generated cumulative losses of almost $20M, and piled up more than $30M in liabilities – including AP, customer deposits, and some exotic forms of debt – against assets roughly half that.
When Holly asked what I thought, I told her I was impressed. It’s a flex to try to sell that instead of filing Chapter 11.
Then cynical me started thinking…
What if the sponsor held both the equity and the debt, floating the company with the latter in order to provide the company with enough liquidity so the PE firm wouldn’t have to take a zero on its equity ahead of its next fundraise? Or even better (worse?), enable the PE firm to argue to its auditor that it had bought the company time to get back on a path to profitability and that there was enough “embedded operational progress” to avoid a write-down on the equity altogether?
That’s a lot of other people’s money riding on what is probably an ultimately futile attempt to save one’s own face.
But it’s a hypothetical. Who knows what’s true?
(As an aside, “embedded operational progress” is joining “I meant it as a parable” as phrases I’ll be turning to at some point to get me out of trouble.)
Anyway, the point is that sunk costs are misleading and expensive, but that reputational ones can be more dangerous than monetary ones. When something’s clearly an L, take it. It might hurt (both reputationally and monetarily), but doing so is always less expensive in the end and will free you up to think about better opportunities.
– Tim
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