Best Practices for Distressed Divestitures in the Mexico Market
In this, our fifth in a series of articles focused on the distinct considerations associated with conducting business in Mexico, we discuss best business practices for the execution of distressed divestitures in that market.
Divesting distressed assets in Mexico requires overcoming legal, financial, and operational challenges that differ from those in standard asset sales. These transactions demand a nuanced understanding of various stakeholder interests, including creditors, landlords, employees, and tax authorities. Beyond determining market value, companies must address critical factors like liens, compliance with strict labor and environmental laws, and lease-related constraints. This guide outlines the best practices for addressing these challenges, including stakeholder engagement, precise asset valuation, and strategic deal structuring, to unlock value in high-stakes situations.
Understanding Distressed Divestitures
Distressed divestitures occur when financially strained companies must quickly sell assets—often at significant discounts—to generate liquidity or prevent further losses. While no business intends to reach this point, many mature organizations encounter circumstances where divestiture becomes necessary. In such situations, swift and strategic action is crucial for maximizing potential recovery.
Unlike standard asset sales, distressed divestitures operate under two key pressures: urgency and complexity. With limited time to locate ideal buyers or negotiate optimal terms, companies face numerous obstacles. These include legal or physical barriers to accessing assets, landlord disputes over lease terms or back rent, union resistance until outstanding payments are settled, and complex tax obligations in cross-border transactions. Successfully navigating these challenges requires proactive planning and an understanding of Mexico’s unique market dynamics.
When Distressed Divestitures Becomes Beneficial
Mexico’s manufacturing and industrial appeal stems from its proximity to the U.S., competitive labor costs, and essential role in global supply chains. However, companies may still find divestiture the most strategic option. Common drivers include:
- Insolvency: Companies nearing bankruptcy can sell non-core assets to cover debts and prevent further financial collapse.
- Operational inefficiency: Underperforming divisions or assets can be divested to prevent further resource drains.
- Strategic refocus: Restructuring to prioritize core operations often requires divesting non-essential assets, freeing capital and management resources.
- Missed payments or default: Asset-based lenders and leasing companies may need to repossess and sell assets if clients default, facing challenges like restricted access or disputes over ownership.
Timing Distressed Divestitures
The earlier companies, lenders, or lessors identify distress signals, the better positioned they are to maximize recovery. Delayed action signals urgency to potential buyers, often resulting in lower offers. Even in late-stage distress, a well-managed divestiture can still optimize value and minimize losses.
Common Assets in Distressed Divestitures
A variety of assets are typically involved, including:
- Real estate (manufacturing plants, warehouses, leased facilities): High-value assets often complicated by leases or regulatory issues.
- Machinery and equipment: Significant for manufacturers, these assets can be critical to liquidity if rapidly liquidated.
- Inventory (raw materials to finished goods): Quick liquidation can help free working capital or satisfy creditor claims.
- Intellectual property (patents, trademarks, technology): Often highly valuable for tech and manufacturing companies.
- Contracts (leases, supply agreements): May be renegotiated or sold to contribute to recovery.
In Mexico, we frequently see U.S.-based companies needing to divest assets like manufacturing plants, real estate, machinery, and inventory. Regulatory issues, labor disputes, or underperformance in these assets often necessitate swift action. Leasing companies and asset-based lenders, meanwhile, face unique challenges in repossessing assets in leased facilities or dealing with labor laws that delay access. Navigating these complexities is best done with local expertise.
Why Speed Matters in Distressed Divestitures
When selling distressed assets, timing is crucial for several reasons:
- Asset Depreciation and Devaluation: Idle assets lose value quickly; machinery rusts, real estate deteriorates, and inventory becomes obsolete. Prolonged inaction turns assets from valuable to unsellable.
- Escalating Costs: Unresolved lease agreements and unpaid wages accumulate penalties, eroding recovery potential.
- Stakeholder Aggravation: Labor unions, creditors, and landlords become less cooperative, potentially blocking access and complicating negotiations.
- Lost Market Opportunities: Delays shrink buyer interest, turning a seller’s market into a buyer’s advantage.
- Reputational Damage: Prolonged distress signals instability to the market, damaging trust and credibility for future transactions.
Navigating Key Hurdles in Distressed Divestitures
Divesting distressed assets in Mexico involves several legal and regulatory hurdles:
- Asset Access Rights: Ownership does not guarantee physical access. When assets are on leased property, landlords owed back rent may restrict access. Employees or labor unions may also block access if wages or severance remain unpaid. Overcoming these obstacles requires skillful negotiation, subleasing agreements, and strategic buyouts to unlock assets.
- Legal Status of Assets: Assets imported under temporary importation status are typically exempt from certain duties, but selling or liquidating them in Mexico can trigger significant tax liabilities or penalties. Ensuring compliance with Mexican tax authorities, transitioning to permanent importation if needed, or arranging export can help minimize unexpected costs.
- Labor Laws and Unresolved Employee Claims: Mexico’s labor laws strongly protect employee rights, particularly in asset sales or facility closures. Unpaid wages, benefits, or severance must be settled to avoid delays. Recent labor reforms empower unions, particularly in heavily unionized sectors, adding further negotiation complexity. Skilled negotiators with deep local knowledge expedite these processes, securing asset access and minimizing depreciation.
- Lease Agreements: Resolving lease-related challenges is essential. In distressed sales, companies may owe back rent or face penalties for early termination. Lease agreements often require property to be returned to original condition, which can be costly for customized facilities. Effective strategies include weighing continuation against penalties, subleasing, and negotiating buyouts to reduce strain.
- Asset Liens and Creditor Claims: Clearing asset liens is critical before selling. For real estate, a Certificado de Libertad de Gravamen (CLG) verifies freedom from encumbrances, while the Registro Único de Garantías Mobiliarias (RUG) tracks liens on machinery and inventory. Addressing liens before sale makes assets more appealing and simplifies the divestiture process. Skilled negotiation and legal support are invaluable for clearing complex, multi-party claims.
Best Practices for Effective Distressed Divestitures
To successfully divest distressed assets in Mexico, companies should follow these best practices:
- Understanding Stakeholders and Their Leverage: Success begins by identifying all stakeholders and understanding their leverage. Creditors, landlords, unions, and tax authorities each hold influence. Knowing their interests and power enables smoother negotiations and faster resolutions.
- Holistic Asset Valuation: Accurate valuation extends beyond market pricing to include legal, financial, and operational complexities, such as liens, labor disputes, and tax liabilities. Comprehensive valuations provide an informed basis for decisions, enhancing the chances of a favorable outcome.
- Navigating Legal and Compliance Complexities: Mexico’s regulatory environment, covering labor, tax, and leasing laws, is challenging. Cross-border tax and compliance requirements add further complications. Local expertise in labor and regulatory matters is critical to prevent delays and costly penalties.
- Maximizing Value through Strategic Negotiation: Innovative deal structures, such as deferred payments, earnouts, or leasebacks, create value even in distressed situations. By resolving claims and preparing assets for transfer, companies can increase buyer confidence and improve recovery outcomes.
Concluding Thoughts
To help ensure the timely and successful divestiture of distressed assets in the Mexico market, companies would be well advised to seek out a partner or partners with a high degree of local expertise and proven government and regulatory relationships. At Hilco Global Mexico, we serve as such a strategic advisor to help businesses involved in these efforts, guiding them on a path toward the most optimal outcomes. We encourage you to reach out to our Mexico-based team with any questions pertaining to the topics addressed in this article or for assistance with a current or evolving situation your business may now be facing. We are here to help. Estamos aquí para ayudar.
