The Distressed Asset Triage: 60 Days to Decide Fix, Sell, or Shut Down

The "Zombie" in Your Portfolio Is Eating Your Returns

You know the asset I’m talking about. It’s the Series C SaaS platform or the mid-market tech services firm that you acquired in 2021 at a 14x multiple. The thesis was simple: inject capital, professionalize sales, and exit in 36 months.

It is now Month 48. The company has missed its EBITDA target for three consecutive quarters. The "100-Day Plan" is collecting dust. And you are having the same circular conversation with the CEO about "pipeline velocity" and "Q4 catch-up" that you had last year.

You are not alone. We are currently living through a liquidity crisis disguised as a market correction. According to Bain & Company’s 2025 Global Private Equity Report, the industry is sitting on a record 31,000 unsold companies, valued at over $3 trillion. The median hold period has stretched to an all-time high of 5.9 years.

The era of "extend and pretend"—using cheap debt to float underperforming assets until the market turns—is over. With Distributed to Paid-In (DPI) ratios for recent vintages hovering around a dismal 0.3x, LPs are demanding liquidity, not excuses.

The Sunk Cost Trap

The danger for Operating Partners isn’t the asset itself; it’s the indecision. Every month you fund a "zombie" company’s burn rate, you are eroding the IRR of your entire fund. You are spending 80% of your time on an asset that represents 5% of your potential carry.

You need a ruthless, data-driven triage process. You don’t have six months for a McKinsey strategy refresh. You have 60 days to make a binary decision: Fix it, Sell it, or Shut it down.

The 60-Day Triage Framework: Metrics Over Narratives

Stop listening to the Founder’s stories about product roadmaps and start looking at the cold, hard unit economics. To determine the fate of a distressed asset, we deploy a 60-day diagnostic that ignores EBITDA (which can be manipulated) and focuses on value retention.

Scenario A: The "Fix" (Operational Pivot)

You double down ONLY if the core engine is sound but the chassis is heavy. This path is for companies with product-market fit but bloated operations.

• Metric Gate: Net Revenue Retention (NRR) > 100% AND Gross Margin > 65%.
• The Reality: Customers love the product (they stay), and the product is profitable to deliver. The losses are coming from inefficient GTM or R&D bloat.
• The Play: This is an Founder Extraction and OpEx reduction play. You cut Sales & Marketing spend by 40%, focus on the existing base, and pivot to profitability over growth. You target the "Rule of 40" solely through the profit lever.

Scenario B: The "Sell" (Strategic Fire Sale)

You sell if the technology is valuable but the business model is broken. These companies often have high churn but proprietary IP that a strategic buyer (e.g., Salesforce, Oracle, or a larger portfolio co) needs.

• Metric Gate: NRR < 90% BUT Technical Debt Ratio < 20%.
• The Reality: The commercial engine is failing (high churn, high CAC), but the code is clean and innovative. You cannot fix the churn in time to save the IRR.
• The Play: Stop trying to sell EBITDA. You are selling synergy. Package the asset for a strategic acquisition based on Technical Debt quantification and IP value. Accept a 2x revenue multiple today rather than risking a zero tomorrow.

Scenario C: The "Shut Down" (The Mercy Kill)

The hardest decision, but often the most accretive to your time and sanity. These are the true zombies.

• Metric Gate: NRR < 80%, Gross Margin < 50%, CAC Payback > 36 months.
• The Reality: The product costs too much to deliver, customers are leaving, and it costs a fortune to replace them. No amount of "operational engineering" will fix negative unit economics.
• The Play: Immediate liquidation of assets. Sell the customer list to a competitor for a referral fee. Sell the IP. Wind down operations to preserve whatever cash remains on the balance sheet for distribution.

Execution: The Courage to Cut

The math is rarely the problem; the politics are. Admitting a "Shut Down" or a fire sale feels like a failure of the Operating Partner's duty. But in 2026, the definition of success has shifted from "saving every company" to "saving the fund's DPI."

The 60-Day Action Plan

1. Days 1-15: The Unit Economic Audit. Ignore the Board Deck. Dig into the raw Stripe/billing data. Calculate the real NRR and Gross Margin (fully burdened with support costs). If the Founder resists this data access, you already have your answer (Scenario C).
2. Days 16-30: The Market Test. For Scenario B candidates, quietly float the "tech acqui-hire" conversation with 3 strategic buyers. Do not hire a banker yet. You need to gauge if the IP has standalone value.
3. Days 31-45: The RIF & Restructure. If you choose Scenario A (Fix), you must execute the cuts immediately. We recommend a single, deep cut (20-30% of headcount) rather than "death by a thousand papercuts." Focus on dismantling cross-functional deadlock that is slowing down decision-making.
4. Days 46-60: The Board Vote. Present the binary choice. Show the "Zombie" forecast (status quo) vs. the Liquidity Event (Sell/Shut).

Conclusion: Asset Allocation is an Operational Discipline

Your time is the scarcest resource in the portfolio. "Zombie" companies are time vampires. By applying this triage framework, you stop throwing good money (and time) after bad. You free up your operational bandwidth to focus on the 3-4 "Winners" in your portfolio that can actually return the fund.

As the PE Operator's Playbook dictates: Hope is not a strategy. Triage is.