7 key issues to consider when purchasing a distressed or insolvent business
The ongoing pandemic will cause upheaval across all markets and sectors. Business models may become unviable. Sound businesses will suffer short-term liquidity crises. Customer behaviour may alter. Distress opportunities can create opportunity if buyers can work to an accelerated timeline. Just click on any of the expandable sections for a short summary, or click here to view the 2 page, print friendly version >
- 1. It's not just insolvency
Distressed acquisitions come in many forms. Various outcomes can be progressed before the administrators are called in. Increasingly business owners and creditors will look at a range of options including accelerated M&A, non-core divestitures, or capital injections, to avoid formal insolvency, help viable businesses continue as going concerns and maximise value.
- 2. Deal structures may vary
Buyers should be flexible as the transaction could be either a share or asset deal. The key to success for a buyer will be the ability to transact quickly, offer a deliverable outcome for the sellers and creditors whilst managing internal risk.
- 3. Distressed businesses do not have the luxury of time
Buyers must be able to identify and understand key issues, evaluate strategic fit and manage downside risk quickly and efficiently. There is no single solution for this, but an efficient and focussed diligence exercise, streamlined internal processes, experienced advisors and flexibility will all help.
- 4. Manage the risk
Risk in mainstream M&A is mitigated through extensive diligence and warranties. But these are commonly unavailable in distressed acquisitions. Deals happen quickly and warranties (if given at all) may not have much value once creditors have been paid. A successful buyer may need to employ different strategies, such as alternative pricing structures, management incentives or insurance to help manage deal risks.
- 5. Is W&I the answer?
Synthetic W&I products provide a set of warranties that an insurer will pay out against without a seller having to give contractual warranties. Buyers will need to assess the time and cost of putting the policy in place and the need for a reasonable level of diligence to be provided to the insurer so it can evaluate the risks.
- 6. Have your chequebook ready
Cash is king for sellers who often require the price to be paid in full on completion. Although deliverability and speed of execution will also be assessed (so price isn't everything). Buyers should have funding lined up. A buyer who is relying on new bank facilities to do the deal may lose out to those with cash on their balance sheet or unconditional funding in place already.
- 7. It's too late when you read it in the press
Distressed businesses come to market quickly and deals complete even faster. Awareness of opportunities is therefore key. This could be relationships with businesses you are tracking or speaking with the corporate finance houses and insolvency practitioners who commonly advise distressed businesses so you are front of mind.
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