Buying a distressed business: When speed is of the essence

Many opportunities are arising to buy distressed businesses – those in financial trouble or an insolvency procedure – or their assets at discounted prices.

Distressed businesses or assets are often sold in a competitive auction process with other potential buyers circling for a bargain. Consequently, it is crucial that any potential acquirer can move quickly and appoints advisors who have the resources and experience to work to any timescale.

The following three practical tips will help anyone who is planning to buy a distressed business to anticipate, identify and assess any key risk areas and ensure they have first mover advantage on any potential rivals.

1. Get the right advice before you make an offer

It is crucial that you seek the right advice at the right time so that your advisors can begin to assess the potential key risk areas and advise you on where to pitch your offer for the distressed business or its assets.

As noted above, distressed businesses or assets are often sold in a competitive auction process. It is essential that you pitch your offer at the right level or you may be excluded from the process. Take valuation advice from your accountant and/or a corporate finance advisor so that your offer is made with the right structure and at the right level.

Your offer will be based on the information you’ve been given and this will not always be complete. Your accountant and lawyer will help you qualify your offer by building in the clear assumptions on which your offer is made and agreeing an appropriate period for legal and financial due diligence to take place. Due diligence will allow you to adjust your offer if the information provided or assumptions you have made are proved incorrect.

Talk to your corporate lawyer so that you understand the structure of the deal, how the acquisition process will work, and how the funding will be structured. Make sure your legal team has the resources to move quickly and, most importantly, make sure they have a lot of experience in acquiring distressed businesses many firms claim to be experts but are caught out in the fast moving Accelerated M&A process.

2. Identify who you are buying a business from

If a distressed business is in an insolvency procedure (e.g. administration or liquidation) it will be operated by an insolvency practitioner, usually on behalf of a qualifying charge holder (such as a bank).

If this is the case, it will be the insolvency practitioner who will negotiate and complete the sale, not the owners or directors of the business. Do not waste time negotiating with people who do not have any influence on the sale or the ability to complete it.

3. Get your funding in place

Fundraising for the acquisition of distressed businesses or assets can be more complex than for a business or asset following a full due diligence exercise and with standard documentation. Getting your funding in place before making your offer will give you credibility as a bidder.

You must remember to carefully budget for both the acquisition costs and your post-completion remedial work with the distressed business or its assets. Failure to appropriately budget may, at worst, put your own business at risk.

It’s important to gain a clear picture of the business or assets you are acquiring at an early stage and to approach the acquisition in a coordinated manner with your advisors.

Matt Simmonds is an associate in Brachers’ Corporate Team. He advises on corporate transactions, including Accelerated M&A.

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