Navigating the Sale and Acquisition of a Distressed Business

The current economic environment is creating acquisition opportunities involving troubled and financially distressed companies. Declining revenue, excessive debt, restricted credit, and liquidity problems are forcing some owners to consider alternatives. For buyers, distressed business transactions may provide access to assets, customers, employees, technology, products, or geographic markets. However, an attractive purchase price does not necessarily make a distressed company an attractive acquisition.

Understand the Seller’s Situation

A distressed seller rarely has the flexibility available in a traditional sale. Cash requirements may create significant time pressure. Lenders may also influence the company’s decisions and available transaction structures.

Under financial pressure, preserving value becomes increasingly difficult. Employees may leave, customers may become concerned, and suppliers may tighten credit terms. Owners should therefore evaluate alternatives before liquidity problems eliminate viable options. A sale, recapitalization, refinancing, restructuring, or Chapter 11 proceeding may provide different paths forward.

Evaluate More Than the Purchase Price

Buyers should determine why the business became distressed before pursuing an acquisition. Temporary financial problems differ significantly from a fundamentally broken business model. Diligence should examine operating performance, cash requirements, debt, customer relationships, contracts, employees, assets, and potential liabilities.

Beneath the financial distress, a buyer may find valuable operations or assets that fit its existing business. Strategic buyers may identify opportunities to consolidate facilities, eliminate duplicate expenses, or expand into new markets. Financial buyers may see opportunities to recapitalize viable businesses with unsustainable capital structures.

Structure the Transaction Around the Risks

Distressed acquisitions may involve asset purchases, equity purchases, bankruptcy sales, or negotiated transactions with creditors. The appropriate structure depends on the company’s circumstances. Buyers must consider secured debt, liens, working capital, cash requirements, transaction timing, and third-party consents (the bank). Lender cooperation may become essential when secured creditors control significant company assets. Given the compressed timeline, buyers must balance thorough diligence with the risk of losing the opportunity.

Find Opportunities Before They Become Obvious

Distressed opportunities may emerge through competitors, suppliers, lenders, attorneys, accountants, and other professional advisors. Sellers should also seek advice before financial conditions become critical.

An experienced M&A advisor can help evaluate alternatives, identify prospective buyers, and coordinate negotiations with other professionals. Buyers should involve experienced legal, financial, and restructuring advisors early. Distressed business transactions can create compelling opportunities, but financial distress changes the normal transaction process. The strongest outcomes occur when buyers and sellers recognize the problem early enough to preserve viable alternatives.