Mergers & Acquisitions Advisors
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Distressed Business Buyers
Buy-Side Distressed Situations
Investing in distressed companies can be very profitable for those who know what to look for and how to execute. There are two distinct buyers of distressed businesses. First, you have the buyer that acquires the company as a stand alone operation. Second, you have the buyer that is acquiring the company to integrate it with an existing operation. Either way, there are numerous opportunities in today’s market to acquire a business or its assets at a reduced price. There are several factors that define a successful distressed acquisition. First and foremost, the investor must find that a company that can be turned around or integrated into another organization. After locating the target company, the most overlooked and critical factor is speed. It is important to remember that the owner of a distressed company wants liquidity and they will substitute value for a quick transaction. Also, if the distressed company has violated any loan covenants with their lending institution, they may only have 60-120 days to sell the company. Another important factor to consider is the due diligence period. Since time is of the essence, the due diligence period may be reduced compared to a normal transaction. This may also include a condensed Purchase Agreement without the standard representations and warranties. After closing, the buyer should diligently manage to their turnaround/integration plan The goal should be to find a company that has debilitating capital shortages or is over-leveraged, but has solid growth potential or synergies with an existing organization. Buying Distressed as a Stand Alone Business When acquiring a distressed company as a stand alone business, the investor’s goal is to build a company that is attractive to future buyers with an emphasis on:
As with any company, an investor should rebuild the distressed company with the purpose of selling it at maximum value while having an exit plan from the start. That being said, an exit strategy should be the last chapter in a detailed turnaround/business plan. This plan should be developed during the evaluation, due diligence and closing phases of the transaction.
Buying Distressed for an Existing Company
If you are a business owner that has managed to weather the current economic storm, there is some good news to report. It is a buyer’s market for underperforming and distressed companies. Furthermore, we have seen many cases where healthy companies are getting rid of business units or product lines to ease their debt loads. Simply “holding down the fort” in today’s environment could mean that you may miss an excellent growth opportunity that can add tremendous value to your company when you are ready to exit.
A strategy to grow by acquisition is usually a smart economic decision even in the best of times. Today, many of the same acquisition candidates you may have coveted in the past can by purchased at reduced prices and favorable terms. Finally, if your balance sheet is in good shape, you should be able to obtain financing as there is capital available for middle market transactions.
There is one important factor to consider if you have never acquired a company before. How are you going to integrate the new company into your existing operation? It is vital that you develop a strong integration plan during the due diligence phase and religiously manage to the plan post sale. Integration includes employees, technologies, recognizing redundancies, financial structures, leveraging synergies and the logistical aspects of the new organization just to name a few! Having M&A Advisors that have personally been through the process is critical to a successful acquisition and the integration process.
Determining turnaround potential requires understanding what has caused the breakdown within a company. Investors shouldn't focus on mere symptoms of distress (low cash and high debt) but should dig down to uncover underlying problems. Distressed investors must make certain that they have solutions that no one else already has used to address a company's underlying problems. The answer is never to just add cash or bail them out…new leadership is always required to implement lasting change. If there are limited solutions to a company's problems and/or uncooperative creditors and/or the price is unrealistic, go on to the next deal.
At Transact Partners, we are there to help guide you through the confidential, competitive & complex world of business sale transactions in today’s challenging environment. Put our experience to work for you!
Contact Transact today for more information!!