In the case of many distressed businesses, a bank is often either the owner of the business, or the key stakeholder driving the sale. This can add complexity to the process of purchasing the business as a whole entity, as banks tend to have different priorities than most corporate sellers. It is also possible for a distressed company to be sold by a syndicate of banks, rather than a single one, which can further complicate the sale process. Clarifying who the seller is, and what their priorities are, is therefore a key early step in pursuing a distressed purchase.
Distressed companies have become distressed for a particular reason or variety of reasons. For potential investors, it is important to understand those underlying causes in order to determine whether they have the right solutions for turning the business around. A distressed company may require operational improvements, cash to resolve particular funding issues, or a complete restructuring process. Investors should be sure they understand the appropriate fix for the issues in question, and have the necessary resources to implement it, in order to avoid further distress to the company or potential risks to the investors’ own businesses.
Distressed businesses can seem like easy acquisitions, but in many cases, they are by no means without other interested buyers. Determining the right offer for the situation, and pitching it appropriately, is therefore essential to a successful distressed purchase. A key step here is a thorough due diligence process in order to ensure that as much is known about the distressed company as possible. This helps investors avoid making premature offers based on assumptions or incomplete or inaccurate information; reducing an offer at the last minute may not only lower an investor’s chance of a successful purchase, it can also create a reputation for “price-chipping” that may be damaging in the long term. It is also important for potential buyers to consider the nature, as well as the amount, of their offer, as it is not necessarily a given that a seller will simply accept whichever offer is highest. For example, a bank that owns a distressed company may choose an offer that is lower, but more secure, than a higher offer that has a deferred element and will require the bank to wait some time before realizing the benefit.
For readily apparent reasons, it is typically easier to secure funding for an asset that has clear value than for a distressed asset. A useful analogy here is the buyer who wants to purchase a run-down house and make improvements to it in order to increase its value; the buyer knows the potential of the property and has a plan for achieving the desired end value, but it will likely take more effort to persuade a bank to lend the necessary funds than would be the case if the house was already in good condition. Given this context, prospective buyers of distressed businesses will find it beneficial to work on securing funding at an early stage, in order to give banks or other lenders sufficient time to assess the potential value for themselves. In addition, most sellers of distressed assets consider certainty to be a high priority; having funding in place in advance will therefore add greatly to an investor’s credibility as a bidder.
One risk area that is among the most likely to hamper a distressed acquisition is the question of management. It is important for buyers to clarify whether the existing management team of a distressed business is included in the terms of the sale, or whether it is possible or necessary to replace some or all of its members. In both cases, buyers will have particular issues to consider. If the management team stays, the question of how to incentivise the team to work with a new owner toward future success is a critical one. If the team is replaced, investors should consider how that may affect relationships with suppliers and key customers. Furthermore, in the latter case, the buyer should clearly outline redundancy terms and costs in the purchase offer, in order to ensure that the present management team is appropriately taken care of.