Insolvency data for September 2023, analysed by PwC shows a total of 1,967 corporate insolvencies during the month, up 17 per cent from the same month a year earlier. While this was down from 2,308 insolvencies in August, PwC’s Head of Insolvency David Kelly said that the firm expected this to be “short-lived” and said the UK was still on track for the highest insolvency figures since 2009.
Businesses are facing uncertainty in the face of this faltering UK economy, resulting in what could be extraordinary opportunities for entrepreneurs to buy distressed businesses.
Those unfamiliar with the world of business distress may not realise the potential value in buying a distressed business. Acquiring a distressed businesses and / or its assets can be a lucrative opportunity, for both current business owners seeking expansion and high-net-worth individuals pursuing a buy-and-build strategy.
However, it is important to have a clear strategy. Only buy a struggling business if you understand exactly why the business is in trouble, you know how to turn it around, and you have an exit strategy. Even for a seasoned investor there are issues to consider.
We outline a comprehensive approach to finding, acquiring, and revitalising distressed businesses and assets.
Define Your Strategy:
Begin by defining your acquisition strategy. Are you looking for businesses in specific industries or regions? Are you interested in companies with a strong customer base or valuable assets? Are you interested in early-stage businesses that haven’t gained traction, or mature businesses that have established clients, suppliers and reputation? Considerations of strategic fit, integration, compatible culture and customer focus are some of the most important points to get right when starting to search for an acquisition or strategic partner in the first place. Clarify your goals to guide your search effectively.
Conduct Thorough Market Research:
Investigate the market conditions in which you plan to operate. Analyse industry trends, competitor landscape, and potential growth opportunities. Is the market facing unprecedented challenges that is impacting many businesses within the sector? Is their growth potential there with a corrected distribution or pricing strategy? Maybe the competition is too intense?
Acquisition prospects might not only encompass direct competitors, but you might also identify the potential in purchasing businesses operating in key parts of the distribution network or even choke points in your industry’s supply chain. Understanding the market will help you make informed decisions.
Utilise Advisors:
Engage experienced professionals, such as turnaround advisors, accountants, lawyers, and specialist M&A financial advisors, to help navigate the complexities of the deal. Their expertise can help you negotiate favourable terms, structure the transaction efficiently, and address legal and financial issues. Specialist intermediaries are particularly useful if they also have considerable turnaround expertise. If you are known to them, you will usually be treated as an important buyer prospect, particularly if you have previously demonstrated the ability to act decisively and close a transaction in an efficient and timely manner.
Secure Correct Financing:
Evaluate your financing options carefully. Depending on the size and scope of the acquisition, you may use a combination of equity, debt, or alternative funding sources. The decision on which method to use will depend largely on considerations such as; the buyer’s financial position, the prevailing interest rate, and the target company’s willing to accept potential future equity or deferred consideration as part of the deal. Work with specialist financial advisors to structure the financing plan. Reaching out to special situations debt and equity funds is paramount if you are not using your own capital. They are used to working in this space and can move very quickly.
Execute a Comprehensive Due Diligence:
Understanding how the business ended up in its current situation is important. Every business is different, and each distressed situation is unique. Careful due diligence is critical in connection with a distressed business due to, amongst other things, the likelihood of limited or complete lack of recourse once the business has been bought.
Financial due diligence should be a rigorous process to accurately evaluate the distressed business’s financial health. Examine historical financial statements, tax records, debt obligations, and cash flow projections. Engage financial experts to help assess the company’s true value and potential risks. Can the business be pre-packed? Is it better to just buy the assets?
Comprehensive due diligence should also include operational, legal, and regulatory checks. Ensure you look to identify any hidden liabilities or issues that could affect the success of the acquisition or could impact you post transaction.
Negotiate the Deal:
Once you’ve identified a distressed business that aligns with your strategy, engage in negotiations. Be prepared to compromise but also ensure that you protect your interests. The entrepreneur will no doubt be under pressure from the seller to buy the entire company, if only assets have been identified as acquisition worthy, but each situation is different, and it is down to smart negotiation and good advice on structuring any deal.
Work with legal counsel to draft comprehensive agreements, once again, use lawyers that are experienced in AMA (accelerated mergers & acquisitions). When buying a distressed business, ‘time is of the essence’, so it is important that you have a full team assembled so that you can go in and get all the information that is required quickly. If you don’t move quick enough you may lose out on deals either to another purchaser or because the business ends up being declared insolvent by a practitioner.
Assess Post-Deal Integration:
The post deal integration stage is an equally critical factor in delivering a successful acquisition strategy and therefore it is important for this reason that all aspects of total appropriateness or fit need to be considered at the outset. Plan for the integration of the acquired business into your existing operations or portfolio. Determine how to streamline processes, merge cultures, and leverage synergies while minimising disruptions to the workforce and customer base. Realise that many of the people in the acquired business will be resilient (they had to be to survive in the business) but will also have had to deal with a fair degree of stress through the distressed trading period.
Develop a Post-Deal Growth Plan:
Create a detailed growth plan for the acquired business. Identify areas for improvement, expansion, or diversification. Having a clear vision for the future will guide your efforts post-acquisition. Can you share overheads? Will you be able to break multiple territories?
Assemble a capable management team with the expertise necessary to execute the post-deal turnaround. Ensure that you have the right talent in place to address operational, marketing, and strategic challenges. Simply, hire the best people with great track records, give them clear objectives, and let them do their thing!
Acquiring distressed businesses and assets can be a rewarding strategy for business owners and high-net-worth individuals. One such example is the story of Marvel Entertainment. In the late 1990s, the company was struggling and had filed for bankruptcy. With the acquisition by Toy Biz and the subsequent shift towards producing its own movies, Marvel experienced a massive revival. The success of movies such as The Avengers, and Iron Man thrusted the company to success eventually leading to its acquisition by The Walt Disney Company for a staggering $4 billion.
Considering some or all of the points raised by this guide, may increase your chances of successfully finding, acquiring, and revitalising distressed businesses. Remember that careful planning with a solid advisory team, thorough due diligence, and effective post-deal execution are crucial to turning a distressed opportunity into a profitable venture.
If you would like to talk to any of our team, we would be delighted to talk you through the process and identify if we can help.
