Acquisition opportunities among distressed businesses
As many of the government measures to support businesses through Covid-19 come to an end, businesses which have limped along may need to take more drastic action and consider renegotiation with creditors, restructuring, disposal, or even winding up or administration.
Depending on your appetite for risk, this gives rise to a variety of opportunities for cash rich or entrepreneurial investors,’ says Troy Warner, corporate and commercial solicitor. ‘However, even for the seasoned investor it is important to have a clear strategy, understand the cause of the business’s problems and the legal and other risks associated with acquiring a distressed business.
Understanding the distress
As with any business acquisition it is important to have a clear understanding of how you will make a return on the investment, and this requires thorough market research and due diligence.
Once you understand the cause of the business distress, whether they result from debt, other liabilities such as a legal claim, poor management, or lost custom, you will be able to evaluate the opportunities. Are you looking to expand your operations or take a competitor out of the market?
Timing is always an important factor and cash rich buyers will be able to take a strong negotiating position.
Acquiring assets or shares
One of the key considerations will be whether to buy the distressed business in its entirety, purchase the assets only, or take share equity. The valuation of the business and the amount which you are prepared to invest will depend on which strategy you wish to pursue.
An asset purchase is often considered the better approach as property, plant and machinery are tangible and can provide a faster way of realising a financial benefit for the buyer. For example, a nightclub may be facing a bleak future in its current role but the building might have potential for other uses or redevelopment. However, you might have to acquire assets which you do not really need as part of the package and then have to dispose of them.
Share purchases, on the other hand, require a longer-term committed involvement in the business as well as taking on liability for its future financial health. This could be the right move for an interested investor where the business is not in dire financial difficulty. For example, where you think you can reduce debt, or turn it around with new management, or if it might benefit from economies of scale within your group of businesses. However legally this approach is likely to be more risky especially if you are unable to prevent the company from going into insolvent liquidation.
The biggest opportunity for a buyer, before a business officially enters insolvency or administration, may be on price. If the business owner has an incentive to avoid insolvency or administration, they may consider discounting for a quick sale.
Any merger or acquisition of a business pre-insolvency would also provide a quick exit for the current owners. While this means that you can mould and restructure the business as you wish, will it leave you with any skills gaps which need to be addressed?
You will need legal advice on many areas, such as insolvency law, employment rights, property, tax, financing, and corporate law. If the business had not been grooming itself for a planned sale, then its affairs may not be in good order and due diligence, negotiation of contracts, and completing any sales processes may take longer than if an administrator was appointed.
Once a business has entered into administration, the sale of its assets (as a going concern or otherwise) will be driven by the administrator wanting to get the best price possible for the creditors of the distressed business.
While you risk losing the opportunity by waiting until this point, there is the advantage that you are more certain to obtain good title to the assets that you are acquiring and avoid picking up any liabilities.
If a business is in particularly bad shape and it goes into liquidation, the end goal will be to sell the assets without having to consider creditor claims. This can present a chance for even better pricing as the business is not expected to continue in any form at all going forward.
In addition to the legal issues already mentioned, interested buyers need to seek professional advice on any tax reliefs or other benefits in taking up post-insolvency purchases.
How we can help
Whether as a buyer or investor, there may be opportunities to realise immediate gains, to invest in the recovery of a business, to acquire assets at a discount, eliminate competition, or to expand your own business. In any business acquisition, there are multiple parallel considerations, issues and negotiations, and particular care is required when dealing with a distressed business in a time-pressured situation.
By guiding you through the specifics of the due diligence, insolvency position, restructuring options, employment and property issues, and negotiation of contracts, we can help you achieve the right goals for your business.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.