The business world as we know has been facing challenging moments during the past years. Oil prices became crazy, companies’ structures became more dynamic, and the idea of being a freelancer or a solopreneur gained more recognition during the past years than it did during the past decades.

There are many factors that can be added to all these circumstances that can cause some business to undergo difficult situations. The more difficult things get, the harder it is for companies to recover. For this reason, most of them face distress and need to be bought by bigger and more stable companies.

Sings to recognize when companies are struggling can be easily detected by potential buyers. Actually, being able to detect this sings soon can give both the buyer and the seller some advantages when it comes to negotiating a sweet deal for both parties.

In this article, we will share some hints on how to recognize if a company is facing distress, so potential buyers and shareholders can take action and obtain the best results out of the situation.

Due diligence

When due diligence starts to appear in the picture, it automatically means that a company is going under distress.

The reason for this is that potential buyers only stat to appear on the horizon when a company is opening the doors to being sold. Even the slightest hint of a due diligence will give any interested buyer the idea that a company is being sold.

This is probably the most basic and important piece of information that can be obtained in case a strong business is wondering if it has chances of buying any given company.

Costs reductions

Another common situation that is easily spotted in companies that are going under distress is the reduction of costs and the restructuration of their debts. Lay-offs start to become real, as the sale of assets, the offering of equities and the changes in the senior management.

These changes take place primarily in the financial department of companies and later on extend to other dependencies.

Capital structure

Another indicator of distress can be a business’ capital structure. A good way to see if liquidity problems are popping up in the horizon is by spotting if assets are being sold, if fundraising activities are taking place or if public debts are growing so fast that they are harder to hide with every passing day.

Relationships

The relationship a company has with both its customers and suppliers says a lot about its current state. Any potential buyer should always investigate about how the relationships of a business are developing in order to understand if it is distressed or not.

When companies go under distress, relationships start to get weak or tense. Distress can be read in different forms. It can come from a low production, a low commercial activity, a poor relationship between managers and customers, among other circumstances.

Lack of understanding of financial statements

IF you come to the owner of a company, or to its manager and ask it how the financial statements of the company are doing, you assume this person will give a clear and complete report about them. When this doesn’t happen, you can clearly see that the company is going under stress.

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Most trouble companies are those that don’t know how their finances are going. This is especially common when the head of a company is not able to understand the numbers and lacks the ability to take action in order to take the company out of its distress.

Money and customers

When a company is more focused on saving money than into finding new customers to serve, you can see that it is going under distress.

When a business is restructured and cutbacks appear, distressed companies decide to stop “wasting” their time in clients that don’t leave much, and prefer to pour all their energy on strategies that could help them save the business.

In the end, this strategy can be harmful and distressed companies may find themselves struggling to get some revenue from clients that are “worth it”.

Warning

Sometimes companies believe that they can buy a business in distress and easily repair its problems. However, it is important to keep in mind that a company may be in distress not only because of its financial situation but because it has some internal problems that need to be taken care of.

When problems are not only financial, buyers need to be prepared for what may come and be able to restructure the distressed business they bought. It is highly recommended to be careful, get advice from experts and avoid misinterpreting the financial states of any given business before taking action.

Poor management and overleveraged, are some of the most common issues buyers need to deal with when acquiring a distressed company.

Related: 4 factors that affect oil prices you need to know about by Suzzanne Uhland

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