As of the past decade, it has been characteristic of entrepreneurs the increasingly tendency to come up with innovative business ideas. Given the fact that today’s markets grow both in numbers and in complexity, such idea is what has enabled the emergence of assorted businesses that benefit from this juncture. Necessity is the mother of invention, and such connotation spans over a much broader meaning. Aside from coming up with innovative game-changing ideas, entrepreneurs also pay special attention to financially troubled businesses, since they also embody an opportunity.
2016 kind of condemned to ostracism a sheer array of businesses —and the fact that easy credits are no longer available could account for that —: simply put: entrepreneurs will face an extraordinary opportunity to acquire businesses, whose financial statements are far from extraordinary, at almost ridiculous prices. There is, however, something much more complex than what generally meets the eye: Suzzanne Uhland has addressed the topic of acquiring distressed businesses and companies and there is something that always stays immutable: buying financially troubled businesses might end up being much more deceptive than expected, and might also entail significant risks and potential drawbacks —the ones that are not normally entailed in the acquisition of trustworthy businesses—.
Be that as it may, should entrepreneurs still consider to pursue this option —truth be told: sometimes it is a golden opportunity—, there are certainly several things they ought to pay special attention to in order to thrive in such venture:
First of all, it is necessary to assess whether the business in question has already filed for bankruptcy or not. History has proven that it is much more recommendable to strive to acquire a business after the filing of the bankruptcy code since it brings along a certain degree of flexibility in terms of its speed and potential benefits, unlike the other scenario. Be that as it may, once this initial issue has already been sorted out, or even if the interested party is open to a larger spectrum of possibilities, these are key activities that ought to be carried out prior to the purchase:
Within the non-bankruptcy context, it is highly advisable to carry out a thorough investigation around the business in questions. This becomes especially important given the fact that distressed businesses may lack post-closure legal recourse. Additionally, although it is almost self-explanatory, it is however, important to find the reason why the business in question is for sale as well, emphasizing the possible causes for the distressed situation. The majority of cases depict businesses that have been lagging behind their competitors due to excessive debt figures, which are also connected to poor management. Businesses in general, are subject to the quality of its execution: poor management and lack of experience are the main factors that lead companies and businesses to this type of frameworks. It would be irresponsible not to analyze the business’s current status, only after such assessment has been carried out, entrepreneurs seeking to purchase financially troubled businesses can have their teams go forward on the idea and generate the outline that will mark the strategy.
Pay attention to assets
In the context of company purchases, it is generally a wise idea for the buying party to purchase assets, not the equity, of distressed businesses. The whole idea behind the perks of such premise is that by buying the assets, the acquiror will benefit from stepped-up tax basis in the purchased assets and it will certainly shrink unclaimed liabilities. Severe distressed businesses, however, might not be as beneficial in this sense; nonetheless, it is the wisest idea to pursue a prudent structure in regards to the liability-risk perspective. Given the fact that all cases are different in their nature, it is advisable to seek counseling so that the purchase does not end being hectic and even potentially negative.
According to experience, if the assets from a financially distressed business are purchased prior to a bankruptcy filing, the buying party, the entrepreneur interested in closing the business, faces a risk commonly referred to as fraudulent transfer challenge. The law states that such sales can be avoided or set aside should creditors show up stating that the sale is intended under the guise of fraud —sometimes this happens as a way to get rid, hinder or mislead creditors—. Be aware of the quantities, for if the sale seems to include figures that are much less than the reasonable equivalent, a fraud might as well be involved.
Activity seems to be getting increasingly more popular within the distressed mergers and acquisitions framework. As any other market, the activity is as competitive as the extent to which funds and parties interested in buying assets emerge: the opportunities are vast, however, the risks and potential frauds seem to have gone through the roof.