Throughout a company’s lifespan, there are many critical moments, and some may lead, in worst case scenarios, to unwanted solutions like bankruptcy proceedings. Companies may attempt several different strategies like amendments or waivers, or even selling assets to improve the financial conditions of the company. All of these different types of corporate debt restructuring procedures aim towards trying to get the company back on track and out of the red.
Companies that are under distress can be seen in the acquisition market at very affordable prices, which in the end reflect the distress they are under. Some companies may actually find that attractive because even though it could be a considerable risk, it is also an opportunity. Some companies identify these distressed companies and before acquiring balance out the dangers and the maximization of opportunities, which you can read more about in the post about what entrepreneurs should beware of when acquiring a distressed business in the Suzzanne Uhland Blog.
Signs of possible distress are essential to identify when looking to acquire a new business since they could be hiding behind other greater issues that would actually be worse than a distressed business. The difference in terms of strategies to undertake in both of these cases are extremely different, as a distressed company can usually have problems that are actually easy to solve, whereas other issues are more difficult to get out of. A distressed company will most likely have a series of debt reduction strategies like asset sales, change in senior management, layoffs, and other strategies that are evident in the financial area, which will be reflected in the capital structure. As a rule of thumb, the purchaser should be able to determine the corrective measures that need to be taken before purchasing the distressed company. This will mean that the purchaser will need to truly understand the scope of the reasons why the company is distressed in the first place.
These acquisitions and merger are becoming commonplace in the today’s market, and most are considered asset sales rather than corporate mergers, due to the amount of debt the company is usually in. There are risks that could turn into real problems that will not allow the purchaser to get the acquired company out of debt in time. In the hope of avoiding this and the possibility of getting distressed companies to a financial stability. There are traps that any purchaser should keep in mind when acquiring a distressed company.
Trap #1: Understand who’s involved in negotiations
When purchasers are going to buy a distressed company, they must realize that the only parties involved are not the distressed company and yourself, but that instead, it will most likely be a multi-party negotiation. Banks, trade creditors, unsecured creditor’s committee, a bankruptcy judge or lien holders might be involved. Each party involved will have their own agenda that come along with making sure their interests are covered, so when negotiating be sure to keep in mind all of the parties involved.
Trap #2: Follow the right acquisition process
This will be one of the most important decisions when acquiring a distressed company because this will determine if you have a successful purchase or not. Both parties should consider the unique conditions of the sale that is going to occur and figure out the best way to complete the transaction. Things like the complexity of the business and its assets, the extent and priority of the current liens and the time that the transaction will last are all factors that will need to be considered. Some options could be bankruptcy sale under Section 363 of the US Bankruptcy Code, an assignment for the benefit of creditors (ABC) or the UCC (Uniform Commercial Code) Article 9 disposition.
Trap #3: Become the stalking horse
The market will recognize a distressed sale as an interesting purchase, which will lead to higher and better bids. To take full advantage of this, the purchaser can negotiate and become the stalking horse in a bid. This will enable the purchaser to shape the auction procedures, which will most likely mean that they will be protected by getting a strategic advantage and protects their interest. Going about this strategy will offer you a substantial advantage with regards to others participating in the bid.
Trap #4: Reduced time for due diligence and less contractual protections
Unlike normal circumstances, where the acquisition or merger refers to a healthy company, when dealing with a distressed company you will most likely have less time to conduct due diligence and the contract itself will have fewer protections. This will mean that the due diligence will need to be done not only efficiently, but effectively. In many cases, it is even done under an express sale, which does not give any time at all for due diligence and normally has very little, if any, contractual protections.
* Featured Image courtesy of Jan Truter at Flickr.com