The appeal of purchasing a failing business and turning it around is undeniably an intriguing task for many business owners.
You can successfully turn around a failing business with meticulous planning and a willingness to take calculated risks. Distressed enterprises do, however, come with a number of difficulties.
It is crucial to perform a thorough review of the company’s finances and operations before making an offer. Having a distinct vision for how the company may be revived is also crucial.
It is simple to become overwhelmed by the work of turnaround without a strong plan in place. However, buying a troubled firm may be a rewarding experience for those who are prepared to put in the hard effort.
What constitutes a distressed business
A distressed business is typically one that is experiencing financial difficulty. This may be due to a number of factors, such as poor management, declining sales, or mounting debts. A distressed business may also be struggling to keep up with changes in the industry or economy.
As a result, a distressed business may be at risk of bankruptcy or foreclosure. While a distressed business can be a challenge for owners and employees, it can also present opportunities for investors. By purchasing a distressed business, investors can often get a well-established company at a fraction of its market value.
With proper management and financial backing, a distressed business can often be turned around and made profitable again. Therefore, while a distressed business may be a risky investment, it can also offer the potential for significant rewards.
Where do you find distressed businesses for sale?
If you’re looking for a distressed business for sale, one of the best places to start is with an insolvency practitioner. An insolvency practitioner is a professional who deals with insolvent businesses – that is, businesses that are no longer able to pay their debts. Many insolvency practitioners will have a list of businesses that are up for sale, and they can provide you with information about the business, its financial situation, and its prospects for turnaround.
Of course, businesses in distress can be difficult to turn around, but if you’re willing to take on the challenge, an insolvency practitioner can help you find and purchase the right opportunity.
Alternatively sites such as www.ip-bid.com allow you to register your interest and will match you up to opportunities which are posted by insolvency practitioners.
Identifying business opportunities
As an insolvency practitioner, one of my key roles is to identify distressed business opportunities. In order to do this, I first assess the financial situation of the company in question. This involves looking at factors such as cash flow, debts and assets. I also consider the company’s share price and how it has performed over time.
If I believe the company is in financial difficulty, I then carry out a more detailed analysis. This may involve talking to the company’s management team and reviewing its financial statements. Once I have gathered all of the necessary information, I can make a decision on whether or not the company is a good candidate for insolvency proceedings.
Understand what is for sale
A distressed business is one that is insolvent, or on the verge of insolvency. This usually happens when a company is unable to pay its debts as they come due. A distressed business may be put up for sale by its owners in order to raise cash to pay off creditors. Alternatively, a company may be sold by its creditors in order to recoup some of the money owed to them. In either case, it is important to understand what is for sale when a distressed business is put up for auction.
The most common asset of a distressed business is its inventory. This includes raw materials, finished goods, and work in progress. Other assets such as machinery, equipment, and vehicles may also be included in the sale. The insolvency practitioner overseeing the sale will provide a list of assets that are available for purchase.
It is important to note that all assets of a distressed business are typically sold “as is” and without warranties or guarantees. This means that there is a risk that some of the assets may be defective or not fit for their intended purpose. As such, it is important to do your due diligence before bidding on any assets from a distressed business.
Assets vs share purchase
There are two primary ways to acquire a company: through an asset purchase or a share purchase. Each method has its own advantages and disadvantages, and the most appropriate option depends on the specific situation.
An asset purchase involves buying only the physical assets of the company, such as inventory, equipment, and real estate. One advantage of this method is that it allows the buyer to select which assets they want to include in the purchase. It also can be easier to secure financing for an asset purchase than a share purchase. However, an asset purchase also has some drawbacks. One is that the buyer inherits any liabilities associated with the assets, such as environmental contamination or outstanding lawsuits. Another is that the company’s history and goodwill are not included in the purchase, which can make it more difficult to successfully transition to new ownership.
In a share purchase, the buyer acquires all of the company’s shares and therefore takes on full ownership of the business. This method offers several advantages over an asset purchase. First, all of the company’s assets and liabilities are transferred to the new owner, making it easier to continue operating the business without interruption. Second, the buyer inherits all of the company’s history and goodwill, which can be valuable intangible assets.
Finally, a share purchase is often less expensive than an asset purchase, since there is no need to separately negotiate for each individual asset. However, one downside of a share purchase is that it can be more difficult to secure financing since lenders view it as a higher-risk investment.
Issues that could derail the purchase
When a business is in distress, it can be a good opportunity for another company to come in and purchase it. However, there are a few things to keep in mind if the business has employees. First of all, the new company will be responsible for any claims the employees have under TUPE (the Transfer of Undertakings (Protection of Employment) Regulations).
This includes things like unfair dismissal and breach of contract. Secondly, the new company will also be responsible for any debts the business has to its employees, such as outstanding wages or holiday pay. Finally, the new company should also be prepared to deal with any industrial action that the employees may take in response to the change in ownership. By taking these factors into account, a company can be better prepared to purchase a distressed business.
Consideration and timing
Many businesses go under each year, and when they do, their assets are put up for sale by the administrators. This can be a great opportunity for other businesses to get a bargain, but there are a few things to consider before making an offer. The first is the timing. If you wait too long, the administrator may be forced to sell at a lower price in order to recoup some of the losses.
On the other hand, if you move too quickly, you may end up overpaying. It’s important to strike a balance and make an offer that is fair to both parties. The second thing to consider is the condition of the business. A distressed business is likely to come with a lot of baggage, and you’ll need to be prepared to deal with any problems that arise as well as having the turnaround finance in place.
Make sure you do your due diligence and understand what you’re getting yourself into before making an offer. With careful consideration and timing, buying a distressed business from an administrator can be a great way to get a bargain.
Pre-packs vs short term trading and then a sale
When it comes to business a distressed business there are many different approaches that can be taken. One important decision that businesses must make is whether to focus on short-term trading or pre-pack administration. Short-term trading generally refers to business activities with the goal of making a quick profit.
Pre-pack administration is a process whereby a company’s assets are quickly sold off in order to pay its debts. This approach is typically used when a company is facing insolvency or some type of legal action and is designed to minimise the financial impact on creditors.
Trading a business short term then selling it on is usually undertaken by an administrator, they will ensure all the debt issues have been taken care of, and the business will be sold without guarantees or warranties.
Each approach has its own advantages and disadvantages, and the best option for a given business will depend on its specific circumstances. However, pre-pack administration is generally considered to be more beneficial for creditors, as it allows them to recoup some of their losses. As such, this approach is often seen as a preferable option for businesses that are in financial difficulty.
Summary
The potential to buy a distressed business will increase as the UK faces recession in 2023. In order to satisfy both the buyer and the seller, business purchasers need to be made aware of the value of quick due diligence. Purchasing a struggling company needs talent and money, so it’s not for the timid.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.