Buying a Distressed Business
The economic impact of COVID-19 will be felt for many years to come with some industries decimated, and many businesses that have managed to survive experiencing distress. Distressed businesses provide a unique opportunity for strategic buyers and private investors and now may be the perfect time to explore the acquisition of a distressed business.
What is a distressed business and how do you identify one?
A distressed business is one that is struggling to stay afloat. It could have falling revenue over multiple years, growing costs, high average debtor days, liabilities that are not paid in a timely manner, inability to maintain stock and owners working significant hours.
Where to find distressed businesses?
There are multiple places where distressed businesses can be found, including:
- Advertisements placed by liquidators and administrators in publications such as the Australian Financial Review;
- Online platforms such as resolve.expert;
- Business for sale websites like seekbusiness.com;
- Through building and maintaining relationships with insolvency practitioners, and;
- By building and maintaining relationships with business brokers.
Conducting due diligence on a distressed business
Due diligence is the investigation into the business that is undertaken before entering into an agreement or contract with a seller. Thorough due diligence is the most important step you can undertake when looking to purchase a distressed business as it will assist you in avoiding a bad transaction and ensuring what you believe you are buying, is what you are actually buying. Some items you should look to examine as part of due diligence include:
- Who holds security over the assets of the company or business?
- Are you planning to undertake a company share or business asset purchase?
- Have the shareholders tried to sell before?
- What entities own the business?
- The business’ financial statements for the last 3 to 5 years;
- The customer and clients and their contribution to revenue;
- Key employees, and;
- Assets, inventory and leases.
While these are good starting points, this list is not exhaustive and proper due diligence requires further investigation by the potential buyer.
Turning around Distressed Businesses
Firstly, it is important to identify areas where costs can be cut and how you can go about enabling this to happen. Costs can be cut in areas such as:
- Interest payments;
- Lease payments;
- Ensuring the assets are unencumbered;
- Salaries, and;
- Removal of duplicate costs.
It is also important to continue to look for revenue growth and improvement opportunities. Consider investing in sales and marketing, consider increasing prices, cease unprofitable or marginally profitable services and sell off any un-used or surplus assets and stock inventory.
Find Out More
Groves & Partners are expert acquisition and due diligence advisors have helped a number of clients purchase distressed businesses. For a free consultation to discuss your requirements, call +61 2 7208 7970 or email email@example.com today.