Press Releases
Buying a ‘distressed’ business
While there is some evidence out there to suggest the worst of the recession may be over, the outlook is still uncertain for many firms and, unfortunately, we are likely to continue to see business failures.
However, when a company does hit tough times, it need not be the end and the coming years are likely to present opportunities for entrepreneurs to pick up distressed businesses.
As well as potentially giving a good deal for the buyer, such a deal is likely to benefit others connected to the business such as employees and suppliers, particularly if the alternative is the business closing down completely. Buying up an existing business can also be more cost-effective than starting from scratch, if there is a ‘ready-made’ track record and client base in place.
However, at the risk of stating the obvious, not all businesses can be saved. If the firm is suffering cash-flow problems, there will be a reason for this. If the problems were caused by a one-off event (a bad debt or a failed deal) and the business is otherwise sound, it may have a good future. If it is suffering because there are long-term problems (costs are consistently higher than income or the business model itself is outdated), any buyer needs to be confident that they can do something about them.
That is not to say a failing business cannot be restructured – indeed business experts doing just that have proved popular subjects for TV programmes in recent years. If there is scope for cutting costs or refocusing the business, new management may be able to turn things around, but there still has to be an underlying demand for its products or the business – no matter how much it is restructured – will still fail.
Careful due diligence is a must, particularly since if a business is in administration or liquidation, there is less chance of seeking redress against the previous owners. The level of the business’s debts and outgoings should be balanced against its assets and the value of future contracts.
There will also inevitably be some additional costs in the early stages of the takeover, including the purchase price of the business itself and the immediate costs of any restructuring, including redundancy payments or the purchase of new equipment. With bank lending difficult to come by in the current climate, a cash-rich entrepreneur who does not have to borrow is at a definite advantage; otherwise interest charges will also need to be factored in.
A distressed business can be located through a number of sources – they may be advertised in the trade press or a specialist intermediary may have been instructed to find a buyer. However, personal contacts are often the best way to hear of an opportunity, particularly for those who already work in the sector that they are looking to buy in. The price of the business would then vary according to its prospects – but a business with some short-term difficulties but reasonable prospects for the future is likely to be more expensive, and may attract several competing bidders. In those circumstances, it is important for a buyer to decide beforehand what the business is worth for them and not pay over the odds.
In conclusion, anyone who finds a business that they feel they can turn round, and has the money to do so, is in currently in a reasonably strong position. There are more distressed businesses around in a recession, but less potential buyers, and anyone who succeeds in turning around such a business is likely to see a good return for themselves as well as the knowledge they have done their bit for local jobs and the economy.
For more information or advice on buying an existing business, please contact us.
John Kinsella
Watson Buckle