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BUYING A DISTRESSED BUSINESS IN CANADA - DISTRESSED ACQUISITIONS OPPORTUNITIES AND RISKS!
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FINANCING AND BUYING DISTRESSED BUSINESSES IN CANADA
Buying A distressed business in Canada. It's a phone call we've received a few times over the years - a client's earnest desire for the acquisition/purchase of a troubled company that... guess what... comes at a great deal and purchase price in that sale process! Here your guide to acquiring a distressed company !
Maybe it's even after a stalking horse bid out of a bankruptcy court .. that initial bid is expected to drive a price higher in buying a company when it comes to distressed assets under the restructuring process.
THE DUE DILIGENCE ISSUES - ACQUIRING DISTRESSED COMPANIES
When it comes to how to find distressed businesses hindsight will often tell the business owner certain things weren't noticed in that whole process around the purchase agreement of a private company and the purchase of potential distressed assets create some tremendous challenges for the new owner/manager. The seller is of course looking for a reasonably equivalent value for the assets and true value for the business in question. Let's dig in.
OPPORTUNITIES IN PURCHASING A DISTRESSED COMPANY IN AN M&A PROCESS
Opportunities in distressed business turnaround and acquisition for an insolvent company come out of several areas. One is simply that in some ways we are still not over the economic crisis of 2008 let alone the Covid 19 pandemic .. and many businesses, small and larger are still affected in certain ways - bottom line, they are distressed. In other cases companies have in some cases ‘ lost their way ‘ as a going concern.
BUYING A DISTRESSED BUSINESS - ART OR SCIENCE?
That presents a tremendous opportunity for a savvy buyer via an asset purchase sale as an example. In some cases it might be a direct purchase; in others, it might mean a merger scenario- the bottom line is you do not want your deal to be set aside. In some cases, the purchase might be done under a management buyout from existing owners.
4 KEY BENEFITS OF BUYING A TROUBLED COMPANY
1. The benefits of a successful acquisition of a distressed situation are obvious - they often include:
2. Solid return on investment and asset values
3. The ability to enter new markets
4. Acquire assets at what some might deem a fire sale price.
DEBT RENEGOTIATION
In many cases, the business purchaser has the ability to remove the debt burden of the original target firm with key creditors - either through legal or informal means- i.e. negotiation with creditors, suppliers, etc.
WHERE DO THINGS GO WRONG
So where are some of the areas where things can go really wrong in buying that distressed business? Part of the problem can simply be the purchaser loses focus of the original intent of the acquisition as things get tangled up in negotiations, business cultures, etc.
WATCH THE HANGOVERS! AVOIDING UNWANTED LIABILITIES
In all cases, it's important to determine there is no legal ' hangovers' in the target business, issues such as existing liens, contracts that were in place, lender agreements, lawsuits, etc. The true value of assets can always be validated through the use of a third party such as a qualified appraiser- as well as the importance of verifying that any distressed assets are free and clear of liens and encumbrances. You do not want a third party who may be able to block the sale.
It's important to ensure that anyone reviewing the transaction ensures that you are not coming up with a less than fair rationalization of the numbers - especially if the target was solvent.
EVALUATING KEY ASSETS OF THE BUSINESS
When it comes to transactions involving the assets of the business in question it in fact might be very prudent to allow certain assets, inventories, etc to remain with the current owner. But don't forget that those supplier /vendor relationships that were in place are critical to the ongoing success of any company. In some cases, a business purchase might include intellectual property.
THE PERSONNEL ISSUE
Don't forget also that the ability to keep key personnel in the target firm is a valuable consideration, however, that presents a big challenge when the business was in fact under duress and may have lost confidence in the business.
In Canada you can of course legally buy a business that’s already in receivership or bankruptcy or CCAA proceedings, however, this has sometimes a larger cost and other legal obligations.
HOW CAN YOU FINANCE A TROUBLED BUSINESS ACQUISITION - PUTTING A NEW CAPITAL STRUCTURE IN PLACE FOR DISTRESSED ACQUISITIONS
The right type of financing is available for all types of distressed business acquisitions. Financing and acquiring a troubled company can be achieved with:
Bank term loans for acquired assets
Asset-based lending - financing and buying distressed assets
Mezzanine financing
Government Business Loan - buying distressed small business via asset purchase under the Canada Small Business Loan program
It can be dangerous to acquire shares in a company given you are acquiring its full liabilities relative to the financial position of the business.
A good business plan and solid cash flow projections are key to any acquisition finance strategy success - 7 Park Avenue Financial prepares business plans that meet and exceed the requirements of banks and commercial lenders. Post-closing key considerations much be given to working capital and daily cash flow needs via business credit lines, as well as the requirement to buy assets required for the restart.
CONCLUSION - ACQUIRING DISTRESSED COMPANIES
Acquiring a distressed business is one of the ultimate challenges in business
If you're looking to eliminate the ' bad times' in the acquisition of a troubled company and deliver on a winning strategy seek out and speak to a trusted, credible, and experienced Canadian business financing advisor who can assist you with ' noticing' the areas that will make or break success in business loan financing.
Depending on the level of financial distress of a business financing options might provide an economic opportunity with less risk - Let out team help you out with deal structure in distressed acquisitions .. that works!
FAQ: FREQUENTLY ASKED QUESTIONS/PEOPLE ALSO ASK/MORE INFORMATION
What is a distressed business?
A distressed business is one that does not have enough funds and cash flow on hand to meet obligations. In many cases, it is preferable to acquire this type of business via an asset sale, not a share sale to avoid more future negative consequences
What is the advantage of buying distressed debt?
The advantage of a prospective buyer buying distressed debt in an asset deal is that it allows investors to turn a profit if the company resumes operation given the steep pricing discounts that come with distressed debts. In some cases, a short period of exclusivity might be desirable for the purchaser.
What are distressed opportunities?
Companies in distress come about from a variety of different circumstances - most typically the company is not performing well or has excessive debt that has arisen from an improper capital structure - In some cases, firms look to emerge from a bankruptcy filing when the bankruptcy code permits, or receivership restructuring via purchasing distressed assets under a better capital structure than previously, often under the guidance of a bankruptcy trustee when it comes to businesses in bankruptcy for sale
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