23/02/2012

By Brian Livingston, Head Of Mergers & Acquisitions, Smith & Williamson

At the moment it may be possible to buy recession-hit businesses at seemingly attractive prices. But those tempted to invest in these potential “opportunities” should be wary.


Experienced businesses and private equity funds with cash to spend will be taking advantage of the downturn by targeting good businesses with poor management or otherwise healthy or salvageable companies that have accumulated unsupportable levels of debt. However, for those who do not have experience of buying businesses in difficulty, caution should remain the watchword of the day.

The prospective buyer of a business in difficulty should keep some important factors in mind. First, the financial information and forecasts available are often limited and in some cases they may be inadequate or non-existent. Moreover, the usual legal protections may be restricted and in certain cases unavailable. In some circumstances, purchasers may need to work with administrators to maintain continuity of trade, especially difficult where concerned suppliers and customers may use a change of control to renegotiate or pull out of contracts.

Potential acquirers will have to learn new ways of working to avoid these pitfalls. These may include different deal structures, for example purchasing assets versus shares, understanding the administration process and arranging short-term bridge funding to see the business through.

Not all businesses in difficulty or sold by insolvency practitioners (IPs) will be a bargain. Here are some top tips to consider before entering discussions.


Understand the business



Visit the business and talk to as may people as possible — directors, suppliers and customers. Did the business go wrong because of poor management, market conditions or product? If you're not familiar with the market, why are you looking at it now?


Get your team ready

As well as having advisers and lawyers in place and access to finance, what will you need to keep your existing business running while you're working on your new acquisition?


Due diligence

This may be limited and you'll probably need to react quickly. Consider doing it yourself or make sure that a third party knows exactly what you're looking for. If appropriate, your offer should reflect the risks associated with a lack of detailed due diligence.



Your offer



This will be benchmarked against 'going concern' and 'liquidation' values. IPs don't like deferred payments so you'll probably need funds available immediately. Be clear what you are purchasing and how your offer reflects other risks, e.g. retention of title, Transfers of Undertakings (Protection of Employment) Regulations (TUPE), unpaid wages, etc.

The contract

Understand the timetable (bearing in mind other potential purchasers) and keep an eye on legal costs. If you're buying from an IP using an 'off the shelf' company and deferred payment, a guarantor may be required. Check that all security has been released by any previous lenders.


Post-completion

Get a grip on the business immediately following completion. There will probably be a huge number of legal and practical issues to address — property matters, employee morale, financial controls, customer contracts, insurance, suppliers and so on. These will not look after themselves and will demand your dedicated management time.

If you’re thinking about buying a company in difficulty and would like some advice or guidance, speak to Brian Livingston on 020 7131 4914 or email brian.livingston@smith.williamson.co.uk


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