Buying a distressed business

The fact a business is distressed or facing insolvency should not be a reason to discount it.

A business can be distressed for a variety of reasons; debts, loss of contracts or poor management, however that does not mean it is not fundamentally profitable and could be a great opportunity for investors and entrepreneurs.

The two most common options when buying a distressed business are either to buy the assets, often from the insolvency practitioner, or to purchase the shares of the company. 

There are advantages and disadvantages to both, it depends on the buyer’s appetite for risk.  Asset purchase is often considered for a quicker financial return and share purchase for a buyer willing to commit to a longer-term involvement in the business.

When buying assets and goodwill of a distressed business, time is of the essence and often deals are completed in a matter of days.  It is unlikely that you will have time to carry out all the due diligence that would normally be conducted.  A few key points to consider:

Purpose – are you looking to take the competitor out of market or expand operations?

Budget – biggest opportunities are often pre-insolvency in terms of discounts on valuation 

Practicalities – consider the skills gaps if owners leave

As the government’s Covid support for businesses comes to an end, more opportunities will arise but make sure you understand the risk.  

Only buy a struggling business if you understand exactly why the business is currently in trouble and you have a clear strategy on how to turn it around.  Expert advice is a must.  

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