Buying Distressed Assets

Any global economic disruption or recession generally creates more opportunities for investors or acquirers looking to buy businesses impaired by the downturn. Many businesses continue to be negatively impacted by Covid-19 and eventually some may feel the need to transact due to capital and performance constraints. Given the range of unknowns associated with such deals, Investors and buyers who decide to press ahead with any acquisition, will need to ask the right question and consider every aspect of the deal. 

Important Questions To Keep in Mind Before You Decide To Buy:

1.Is the deal priced correctly? 

The acquirer must ensure that an appropriate price is being paid for the value of the distressed business. Just because a thing is inexpensive does not mean it represents good value.   

2.Are you ready to handle the complexity involved?

Buying a distressed business or asset is different from a regular acquisition. Distressed asset or business acquisition are more complex. For e.g., the acquisition process might involve insolvency. The upside of such complexities is that being well prepared helps deter competitors and drive down the acquisition price.  Thus, investors or buyers must be confident with their ability to handle such complexities and take advantage of the same.  

3.Do you have the required information?

One of the major challenges of buying a distressed business is the quality of information supplied and the timely availability of the same. Thus, knowledge of information critical to the decision-making process and early identification of defects in the information supplied, works to the advantage of the buyer.  

4.Do you have the speed?

Buyers who can move faster than others, will always have a critical advantage over slower moving competitors. Thus, organisations with swift decision-making governance structure should always flex the same to meet the timetable set by the seller.   

5.Do you have access to any leverage?

Having access to existing leverage helps gather the capital required to deliver the transaction. Thus, buyers should address this issue early in the negotiation process, and accordingly open up the dialogue process with existing debt capital providers, to facilitate the same.  

6.Do you have the ability to fix the operational inefficiencies?

A distressed business is acquired assuming that the operational inefficiencies can be fixed, and it can be turned into a productive, return-generating unit. Thus, carrying out an effective commercial and operational due diligence carries elevated importance in a distressed situation especially in the post-covid world. Understanding if such fixes are feasible and the timeframe within which it will be fixed, is key to a successful post-acquisition integration process.  

7.Are you aware of the limitations?

Governments across the globe have provided unprecedented assistance to various businesses impacted due to Covid. However, such assistance also attract terms and conditions which may limit the actions an acquirer can take.  Thus, staying regularly updated on these developments, is of prime importance when considering acquiring a distressed business in a covid and post-covid world.   

8.Do you have an exit strategy relevant to the post-covid world?

Acquirers or buyers must have clearly defined objectives and exit strategies (including the end value the acquirer expects to derive from the distressed business). This is all the more important considering the fact that the traditional KPIs based on historical data may no longer be valid in a post Covid-19 environment.