The ongoing global economic
turmoil has resulted in a deluge of distressed
companies available at bargain deals. While
these deals provide the opportunity to generate
value, they can be risky as buyers overlook
important objectives in favour of the attractive
low price of the target company.
--------------------------------------------------------------------------------------------------------------------------------------------------------------
In addition to financial due diligence,
which is as important in a distressed transaction
as a healthy deal, the following areas require
particular focus.
Suppliers
Many types of distressed transactions permit
the buyer to leave working capital liabilities
with the old entity and start afresh. From
a valuation perspective this means that
the company can generate profit from its
inventory on hand and simultaneously continue
buying new material on credit.
Therefore, relationships with suppliers
need to be addressed upfront as any disruption
can raise costs exorbitantly.
 |
Customer relations
In any business, customers
are the most important asset. In distressed
situations, customer relationships
may be strained as a result of supply
disruptions or negative public perception.
Therefore while not easy, evaluating
customer relationships is critical.
The buyer needs to take prompt action
to amend customer concerns.
In some cases the relationship
can be recovered simply by providing
assurance that the business will
be properly managed and capable
of meeting expectations going forward.
However, repairing the company’s
image following negative publicity
surrounding financial distress may
require greater to regain customers’
loyalty.
Management / Ownership
In many mid-sized companies, the
shareholders also manage the business
and are critical to the day-to-day
operations of the |
business. In a typical deal, the buyer structures
the purchase to retain necessary management,
including the selling shareholder, for a
period of time. Doing so ensures continuity
of management and minimises business disruption.
However, retaining senior management in
a distressed transaction is often not viable—
whether out of concern for past performance
or because of the nature of the transaction.
It is therefore important to identify either
an external management team familiar with
that type of business or junior managers
capable of taking over operational control.
Both options introduce an added dimension
of risk.
Employees
Most importantly, employees form the backbone
of any successful business. Often, employee
morale is low in a distressed business
resulting from forgone pay raises, or
caused by work load stress due to hiring
freezes and loss of confidence in senior
leadership.
A buyer must be aware of the employee
situation at the target company as there
might be a need to budget for immediate
steps to address. These costs need to
be considered as part of the evaluation
process. Furthermore, a buyer needs to
expect some attrition and plan accordingly.
Objectives
Losing sight of your objectives when buying
a distressed business can be costly. If
a target company does not meet specific
acquisition objectives, chances are it
will underperform and potentially steal
management attention from the core business.
Retaining knowledgeable advisors is highly
recommended and provides the acquirer
with the greatest chance at success, by
preparing upfront and retaining proper
counsel. |
