Managing risks
The price of a distressed business should reflect the potential risks of an acquisition and a purchaser should be aware that they are usually high risk ventures. Such transactions should not be entered into unless the purchaser is willing to potentially lose the investment.
The key to managing risks of a distressed acquisition is effective planning so that potential problems are factored into the initial price and solved quickly.
Some possible obstacles or issues to consider include:
Problems sourcing supplies from some suppliers; ensure that alternative sources are known in advance.
Credit lines; these will often take time to set up as suppliers and other parties are often wary where a business has previously failed. Therefore assume that a significant level of purchases will have to be made on a proforma basis.
Ransom payments; key suppliers may use the situation to their advantage and may require payment of some or all of their losses. Such possibility should be factored into any trading plan.
Stock levels; the level of stock will normally be at a very low level and therefore there is often a larger initial requirement for purchasing stock.
Employees; if the business has been trading within an insolvency procedure, staff will have normally commenced searching for a job elsewhere. Consideration should be given to motivating any key staff to ensure that they do not leave the business.
