Golden rules of buying distressed businesses
Never purchase through an existing business – distressed acquisitions are high risk and despite the best efforts of the new owner they sometimes fail. Using a separately set up company provides some protection to any existing business should the venture fail.
Don’t pay more than its worth – businesses a different value to different people. A purchaser should decide upon a value and ensure their offer does not exceed this. Be prepared to lose out to other interested parties.
Full investigation – ensure that as much investigation as possible has been undertaken. Often purchasers enter into situations where they were not aware of some fundamental risks and problems. If you don’t have enough information to make a decision don’t buy the business.
Never buy a business just because you can - this is a frequent mistake where pre-packs are concerned but applies to all scenarios. Failing to address the underlying problems with the business may result in the failure of the purchased business.
Stick to a total budget – decide how much money in total can be afforded to the venture and be prepared to walk away once this limit is reached.
Plan for the worst case trading scenario – the cash requirements in the early days are often underestimated. See managing risks section.
Remember the employees – they are often the biggest actual and potential liability acquired by a purchaser. Ensure any liability is considered before making an offer.
Always take advice – there are many risks associated with a distressed purchase. The use of advisors will not eliminate all of these risks but can provide valuable assistance in order to minimise or plan for their effects. (consideration should be given to the rules relating to financial assistance, re-use of company name, etc.)
