Initial considerations
Before embarking on the search for a distressed business there are some initial things to consider:
Why you want to do it
Consider and document the reasons for looking for a distressed business. This will provide a criteria against which opportunities can be reviewed, assisting in the decision making process.
Such a purchase would usually be classed as a high risk investment. Consider whether this risk rating fits in with any existing portfolio.
What type of business are you interested in buying?
There are thousands of distressed businesses in the UK in many different industries. In order to make an informed decision about an opportunity it helps to understand the industry that it operates in. Therefore it often helps to focus on particular sectors or in particular locations.
People who say they are interested in any type of business may not be taken as seriously by Insolvency Practitioners as people who specialise in particular areas.
Funding
Funding is vital to both the success of buying the business and trading it forward. However it is often given too little thought until an opportunity presents itself.
Due to the nature of distressed sales they often have to be completed very quickly and therefore the likely source of funding should be known before the search even commences. This strategy also gives a prepared party an advantage over the others interested in the business. Consider:
How much money you (personally or the business you work for) are willing to put into a venture. Stick to this budget and be prepared to lose it.
How the assets would be purchased, investigate the best source of finances such as plant loans, mortgages, etc.
How the working capital will be funded. Find out which invoice discounters and other finance providers can make decisions quickly and have experience funding distressed sales.
If you have a short list of providers with whom you have already made contact then it may be possible to reduce the time it would take to release funds.
May offers made by interested parties are discounted due to them not providing confirmation or proof of funding. Reduce this risk by being prepared.
Commitment
Who is to run the business - do you have sufficient time to be able to fully commit to the potential acquisition or are you to rely on the existing management team. Consider bringing in a specialist who is experienced in turning businesses around.
Advisors
The acquisition of a distressed business is very different to a ‘regular’ purchase and it is recommended that specialist advice is obtained.
Lawyers that are experienced in dealing with administrators, liquidators or receivers should be used since they will be familiar with the standard form of contract and can advise on the associated risks.
Similarly not all accountants have experience in dealing with distressed sales. Consider using a specialist to review any information available and to advise on pricing, trading etc.
Decide which advisors you intend to utilise before starting the search as again this will save time later on in the process.
