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M&A – tips for acquiring distressed competitors

One Hundred BILLION Pounds.  That is the cost incurred by the Government for the financial support provided to businesses since the start of the pandemic; in fact it is more.  That was the figure for the 20/21 financial year, and the support continues.

All things must pass; and that includes the furlough scheme, CBILS, Business Rates Relief, the Future Fund etc.  As the various state-backed schemes fall away, the economic reality is going to bite hard.  There is likely to be a general economic malaise with the obvious specific pockets of distress (travel, hospitality) and some surprising hot spots of ferocious growth (particularly for businesses where all aspects can be efficiently executed online – e.g. gaming, fintech).

In turbulence lies opportunity. Businesses which have weathered the storm will be able to throw a lifeline to floundering competitors and subsume them in the process. A company that needs to be rescued will seldom be picky about the identity of its saviour, which is the basis of our first tip: Be Bold – when distressed, the resolve of boards (and shareholders) will crumble. If you have been trying to acquire a key competitor for years without engagement, now may be the time. If you have not historically considered increasing market share through acquisition, now may be the time. If you have dismissed the idea of buying a competitor because it would be too expensive, now may be the time. Prices are lower when targets are distressed.

Tip two: Remember that it’s a buyers’ market. There may be competition for acquisitions, of course, but you can be sure that there would have been much more had the target not been distressed. Prices would also have been much higher. With luck, an ear to the ground and a good advisory team you can hope to be the lead bidder and you can expect to be able to pick up a challenged rival for much less than it is worth in your combined business. Don’t be afraid of bidding low.

The financial distress that your competitor target is under will necessitate an accelerated M&A process. Don’t expect this to be as drawn out or as thorough as a standard deal. You will have to take on additional risk; your DD will be lighter than you may like simply because you will need to get it done (and complete the deal) before the competitor goes into a formal insolvency process (see below). It is vital that you price in the uncertainty by reducing your bid to reflect the inadequacies in the DD and the warranty and indemnity package you are getting.

Don’t be afraid of INSOLVENCY. It is daunting to take a dip into the parallel dimension of insolvent acquisitions for the first time, but there are significant advantages for buyers.  Firstly, practically, if the specific business you want to buy is in administration (the most likely insolvency process), then you don’t have a choice!  You’ll have to buy it from the administrators. They will sell it to you without any representations or warranties at all - 100% Caveat Emptor – what you see is what you get. That is sobering but it means you can pick up assets and businesses for a relative bargain because you price in all the risks but hope that most (or all) of the material ones do not crystalise. Assuming they don’t, you end up with much more value than the cost. If your target is teetering on the edge of insolvency, you should consider letting it fail before acquiring, you can often pay much less if you take it from administrators, and you are also able to cherry pick the assets you want and leave behind the liabilities you do not. 

Lastly, move quickly, many businesses go under before they can be rescued, and many other are sold in pre-pack administrations which means that the deal may be completed before the wider market becomes aware of it. You will need to engage lawyers familiar with accelerated M&A and dealing with administrators to expedite you through the process.  Engage professional help early, too.

We expect to see many more distressed deals as the Government scales back its support.  If you would like to discuss any of the issues in this article please contact Michael.arnott@mbmcommercial.co.uk

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