Buying or Selling a Struggling Business (aka the Distressed Business) – Part 2
In Part 1 of this series of posts, we discussed how business owners must think beyond the near term and that certain Buyers may view this as an opportune time to acquire a company while certain Sellers may be thinking that the best path forward is to sell their companies. In this post we will go over some initial steps for Buyers and Sellers in buying and selling the struggling business.
Finding the Potential Buyer or Seller
A potential Buyer may already have identified a target Seller to approach, or a Seller business may know of potential Buyers for its business. Frequently this is a result of a business’s usual business development methods, such as identifying new channels or products it would like to add to its business, keeping tabs on competitors, and meeting other business leaders at conferences or industry events. Or, a Buyer or Seller may need assistance in locating the potential transaction party. In either event, a Buyer and a Seller may turn to business brokers, or investment bankers or M&A advisors for help in both identifying the potential transaction party and negotiating terms. (M&A means mergers and acquisitions, which includes the different ways to structure the purchase and sale of a company and the financing of the transaction.)
Although there is overlap with other advisors, business brokers generally work with small transactions, frequently (but not always) with values less than $1 million. An advantage to a business broker is that, subject to licensing and other factors, a business broker can often represent both the Buyer and the Seller in the transaction which could be more cost-effective for the parties to the transaction. See https://cabb.org/ for some information.
Investment bankers or M&A advisors are engaged by only one party to a transaction, so a Buyer and a Seller may each have their own M&A advisor. Because a transaction to buy or sell a business involves a lot of steps, such as valuation and structuring the transaction as well as negotiating many terms, each party may find it helpful to have its own M&A advisor. There are many M&A advisors available with different specialties. Contact us for some referrals.
Sellers Should Prepare Prior to Speaking with a Potential Buyer
Although a Seller may feel squeezed for cash, it is especially important that Seller has the right set of advisors ready to help it with any transaction. These advisors will ensure that Seller receives the optimal deal in a transaction and mitigates the many areas of risk the Seller has. In addition to potentially engaging an M&A advisor, a Seller should engage an experienced M&A attorney as well as an accountant familiar with M&A transactions.
The person or firm that prepares the company’s annual tax returns may or may not have the knowledge needed to advise you in a purchase and sale transaction. Ask them now if that is an area of expertise for them.
Debts and Obligations
A struggling company looking to sell should prepare a schedule of all of its debts and other obligations with information on: payment due dates and interest accrual; security interests and other liens securing the debt; personal or other guaranties; and prepayment or termination penalties. This information will be essential to negotiating how a potential transaction is structured and the purchase price is to be paid.
Evaluate Your Business
A struggling company should also work with its advisors to evaluate the business: is it more valuable sold as a whole? Or are certain business lines or products more profitable and could be more easily sold to a potential Buyer separately?
Up Next in the Series
In part 3, we will discuss due diligence and deal structuring.