Round table report: Kissing frogs – how to buy a distressed company

Our panel

You own a successful company and you want to expand through snapping up and turning around distressed assets. But, without the inside run on what’s going on in every sector, how can you keep on top of what’s for sale – and where?

Our latest round table looked at how to buy a distressed company and brought together some of the region’s foremost insolvency and turnaround advisers to meet at the offices of fast-growing engineering firm Cullum.

The discussion kicked off by asking how advisers identify a distressed company.

Tyrone Courtman, from RSM, said these companies identify themselves by running out of cash.

He added: “Then they’ll turn to their adviser, whether that be a lawyer or an accountant. The challenge is trying to get business owners to admit they have problems.”

Andy Rudkin of Nelsons added: “Because as advisers we’re close to our clients we can help to identify a problem before it happens. However, sometimes that’s simply not possible. Sometimes a company simply can’t afford to pay a supplier, creditor or the next big bill.”

Courtman replied: “Those in charge of a distressed business can come up with a lot of parameters, but they might be 12 or 18 months out of date. That’s when they need a trusted adviser in.”

John Harlow of Harlow Insolvency said that business owners often aren’t keen to admit what’s staring them in the face.

He added: “It’s not the same in every case, but when it’s been blood, sweat and tears for so many years, a business owner admitting to themselves that it’s gone beyond the point of no return isn’t always an easy thing to do.”

Sonia Baigent of Assist Business Consultant said that most people looking to buy a distressed company don’t understand the process. “That’s why they’re often late to the party,” she said, adding: “My advice to any potential buyer is to think: what are we definitely going to look for when we’re acquiring?”

David Nelson of PKF Smith Cooper said that he often gets called in to a distressed company at the last moment.

He added: “Time is not on our side and the timeframe we have to operate in can be quite prohibitive. For the buyer, it takes bravery to have a punt at buying when time is tight.”

The advisers were asked whether there any sectors particularly struggling at the moment.

Mike Denny of Alvarez & Marsal Europe said he tends to be sector agnostic. He added: “Some sectors will become hotter and follow downward trends. For example, the energy retail sector imploded because the market was broken. We’re seeing trouble in the construction sector because of thin margins. But these are obvious things that are happening in the economy.”

For Phil Morton of Leonard Curtis every business is different.

He said: “I follow what is trending – but there can be a domino effect from sector to sector as supply chains take a hit.”

Nelson said: “Over time we create databases to which we send out marketing literature when we’re looking to try and sell a company – but they’re pretty generic. My advice for a business owner looking to buy a distressed company would be to get your name on as many lists as possible.

Harlow added that all insolvency practitioners use valuers and that it’s useful to get to know them.

Morton: “It helps if the potential buyer has the funding in place to complete the deal. We would more often than not choose them as a preferred bidder.

Mark Jansen from Cullum replied that although his company had provided proof of funds in the past, he had lost out to private equity firms in a deal.

Sean Moran of Shakespeare Martineau said he’d seen a lot of examples where an owner-managed business had wanted to go to market, but held on for too long.

He added: “Whatever pressures there are in the economy can come back to bite them.”

Baigent agreed, and added: “Owners are tired after Covid – they’re much more primed to sell.”

Jansen said that Cullum had been looking to snap up sub-£10m companies, but added: “It’s been difficult to get a foot through the door unless we’ve had a personal relationship with the owners.”

Nelson said that things can quickly change. He added: “Owner managers are brow beaten. You might find things change from a share sale to a distressed sale.”

Jansen asked what sector will struggle next.

Nelson thought construction and energy are struggling – and that the charity sector is “severely challenged”.

Courtman pointed to problems in the engineering sector. He said: “There just aren’t succession plans in place because there aren’t enough highly skilled people in the workforce.”

Moran thought the education sector was under pressure. “There are stresses in that market,” he said, and added: “That’s unusual, it’s not a sector that is used to collapse.”

Rudkin said that one of the biggest barriers to sale is that a new management team coming in and “ripping things apart”.

He said: “I’ve got a number of clients who have a pot of money and there will be opportunities that arise for these people. However, they need to get closer to their target companies and the individuals at the top, because those owner managers don’t want to feel like someone is going to come in and rip things apart. They’ll immediately put the walls up around their company. Buyers need to learn to not be over-eager.”

Morton agreed, adding: “There’s also an emotional attachment to their employees. Owner managers want to let their staff know that they’re going to be safe.”

Courtman, meanwhile, admitted that potential buyers might have to “kiss a lot of frogs” before they find the right acquisition.”

The discussion turned to how such a deal can be financed.

Denny stressed that cash is strength. “It carries the least risk,” he said. “You also have to look at it from the seller’s perspective – cash works for everyone.”

And what about how a rescue bid can transform a previously collapsed firm?

Jansen said it was a busy time, post-deal. “You have to look at restructuring customer contracts all while assessing the strength of the management team. However, once you get through a 90-day stability programme, most suppliers and customers will treat you as a going concern.

“We always try to identify five or six key people who we think can transform the business.”

Baigent replied: “The problem with that is the people that are good enough to drive the company forward have usually left the business. Buyers should make that who’s left and who’s stayed part of their due diligence. Some may be interested in returning.”

Ruskin said that with any distressed business, key employees leaving can be the start of the decline. He said buyers should incentivise the quality people left and they will be more likely to stick around.

Jansen asked what due diligence should be undertaken when it comes to a target’s customer base.

Denny said he should ask to speak to them; while Baigent thought it was a good idea to ask why they buy from that company.

We completed the discussion by asking three advisors what their best piece of advice would be for businesses looking to buy distressed counterparts.

Baigent said: “Whilst your criteria might be quite wide, you can run the risk of being too  wide and too open. It’ll pay off to be quite niche. Another thing: treat them as a customer.”

Nelson said: “Use an insolvency practitioner to help you acquire the business – we know all the statutory requirements. There are no games to play when time is tight.

Denny said: “Firstly, you need to be networked. When you get an opportunity, be focused on it, understand the process, take advice and convey your USPs to the seller.”

Mark Jansen, Cullum
Mike Denny, Alvarez & Marsal Europe
Sean Moran, Shakespeare Martineau
Dean Nelson, PKF Smith Cooper
Mike Suart, Cullum
Sonia Baigent, Assist Business Consulting
Tyrone Courtman, RSM
Phil Morton, Leonard Curtis
John Harlow, Harlow Insolvency
Andy Rudkin, Nelsons
Sam Metcalf,