Finding your bearings with distressed acquisitions

Business insolvency statistics make depressing reading for many people, serving primarily to highlight the gloom that has gripped the nation's finances since the 2008 crash. But the figures can take on a whole new light if you're on the hunt for a distressed acquisition and when you start to break things down by location, insolvency data can even highlight opportunities you might not have previously considered.

Generally speaking, business insolvencies are starting to level out across the country having reached a peak in the first quarter of 2009. Figures from The Insolvency Service for the third quarter of 2012 revealed a further drop in the number of companies pushed into compulsory liquidations and in creditors' voluntary liquidations. A decrease of 2.8 per cent was recorded against the previous quarter's figures, along with a 6.6 per cent year-on-year decline.

If you're on the search for a distressed business, it's starting to look like your options are getting narrower. But savvy buyers are taking a closer look at the data and finding that - once you look past the headlines - it becomes clear that the trend in business insolvencies is actually very uneven.

There are pockets of the country where insolvencies are actually on the rise, while others areas are yet to bottom out. Experian's regional insolvency data found that Wales, the North East and Yorkshire all showed a rise in the number of insolvencies reported in October 2012 when compared to the same month in 2011. The Midlands, on the other hand had a higher decline in the number of insolvencies than any other region in the UK. The West Midlands saw its insolvency rate fall from 0.16 per cent in 2011 to 0.007 per cent in the same month in 2012. The East Midlands fell from 0.12 per cent to 0.09 per cent.

Statistics from the Business Sale Report confirm that while the insolvency rate in the Midlands might be on the decline, there are still a significant number of businesses entering administration in the area. From the beginning of December 2011 to the same time in 2012, we listed 219 companies insolvencies in the West Midlands and 110 in the East Midlands.

Our data puts the region in the top third of regions in terms of insolvency figures. Unsurprisingly London came out on top due to the sheer numbers of businesses that start up in the capital. London saw 475 insolvencies over the year, followed by the North West with 333 and the South East with 307.

Successful purchasers are keeping a close eye on this regional data with the knowledge that it will empower them to find a distressed business in the right town or city. Some people are keen to buy a business in areas with lower numbers of insolvencies on the understanding that a decline in insolvencies could signal growth in the local economy. Other buyers are looking for acquisitions in bottomed-out markets or even in regions where insolvencies are still on the rise, buoyed by the belief that they can afford to hold on to the business long enough to wait for the inevitable upturn in the economy.

In many ways, getting your hands on the perfect distressed opportunity is about timing. The ideal for many is to catch on to a struggling economic area that is due an upturn shortly but is yet to experience an increase in prices. Get this timing spot on, and you have a bargain business with strong growth in its future. Get it wrong, and you could be lumbered with a dead weight.

As we highlighted in a recent blog post, these figures confirm that the phrase location, location, location applies to buying a business even more so than when buying a residential property.

The economic climate is obviously a major factor in this regard and, while in some ways this will differ depending on sector, there are certain sets of economic data that will have an impact regardless of sector. Insolvency data and unemployment figures, for example, tend to reflect the general affluence of an area and are worth monitoring if you are looking to buy a business that will be particularly vulnerable to cash flow fluctuations.

General trends can give you an idea of where to buy but when things start to get serious, successful buyers will consider location in context with the sector they want to buy in. Buying a retail business, for example, is going to be very different depending on if you're buying in Milton Keynes or Swansea.

The two may be of similar size, but Milton Keynes' proximity to London means that it is more likely to see improvements in its employment rate due to its potential as a commuter town. Swansea, on the other hand, is cut off from the capital and it is going to take longer to recover from the financial crisis. Chances are residents of Milton Keynes have more disposable income at their fingertips and a higher level of consumer confidence thanks to their improved employment opportunities – both of which are key contributors to growth in the retail sector.

The weather is also a factor. Again, if we look at retail as an example, different climates have been proven to influence spending patterns. Figures from the British Retail Consortium show that more people turn to online shopping when the rains hit. This is more likely to be a problem for towns with higher levels of precipitation.

Finally, when considering location as a factor when buying a business, don't forget to about your personal situation. The statistics might point to a certain town as a great location for turning around a distressed retail business, but if the area isn't practical for you it isn't worth the gamble.

Business owners often need to be on-site on a daily basis or available at short notice, especially with a turnaround. Some companies can be managed from afar if the buyer has the experience, but if you're new to making distressed acquisitions this isn't always wise. So be careful not to discount the importance of living nearby when it comes to buying a distressed business.

Location is one of the most basic considerations when it comes to making an acquisition, but don't make the mistake of thinking it is simple. There are numerous factors to look into when it comes to deciding where you want to buy and a successful purchaser will take the time to go over them all in as much detail as is necessary.


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