As we’ve covered extensively, levels of business distress in the UK are running high, with companies buckling in the wake of the ending of the moratorium on insolvency proceedings, having to pay back government-backed Covid support loans, and higher input and energy costs.
In every region of the UK, thousands of businesses face falling into insolvency, administration and potential liquidation as a result of heavily impacted cash flow and mounting piles of debt.
Unsurprisingly, some business owners are seeking to either exit their business through a sale or remain at the helm but have ownership of the firm taken over by a bigger parent company. With time of the essence as government support nears its end, these business owners will be desperate to sell while their enterprises are still solvent, in order to maximise value and avoid the cost, legal restraints and ignominy of entering insolvency.
Selling a business that’s suffering from financial distress (and attracting a good price for it) is naturally a difficult thing to achieve. However, it is not impossible and, if the process is approached correctly, a successful sale - that sees the business continue trading and begin to recover – can be achieved.
Crucially, selling a distressed business prior to it entering insolvency is a time-sensitive operation and one that is as much about keeping the business afloat through careful management as it is about the sales process.
Steps to a distressed sale
When conducting a sale of a distressed business, a crucial early step will be enlisting the help of a trusted expert to guide you through the sales process. Your chances of securing a successful sale will be significantly improved with the help of an experienced agent with a track record of marketing and selling distressed companies.
This kind of professional help will also be key with the next crucial step: gaining a valuation of your business. A valuation of your business and its assets as a going concern (and less your liabilities), will provide you with a costed, demonstrable and potentially realisable figure with which you can enter into negotiations with potential buyers.
You’ll also need to determine what kind of sale would work best for your business and its current situation – another decision that is best made in concert with a trusted professional. We’ll look at the different types of sales process available to financially distressed businesses later on, as well as the constraints placed on the sales process should a business enter insolvency.
Things you’ll need to do to attract buyers
Attracting a buyer for your business if it’s financially struggling is by no means simple. While plenty of buyers actively seek out distressed acquisitions, many will wait until firms have entered administration before making their move when the company’s valuation is at its lowest. Attracting buyers to a struggling business while it remains solvent arguably requires a considerable amount more effort.
Firstly, the most important thing to do when attempting to attract a buyer is to keep on top of your remaining cash. Lax cash management while in a distressed position can quickly see a business slide into administration, so careful book-keeping, regular forecasting and daily balance checks are vital.
Primarily, of course, this will help keep your business afloat and solvent, but it will also help to reassure buyers about your professionalism and, more importantly, your commitment to the business and your belief that it can be turned around despite its struggles.
If you’re looking to attract a buyer to your business, but hoping to stay at the helm post-sale, then it will also be vital to produce and demonstrate a clear, convincing plan for how the business can be turned around. Again, this will demonstrate your professionalism, ability and commitment, but it will also be key to convincing potential buyers that they can realise value on what is ultimately a risky investment.
Re-examine the key features that make this business stand out in the market. Remember that the attractiveness of a target business is often not just down to its annual net profits. Does it have a group of experts that work together well as a team? Is the business a market leader in a particular industry segment or in a region? Does it have valuable IP? If net profits are low, then it is all the more important not to neglect the intrinsic value of other aspects of the business, and that your adviser takes these into account.
Finally, potential buyers will want you to be open about the business’ struggles. You will, of course, need to demonstrate its value and worth as an acquisition, but this does not mean attempting to paint an inaccurate picture of your business that brushes over its flaws.
During this kind of sale, any delusion or dishonesty on your part will be a guaranteed way to put off potential buyers. Openness about what’s gone wrong and why will be key to conducting a successful sale. Honesty and transparency will help to reassure buyers, whilst also helping to identify and (hopefully) begin to resolve your business’ problems.
Keeping your distressed business afloat
Selling a distressed business prior to insolvency is, as we mentioned, almost as much about solid management as it is about finding a buyer. The importance of careful cash management is obvious, but remaining level-headed, professional and open with your employees is just as important during times of distress.
When it comes to your management team, you’ll need to consult with them and keep them up to speed on the sales process and the business’ financial state every step of the way. This is vital for two reasons.
Firstly, keeping your top partners in the loop will be key to working out, identifying and addressing the underlying causes of your business’ distress. Secondly, having a unified management team that is serious about turning the business around means a unified, honest front to present to potential buyers.
When it comes to the rest of your staff, the same kind of honesty is key as a matter of professional courtesy. Financial distress is as stressful a time for employees as for management, given their reduced job and financial security.
Keeping them abreast of developments will help to assuage some of their fears whilst also demonstrating (to both staff and potential buyers) your qualities as a boss.
Finally, keeping employees in the loop can also be crucial in terms of getting valuable input and potential solutions for the business’ struggles.
Choosing your type of sale
In times of business distress, moving quickly is the best way to ensure a successful sale. A sale while the business is still solvent is the best way for you to remain in control of the process, realise a decent value on your business and give it the best chance of recovering.
Should your business be declared insolvent, however, the chances of this kind of sale are drastically reduced.
If your business still has sufficient working capital to continue trading while you seek a buyer then a sale on the open market is perhaps the ideal scenario for attaining a good price and finding a buyer committed to helping turn the business around.
As opposed to a sales process conducted while a business is insolvent or in administration, you as the business owner can remain firmly in control of the process. This isn’t to say that you shouldn’t seek professional help with your sale, but it affords you more control (and the likelihood of a higher price) than if the auction is handed over to an administrator.
Crucially, an open market sale can help drive up the valuation of your business due to there being a bigger pool of likely buyers competing to acquire it. However, conducting a sale in this manner is completely reliant on having sufficient cash – something that may be unachievable (or just inadvisable) when your company is distressed.
As a result, this kind of sale should only be undertaken with absolute certainty that the capital is there to support the business’ day-to-day operations. Alongside this, careful cash management and forecasting, as well as a sense of urgency to complete the deal, will also be necessary.
Something that could help ease your business distress and either negate the need for a full sale, or allow you to postpone it long enough to help your company recover and increase its value, is a partial sale, either through the sale of a minority stake in the business or a sale of some assets.
With a stake sale, buyers can acquire a minority holding (less than 50 per cent) in your business. If yourself and other partners are the existing shareholders, this kind of sale will leave you in control of the majority of the business, while giving you access to another source of funding.
In this kind of sale, the buyer may be taking a significant risk (given your firm’s financial situation) and, as a result, may seek to drive down their valuation when negotiating the acquisition of their stake.
Furthermore, despite being a minority stakeholder, they will still wield considerable influence over the business and, due to the high risk of their investment, will want a significant say in how the business is run and restructured moving forward.
However, a minority stake sale can be an ideal way to tap into a new stream of investment when your business is in distress and, if you’re eying a full sale further down the line, selling a minority stake can be a perfect first step in that direction.
Sometimes, underperforming areas of a business can push the overall firm into distress. In such a scenario seeking a sale of struggling units or subsidiaries can be key to gaining much needed capital and to refocusing the business around its better performing operations.
Similarly, a distressed business could look to improve its situation and potentially cut debts and other liabilities by selling assets. While more complex and less advantageous from a tax point of view than a share sale, selling assets can be a great way to realise value from the business, raise working capital and reduce debt burdens.
In 2020, fashion retailer Next saw its sales decimated by the COVID-19 pandemic – forecasting that its sales could potentially be down £1 billion within a year and that its profits could fall from £594m to just £55m.
Faced with such grim scenarios, the retailer took the unusual step of selling and leasing back its head office and three warehouses in order to give it the capital it needed to survive the crisis. The company predicted that it could generate around £100 million from the sale of some of its properties.
Ultimately, the sale proved even more successful, with the head office attracting £48 million and the three warehouses generating a further £107 million. Since then, the retailer has emerged strongly from the pandemic (even making some impressive acquisitions this year), but the story may have ended very differently if it hadn’t acted quickly to sell its valuable assets.
Like many restaurants, Yorkshire-based South American grill chain Fazenda faced huge difficulties as a result of the COVID-19 pandemic, as eateries were buffeted between lockdown-enforced closure or trading at significantly reduced capacity.
Hit by reduced cash flow and mounting debts to both HMRC and its landlords, a significant part of the business was acquired immediately after being placed into administration in a pre-pack deal. The pre-pack saw a newco connected to the former holding company acquire four of Fazenda’s six restaurants as well as its booming new e-commerce line Fazenda at Home, which had helped the business continue generating revenue during the pandemic.
CEO Terence Langley commented: “The pandemic has meant that we have had to regroup and review to navigate the current climate as best we can and put the business in good stead in order to come back strong. We have high hopes that Fazenda will find the right place in Birmingham to operate in the near future, and we can continue on the growth path planned pre-COVID.”
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