Buying a Distressed Business: Strategic Acquisition Guide| 7 Park Avenue Financial

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Acquiring & Buying A Financially Distressed Company 

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THE ART ( OR SCIENCE ) OF BUYING A DISTRESSED BUSINESS

 

 

 

"In the middle of difficulty lies opportunity." - Albert Einstein

 

 

 

Some might view buying, acquiring, and financing a business in Canada as a ' cakewalk '! They might even say it’s as easy as ' ABC,' as the saying goes.

 

Profitable investing in a distressed business sale transaction is no different than investing in other types of businesses. 

 

It requires selecting a business that, once stabilized, will have a demonstrable demand for its product or service going forward, for at least long enough to maximize your return on investment before or at your intended exit.

 

So you must do your research. Why is the business in trouble?  Are they in Special Loans at the bank ? Careful due diligence is critical in connection with a business in financial distress due to, amongst other things, the likelihood of limited or complete lack of recourse once the company has been bought.

 

 

Distressed Business Acquisition: Opportunity Amid Crisis

 

Are you watching valuable business assets deteriorate while their price tags plummet? Distressed businesses represent substantial opportunities, yet many potential buyers hesitate due to perceived risks and uncertain financing options.

 

Let the  7 Park Avenue Financial team show you how. By understanding proper valuation methods and securing specialized acquisition financing, you can transform troubled companies into thriving enterprises while protecting yourself from hidden liabilities.

 

 

3 Uncommon Takes

 

 

1. Contrary to conventional wisdom, the best distressed businesses to acquire are often those with healthy customer relationships but poor financial management rather than those with good financials but declining market relevance.

2. Successful distressed business buyers frequently maintain previous management in advisory roles rather than complete replacement, preserving invaluable institutional knowledge during transition periods.

3. The most profitable distressed acquisitions typically occur 3-6 months before formal insolvency proceedings rather than during bankruptcy proceedings when competitive bidding increases acquisition costs.

 

 

 

 

THE IMPORTANT QUESTIONS!

So here are the essential questions to ask:

Is the business overburdened with debt?

Are there any significant liabilities, such as an adverse judgment or product liability claim?

Are any tax losses available?

Has the business lost key management?

Are the company's problems merely due to poor delivery or execution?

 

 

THE DISTRESSED BUSINESS  SALE OPPORTUNITY

 

 

 But what about if after that 'ABC ' comes  ' D ‘... A distressed or turnaround situation? 

 

That's when real challenges arise, so if you or your firm sees an opportunity in that type of transaction, there are some solid tips and assistance we think we can provide before you sign the purchase agreement or there is a bankruptcy filing! Let's dig in!

 

 

It's safe to say there are many issues when considering buying a distressed business. At the top of the list is your ability to perform solid due diligence. Another consideration is your ability to structure the transaction as an asset sale versus a share sale with potential legal obligations / potential liabilities.

 

 

In your due diligence process, prospective buyers have some obvious immediate issues to investigate, such as outstanding lawsuits, liens, etc. - those can be accomplished via a search of public records - but it's more challenging to find any hidden liabilities or issues in the business with careful consideration around corrective measures.!

 

 

If you successfully negotiate an asset sale, the issue becomes valuing assets within the timeframe you must close the transaction. 

 

That's where any third-party assistance the purchaser can muster helps - business financing advisors, lawyers, accountants, bankers, etc. Formally engaged or otherwise, they are key members of your ' team'.

 

The strength of an asset purchase versus a sale purchase revolves around the issue ot limiting any future liabilities that might arise, you are buying assets, not shares.

 

In some cases, it's highly desirable to negotiate some financial holdback in the business purchase payment, allowing you to cover any unforeseen issues in the financially distressed company.

 

 

 

THE POTENTIAL UPSIDE IN THE PURCHASE OF A TROUBLED BUSINESS 

 

 

More often than not, the ability of the business owner or manager to capitalize on a distressed business with financial distress and a turnaround situation revolves around the tremendous upside they see relative to price and potential capital and profit appreciation. 

 

The challenge, though, is recognizing clearly that the distress and challenges the firm you're looking at probably came over a long period, sometimes years.

 

So, thinking about realistically how quickly you can reverse that situation is well worth the thought!

 

 

 

CHANGING THE CAPITAL STRUCTURE

 

 

In some cases, some pretty good companies are plain and poorly financed; by that, we mean their overall capital structure. So while they might be profitable, even growing, the debt load, cash flow and working capital issues become somewhat of a crisis.

 

 

 

PUTTING CASH FLOW AND WORKING CAPITAL BACK INTO THE COMPANY - HERE'S HOW! 

 

 

Typically, you want to ensure the company has adequate working capital facilities. This can be accomplished by looking at solutions such as:

 

New bank  financing arrangements

Non-bank commercial credit facilities

Receivable and inventory financing

Purchase order/Supply chain finance

Sale-leaseback of assets

Government SBL Business loan for asset acquisition and working capital

 

etc.!

 

 

 WHAT IS THE TRUE VALUE OF THE ASSETS  

 

 

Another common exercise that provides great value is to examine the ' true value ' of the assets as opposed to current book values, which are driven by accounting issues such as depreciation policies, etc. 

 

Values will differ around each asset class. You might find that the true ' net worth ' of the business is, in fact, a negative number, at which point a solid strategy might be to put in an offer to simply take over the company's debt, perhaps accompanied by some sort of ' royalty arrangement ' to current owners or management.

 

 

The value of careful due diligence can never be underestimated.

 

Sometimes, you should explore the market value of any intellectual property the company might own. Your goal is to buy assets, hard or soft, at their true value!

 

 

NO MONEY DOWN IS ' NOT ' A FINANCEABLE TRANSACTION

 

Unfortunately, we meet many clients who mistakenly believe that businesses can be bought with no money down, i.e., no new owner equity. While that certainly might be a dream of some, it's not reality as we see it! 

 

Even if you assumed ownership with no new equity, the downside of any existing debt is surely a challenge, as are all the other operational, employee, client, and vendor relationships that come with distressed-type business acquisition opportunities.

 

 

THE ASSET SALE VERSUS A SHARE SALE ISSUE

 

So, back to that asset/share sale issue!

 

Remember also that financing share sales in Canada is difficult, if not nearly impossible. So while they might be highly desirable by the seller, they are very ' unfinanceable' by you, the buyer! You may often wish to consider legal advice or your accountant's opinion on your transaction.

 

 

MAIN BENEFITS OF BUYING A  DISTRESSED BUSINESS IN CANADA

 

 

Buying distressed businesses in Canada has some great advantages -

 

Entrepreneurs are very familiar with the challenges around start-ups and the time and business capital they need to succeed, including ensuring their product and service has market acceptance.

 

 

During an economic downturn, entrepreneurs and business owners have numerous opportunities to investigate distressed businesses that could benefit from new capital and management.

 

 

In many cases, the business's assets can be sold to improve liquidity in the acquired business. From tax and accounting viewpoints, asset sales tend to benefit buyers, not sellers, as we have already covered, around eliminating hidden liabilities.

 

 

  

WHO ARE THE SECURED CREDITORS - HOW TO DETERMINE SENIOR LENDER COLLATERAL   

 

One quick strategy in Canada to uncover potential problems in acquiring a distressed company is to have your lawyer (or you can do it yourself) run a PPSA search.

 

This search identifies secured creditors and other liens you wish to know about.

 

Trust us on that one! Another quick technical point in this area is to ensure you comply with the ' BULK SALES ACT ' when you're acquiring assets. This gives the business's creditors and yourself the comfort that things have been done properly.

 

 

 

KEY TAKEAWAYS IN BUYING A DISTRESSED BUSINESS  

 

Due diligence is important in any business acquisition and is key to success in acquiring a troubled business or distressed deal.

 

It is more important to acquire a distressed business around key issues such as debt burden, problems of management and employee, and the ability to execute a proper business strategy going forward.

 

 

Buyers should take careful guidance around the improper transfer of assets in the business, around key areas such as creditor claims, prior improper transfers, etc.

 

 

Timing is always important in business acquisitions, and time delays can significantly impact any offer-to-purchase agreement.

 

 

We have already discussed this ability, i.e., holding back a portion of the purchase price in escrow, which will always help protect the buyer from potential unknown issues and claims.

 

Some business purchasers see value in buying businesses already in bankruptcy, as it is sometimes faster and less expensive, given that the process helps confirm assets are free and clear.

 

 

The negotiation process will involve negotiations with business owners, but in non-bankruptcy purchases, buyers should be prepared to negotiate with secured creditors, suppliers and vendors. landlords or mortgage holders.

 

Buyers should also be aware that other prospective purchasers might be involved in certain cases, so issues around financing conditions and termination fees should be considered. 

 

Some transactions are already  ' pre-packaged' and have specific benefits around that process.

 

 

  

CAN A TURNAROUND SUCCEED?  

 

We're told that Warren Buffett once said Turnarounds in distressed businesses seldom succeed.

 

 

What critical differences exist between asset purchases and share purchases when buying distressed businesses?

 

• Asset purchases allow the selective acquisition of specific business components while leaving liabilities with the selling entity
• Share purchases maintain business continuity, including key contracts and relationships, but typically include all liabilities.
• Tax treatment differs significantly with asset purchases, providing stepped-up basis benefits.
• Employee arrangements must be formally transferred in asset deals but continue automatically in share transaction.s
• Regulatory approvals and third-party consent requirements vary substantially between transaction types.

 

 

Case Study

 

When a manufacturing firm faced insolvency after losing its major automotive contract, an experienced investor identified significant untapped potential in its aerospace division. Using asset-based financing secured against equipment and receivables, he acquired the business for 45% of book value in the final bidding process.

 

Rather than wholesale management replacement, Laporte retained key technical staff while bringing in specialized financial leadership. By focusing exclusively on aerospace contracts and selling unnecessary equipment, the company eliminated 30% of overhead costs while maintaining core capabilities.

 

Within 14 months, the renamed company had achieved stable positive cash flow. By month 24, the business had doubled its aerospace customer base and achieved EBITDA 60% higher than pre-distress levels. The total investment returned 3.8x capital in under four years, demonstrating how strategic distressed acquisitions can deliver exceptional returns with proper planning and financing.

 

 

 

KEY  TAKEAWAYS

 

  

• Accurate valuation methodology remains the foundation of successful distressed acquisitions, with particular focus on asset-based approaches rather than earnings multiples.

 

• Thorough due diligence discovering hidden liabilities can prevent catastrophic post-acquisition surprises that might otherwise destroy acquisition value.

 

• Cash flow planning must extend beyond the acquisition to cover 6-12 months of operations, as distressed businesses typically require substantial working capital during turnaround periods.

 

• Employee communication strategies determine whether key talent remains with the business, often representing significant uncounted value in the acquisition.

 

• Understanding creditor priorities helps buyers negotiate substantial debt reductions, transforming balance sheets immediately upon acquisition completion.

 

• Specialized acquisition structures including asset purchases rather than share purchases frequently shield buyers from successor liability while preserving business operations.

 

• Identification of core profitable business segments allows strategic pruning of underperforming divisions, creating immediate performance improvements post-acquisition.

  

 

 

   

CONCLUSION   

 

The risk of buying a distressed or challenged business also comes with opportunity—it might be a solid opportunistic valuation, good execution of a business strategy going forward, and a solid financing plan that helps guarantee success.

 

Good management and minimizing risks around your due diligence help guarantee a win.

 

Speak to 7 Park Avenue Financial,  a trusted, credible and experienced Canadian business financing advisor who can assist you in properly buying/acquiring and financing a distressed business in Canada with a solid chance of upside longevity.

 

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