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BUYING A DISTRESSED BUSINESS IN CANADA - DISTRESSED ACQUISITIONS OPPORTUNITIES AND RISKS!
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Quote
"In the midst of difficulty lies opportunity." — Albert Einstein
FINANCING AND BUYING DISTRESSED BUSINESSES IN CANADA
Buying a distressed business in Canada can create significant value when executed properly. Many buyers pursue these opportunities because distressed companies often come with discounted pricing and strong turnaround potential. This guide outlines key risks, financing options, and due diligence considerations.
"The Distressed Business Financing Gap"
Your dream acquisition is sitting there—undervalued, full of potential.
But your bank just declined your loan application, citing the target company's poor financials. Meanwhile, the clock is ticking, and other buyers are circling. Traditional lenders don't understand distressed acquisitions.
At 7 Park Avenue Financial, we specialize in structuring creative financing solutions that banks won't consider, helping you secure deals others can't.
3 Uncommon Takes on Buying a Distressed Business
The Best Distressed Businesses Aren't Actually for Sale: The most lucrative distressed business opportunities never hit the open market. Smart buyers identify struggling companies before they're officially listed, approaching owners directly with financing already arranged. This preemptive strategy eliminates competition and creates negotiating leverage that public listings destroy.
Distressed Business Financing Should Cost More—And That's Okay: Business owners often balk at higher interest rates for distressed acquisitions, missing the bigger picture. When you're buying a $2 million company for $400,000, paying an extra 3-4% in financing costs is irrelevant compared to the equity gained. The math favors expensive money over cheap equity every time.
The Seller's Desperation Is Your Financing Strategy: Most buyers approach distressed acquisitions seeking third-party financing first. Savvier acquirers structure seller financing into the deal from the start, using the seller's motivation as leverage. When owners are desperate to exit, they become your most flexible lender—often with better terms than any bank would offer.
Understanding Distressed Companies
Purchasing a distressed company often starts with a buyer identifying a business offered at a steep discount. Sometimes, the opportunity arises after a stalking-horse bid during bankruptcy proceedings, which is used to set a baseline price. Understanding the seller’s motivations and legal structure of the sale is essential.
Due Diligence Issues When Acquiring Distressed Businesses
Due diligence on a financially distressed company is critical because distressed companies often carry hidden risks. Buyers frequently overlook issues within the purchase agreement or underestimate challenges tied to distressed assets. Sellers still seek reasonable value, so the buyer must understand actual asset worth and potential liabilities when acquiring distress assets / businesses.
Key areas to review include:
Existing liens and encumbrances
Supplier and vendor contracts
Customer concentration and revenue stability
Opportunities in Distressed M&A
Distressed business acquisitions present unique opportunities. Many companies continue to experience the lingering effects of past economic shocks, including the 2008 recession and the COVID-19 pandemic. Some firms simply lose their strategic direction, which opens the door for capable buyers.
Buying a Distressed Business: Art or Science?
Savvy buyers often secure valuable assets through an asset-purchase structure, which limits liability exposure. Some deals involve direct acquisition, while others take place through mergers or management buyouts. The key is ensuring the transaction cannot be challenged or reversed and using the best financial advisors.
Four Key Benefits of Buying a Troubled Company
Strong potential return on investment
Access to new markets
Acquisition of quality assets at discounted or liquidation-level prices
Ability to restructure operations quickly
Debt Renegotiation Advantages
Buyers of a struggling business can often reduce or eliminate the target’s existing debt load. This may occur through formal restructuring processes or negotiated settlements with creditors and suppliers. Reducing the debt burden creates immediate financial breathing room for the new owner.
Where Deals Go Wrong
Deals often fail because buyers lose sight of their original objectives. Challenges may arise during negotiations, cultural integration, or when unexpected liabilities emerge. Maintaining focus and discipline is essential throughout the acquisition process.
Avoiding Legal and Financial “Hangovers”
Buyers must confirm that no hidden liabilities remain, including lawsuits, tax issues, or lender claims. Validating asset values through third-party appraisers reduces risk and ensures assets are free of liens or competing claims. Any unresolved liability can impair the buyer’s ownership rights.
Evaluating Key Assets
When acquiring assets, it may be prudent to exclude certain inventory or equipment that no longer adds value. Supplier relationships must be preserved, as they are vital to the company’s operational stability. Transactions may also include intellectual property that enhances long-term value.
Retaining Key Personnel
Keeping essential employees during a distressed acquisition is often difficult. Staff members may have lost confidence in the business due to financial pressures or operational instability. Clear communication and incentives help retain critical talent.
Buying Businesses in Bankruptcy or Receivership
In Canada, buyers can legally acquire businesses in bankruptcy, receivership, or Companies’ Creditors Arrangement Act (CCAA) proceedings. These transactions offer clear legal pathways but may involve higher costs and specific court-imposed obligations. Buyers must understand the legal framework before proceeding.
Financing a Distressed Business Acquisition
Financing options exist for buyers looking to acquire troubled companies. Creating a strong capital structure is essential for stabilizing and rebuilding the business.
Common financing solutions include:
Bank term loans
Asset-based lending
Mezzanine financing
Government small business loans (including the Canada Small Business Financing Program for asset purchases)
Acquiring shares instead of assets increases liability exposure, so asset-based purchases are often preferred. A detailed business plan and realistic cash-flow forecasts are mandatory for lender approval. Post-closing, buyers must ensure sufficient working capital and access to credit lines.
CASE STUDY: DISTRESSED BUSINESS ACQUISITION — COMMERCIAL PRINTING
FROM THE 7 PARK AVENUEL FINANCIAL CLIENT FILES
Overview
ABC Company, a long-standing commercial printer in Ontario, faced declining sales and rising debt after losing two major clients. The owner, nearing retirement, couldn’t secure bank financing and risked shutting down within six months. Equipment valued at $1.2M sat underused, and service issues eroded customer confidence.
Acquisition Structure
A qualified buyer partnered with 7 Park Avenue Financial to complete a distressed purchase using a blended financing package:
$350,000 asset-based loan on receivables and equipment
$200,000 seller financing with six-month payment deferral
$100,000 buyer equity injection
$50,000 assumed trade payables
The $700,000 purchase price represented 35% of the $2M book value.
Outcome
Operations stabilized within 90 days after equipment repairs and quality controls improved delivery and service levels. Six former customers returned within a year, and revenue rose 45% by month 18. The business refinanced its high-cost acquisition debt after a full year of profitability. Within three years, the buyer built $1.1M in equity from an initial $100K investment, completing a successful turnaround while preserving jobs and ensuring a smooth seller exit.
Key Takeaways
Distressed acquisitions offer discounted prices and strong turnaround potential.
Asset purchases reduce liability exposure compared with share purchases.
Due diligence must uncover liens, lawsuits, and supplier risks.
Buyers can renegotiate or eliminate existing debt for immediate relief.
Financing options include bank loans, asset-based lending, mezzanine funding, and government programs.
Retaining key employees stabilizes operations during transition.
Legal structures such as receivership or CCAA can provide clearer pathways for acquisition.
Conclusion: Acquiring Distressed Companies
Acquiring a distressed business is a challenging but potentially rewarding strategy.
Success requires experienced guidance, disciplined due diligence, and the right financing structure. Working with 7 Park Avenue Financial, a knowledgeable Canadian business-financing advisor helps buyers identify risks, secure funding, and structure deals that achieve long-term success.
FAQ: Frequently Asked Questions
What is a distressed business?
A distressed business lacks the cash flow needed to meet obligations. Buyers often pursue asset purchases instead of share purchases to avoid inheriting liabilities. This structure reduces risk and increases control.
What is the advantage of buying distressed debt?
Buying distressed debt allows investors to benefit from deep discounts. If the company stabilizes, the investor may capture substantial gains. Some buyers negotiate short exclusivity periods to evaluate the opportunity.
What are distressed opportunities?
Distressed opportunities arise when companies face poor performance, excessive debt, or capital-structure failures. Some firms emerge from bankruptcy with stronger financial structures, often guided by trustees or court-appointed monitors. Buyers gain access to assets and operations at favorable prices.
Statistics on Buying Distressed Businesses
Key Statistics:
Approximately 60-75% of distressed business acquisitions fail to achieve projected returns within the first three years, primarily due to inadequate working capital and overly optimistic turnaround timelines
Distressed businesses typically sell for 20-50% of their book value or 2-4X EBITDA (when EBITDA is positive), compared to healthy businesses selling for 4-6X EBITDA
Canadian business insolvency filings increased by 37% in 2023 compared to 2022, creating expanded opportunities for distressed acquisition financing
Asset-based lenders typically advance 50-60% against accounts receivable and 30-40% against inventory for distressed businesses, compared to 80-85% and 50-60% respectively for healthy companies
Approximately 70% of Canadian business owners are over age 55, with many lacking succession plans, creating a growing pipeline of distressed business opportunities
Studies show that buyers with direct industry experience have a 65% higher success rate in distressed business turnarounds compared to buyers from unrelated industries
Citations
Industry Canada, "Business Insolvency Statistics 2023," Innovation, Science and Economic Development Canada, accessed November 2024, https://www.ic.gc.ca
Canadian Federation of Independent Business, "Business Succession Planning: The Canadian Landscape," CFIB Research, 2023, https://www.cfib-fcei.ca
Business Development Bank of Canada, "Buying a Business: Financing Options and Considerations," BDC Knowledge Bureau, 2024, https://www.bdc.ca
Office of the Superintendent of Bankruptcy Canada, "Annual Insolvency Statistics," Government of Canada, 2024, https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/home
Medium/Stan Prokop."Buying, Financing Or Acquiring A Business In Canada?" . https://medium.com/@stanprokop/buying-financing-or-acquiring-a-business-in-canada-43b4287ee141
Statistics Canada, "Business Ownership Demographics and Age Distribution," Canadian Business Statistics, accessed November 2024, https://www.statcan.gc.ca
Turnaround Management Association Canada, "Best Practices in Distressed Business Acquisitions," TMA Canada Publications, 2023, https://www.tma-canada.org
7 Park Avenue Financial ." Buying a Distressed Business: Complete Canadian Acquisition Guide" https://www.7parkavenuefinancial.com/tips-on-buying-a-distessed-business-in-canada.html
