Purchasing or investing in distressed businesses gives rise to complexities and considerations that are not typically present in ‘good book’ deals. Considerations for buyers and investors in such circumstances include the need to pay careful attention to structuring the transaction from the outset, the applicability of insolvency laws and the extent and duration of due diligence. Buyers should also be mindful of the extent of the seller’s and/or target’s distress, the underlying interests of stakeholders, valuation difficulties and any advantages that insolvency processes can offer. The expanding range of insurance products available in the market, such as warranty and indemnity policies incorporating ‘synthetic warranties’, can also help facilitate a deal where suitable warranty and indemnity protection from the seller is lacking. In this alert, the first in a three-part series, we consider transaction structuring and the impact of insolvency laws when investing in distressed businesses.
The ongoing COVID-19 situation has affected a large number of businesses across a wide variety of sectors. It is, however, not all doom and gloom, for, as with previous crises, opportunities emerge for astute investors and buyers seeking acquisitions or investments at attractive valuations. Strong-willed business owners may now be more easily persuaded to transact with the promise of a cash injection lifeline, and cash-rich, opportunistic buyers will undoubtedly be interested in businesses with strong fundamentals that are positioned to ride out the storm and emerge stronger.
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