Companies face a challenge with the rise of distressed M&A deals. This comes as corporate insolvency levels reach a high not seen since 2009.
Across England and Wales, businesses are struggling. This is mainly because of the end of COVID-19 support from the government. It’s also due to debt, inflation, and higher interest rates.
Due to these challenges, we see more companies looking to sell in tough times. This means sales happen fast and are complex. They also focus heavily on how directors protect the company.
Buyers and directors must be very careful during these deals. Legal knowledge is crucial to avoid the many risks. The goal is for the sale to benefit the company and its members, which includes creditors.
In October 2023, there was a 14% increase in Company Voluntary Arrangements (CVAs) over September 2022. This shows they are a common choice for companies in trouble. The overall number of distressed M&A deals is going up as well.
Because these transactions are in a hurry, due diligence is mostly limited to key points. Sellers often can’t provide all the guarantees buyers want. This increases risk.
Directors need to really think about their responsibilities in hard times. When a company is struggling, there are specific legal processes to follow. These aim to protect creditors or help the company find a way forward.
For example, Administration gives a company a bit of time to fix things. A Company Voluntary Arrangement (CVA) lets a business pay debts slowly, agreed by its creditors. And a scheme of arrangement helps companies make deals with creditors or shareholders that everyone must stick to.
Understanding Distressed M&A Transactions
Distressed M&A deals have their own unique challenges and rewards in finance, especially for troubled companies. With more businesses facing financial problems, the need for these deals is rising. This is due to issues like the world’s economy and global politics.
Buyers in distressed deals don’t have much time to check things out, making it riskier for them. They usually can’t get the usual promises of safety in the deal. How the deal is set up is crucial. It lets buyers pick good parts of a company to keep, and not the bad stuff.
In the UK, a company can deal with debt in two main ways: try to reorganise or just close down. One way is to put the company under administration. This helps keep the business running while it sorts out its debts. Another option is a CVA. If at least 75% of its key lenders agree, a company can do this. From 2022 to 2023, more companies chose this method, showing it’s becoming more popular.
UK law doesn’t have a clear definition for “insolvency,” but it divides it into two types based on finances. This legal system helps with these tough deals, which need quick thinking and detailed plans. Insurance is also used to lower risk, in case the seller doesn’t keep their promises.
In tough economic times, companies might sell off parts quickly to fix their money problems. Buyers who are quick and have ready cash often do well in these situations. But, fast deals can also lead to problems, like having the deal changes later if it seems unfair.
Examining important details and getting advice can help buyers avoid problems and make their purchase a success. Turning to experts can help buyers understand the difficulties of such deals. This can lead to deals that work out for everyone involved.
Key Legal Considerations in Distressed M&A
When it comes to distressed M&A, knowing about insolvency law is key. The UK’s Insolvency Act of 1986 sets out two types: balance sheet insolvency and cash flow insolvency. These help choose the right path for companies, whether it’s reorganising or closing down.
Admin and CVAs are important choices for saving companies. Admin gives a time-out from creditors, letting the company consider new options or sell its assets. CVAs help by letting companies change how they pay back debts if most of their creditors agree. This method saw more use in October 2023, jumping by 14% from the year before.
Schemes and plans for restructuring also offer ways to bounce back, uniting creditors and shareholders behind a common plan. The National Security and Investment Act 2021 is vital too. It makes some deals require a notification to protect the country’s security. This is a big deal in the UK’s distressed M&A landscape.
In these deals, directors face big responsibilities. They have to watch out for mistakes like trading when the company can’t pay its debts or acting dishonestly. Their main aim should be helping both the people who own the company and those it owes money. Getting advice from experts is a must. They help avoid problems and make sure the M&A deal goes as planned.
Negotiation Tactics for Successful Acquisitions
For successful acquisitions in the UK, a strong negotiation plan is vital. This is even more true in quick deals amid the Covid-19 crisis. Buyers need to focus on convincing key players. This includes senior secured creditors who have a lot of say. Thanks to the pandemic, many companies are not doing well. So, it’s key to focus on the most important issues and risks.
Legal teams, like those at Burges Salmon, are key. They deal with pension, tax, and regulatory issues. These concerns shape the negotiation tactics used.
After the pandemic, the risk of insolvency is high. Directors aim to save the business and avoid going broke. In this risky setting, it’s hard to secure contracts. So, doing proper checks quickly is very important.
Buyers should think of new ways to make deals and make sure they go through. They also turn to insurance to protect against risks.
Being able to manage risks well is crucial for a good deal. Using strong legal advice and having in-depth knowledge of the market is key. Also, new tech like AI can make the process smoother and more accurate. This could change how we do these deals in the future.
Conducting Financial Analysis
When looking at distressed mergers and acquisitions (M&A) deals, a thorough financial analysis is crucial. This process looks deeply into the company’s worth. It checks current debts and what the future might hold. Many UK companies face tough times. They deal with problems like not enough supplies, not enough workers, and increasing costs and currency changes.
The world’s financial situation and the rules around it greatly affect how we see a company’s value. When companies are in trouble, it’s even more critical. Looking closely at the financial side before buying can help a lot. It makes sure buyers know what they’re getting into. It can also help in making sure deals are good and secure for everyone involved.
In bad financial times, who’s paid first – the owners or the people the company owes – changes. Company leaders must get this right to avoid bad legal problems. Keeping the business running is crucial. Quick and smart financial checks can keep things going and make the future more stable.
To sum up, sorting out the financial side of troubled business deals is tough. You need experts to avoid big mistakes and to make deals that protect the company’s worth and keep it running well.
Deal Structuring Strategies
Distressed M&A deals are quite complex, especially when it comes to how the deal is structured. Companies facing money troubles might choose from different strategies. This could include selling assets, selling shares, or going through formal insolvency processes. Each choice is made to get the most from the deal and reduce debts.
Asset deals let buyers pick the best parts of a company without the bad bits. This can be very attractive to those looking to buy. Share sales, on the other hand, keep the company’s structure and relationships the same. These deals need to happen quickly, so quick checks and fast decision-making are common.
When making these deals, it’s key to think about everyone involved. This includes lenders, investors, managers, and those who make the rules. It’s important to understand that what the sellers want may be different from what buyers will pay. Using insurance can help close these gaps, keeping everyone happy and reducing certain risks.
Buying from a seller that owes money can be smart. It gives the buyer a stronger position. For deals in the UK, issues like supply problems, money value changes, and higher interest can complicate things. Having expert legal advice can help use the law to your advantage. This is very important for making good deals in a tough market.
Considering the UK Market Climate
The UK market isn’t seeing as many distressed sales as expected post-2020’s economic hit. Yet, challenges persist in sectors like retail, energy, and more. These issues might push more companies towards distressed M&A deals. Such challenges include supply chain problems, shortages of workers, and high inflation.
In tough times, company directors need to watch they’re not trading wrongfully or fraudulently. This is to not be held personally responsible. When selling under distress, owners must work hard to get good value, keep up demand, and reduce risks to sell quickly. If sales don’t cover the debts, these owners might choose to go bankrupt instead.
For both buyers and sellers in a rush, speed and certainty matter more than getting the best price. Those buying must move as fast as those selling wants them to, focusing on what matters most in their investigations. The sellers crave cash assurance and might not like waiting or uncertain payment plans. Buyers, then, must prepare financing for any necessary checks or third-party checks.
Choosing the right way to sell, such as selling the business or just its parts, can help both sides. In 2023, public sales’ activity in the UK rose by a quarter but saw half the value. Most deals were below £100m. Very few exceeded £1bn, decreasing from the year before. Deals on average were £325m big.
In 2023, it became a bit easier to get funding, but it was still costly. People tried out new ways to structure deals and how to pay for them. It got a bit harder as well because of stricter global competition regulations.
In 2024, we expect to see more action in the smaller and middle markets. Still, there might be differences in what people value businesses versus what they’re willing to pay. Also, people are looking more into new ways to make deals happen.
Risk Mitigation Techniques
In the world of distressed M&A deals in the UK, mitigating risk is essential. This is because buyers face huge risks. These include few guarantees and less time for checking things out before buying. It’s common for quick or ‘distressed’ sales to happen. This is driven by financial struggles and the economic pressures. Such as higher energy costs and inflation. In these deals, the buyers need to be very careful. This is because sellers often want to be paid in cash to close the deal fast and avoid delays.
Investigating everything is critical but hard when time is short. Important points to look at closely are the selection of directors, the ownership of assets, what’s used as security for the sale, data protection, and how employees will be affected. Having expert advisors on board helps to deal with these issues efficiently.
In distressed M&A deals, a big worry is the absence of solid promises or protection from the sellers. This makes it even more necessary for buyers to thoroughly inspect everything. To reduce their risks, buyers might look into getting warranty and indemnity (W&I) insurance. But this option costs more and doesn’t cover all the risks.
Buyers also need to think about the effects on pensions, national security, and the competitive landscape. Talking with insolvency specialists early is smart. It helps the buyers to better understand possible staff-related issues and improve their bargaining position.
Getting things wrong during due diligence could lead to serious risks. These include being sued by liquidators or fined by regulators. Taking proactive steps, like smart pricing, delaying payments, and using insurance, can protect against these dangers. This approach helps safeguard the interests of creditors and keeps away negative financial outcomes.
Directors and sellers need to keep in mind their legal obligations during financial difficulties and the reviews from authorities. They should make sure the deal structure considers both risk and rules. Managing risk in difficult M&A situations needs a comprehensive plan. It should focus on being careful with money, following laws, and looking ahead wisely.
Making a Compelling Offer in Distressed M&A Deals UK
Creating an attractive offer in UK’s distressed M&A deals isn’t easy. It involves facing many challenges like quicker processes and less guarantees. With distressed M&A, deals are often more complex because of the special conditions they happen under.
It’s crucial to understand the complicated nature of these deals. By dealing with the issues that come with distressed assets and negotiating well, you make your offer stand out to sellers and others involved.
In UK’s distressed M&A deals, understanding the company’s financial health is key. It helps buyers work around the few guarantees the seller might provide. Also, knowing the relevant laws, such as the Insolvency Act, is crucial for the deal’s structure and success.
Buyers bear most of the risk in these deals because they can’t check everything out and guarantees are few. That’s why having expert advisors is so important. They guide on legal duties, restructure if needed, and help set up agreements that benefit everyone.
It’s important for buyers to look at specific businesses sectors. Distressed M&A opportunities are ripe in the UK across many sectors such as retail, finance, and tech. As more distressed assets are sold, a strong and well-organised offer is vital for good deals in the changing UK market.
Conclusion
The scene for buying troubled businesses in the UK is tricky but full of chance. The pandemic didn’t lead to many urgent sales at first. But now, with issues like supply chain troubles and labour shortages worsened by higher interest and inflation, some companies are facing real trouble. Especially those in shops and hospitality.
Companies in financial trouble need to be very careful. As they get closer to not being able to pay their debts, their director’s responsibilities change. They might face serious charges if they are found to have acted wrongly or fraudulently.
Doing well in acquiring distressed businesses means sharp legal knowledge, strong financial views, and flexible negotiation skills are key. For sellers, moving quickly and sealing a deal is vital to avoid bankruptcy. Buyers, therefore, must focus sharply on key areas. Keeping detailed records of all board decisions is crucial for those selling or buying. This helps legally and prevents misunderstandings.
Selling assets is usually preferred over selling shares in these situations. It cuts down on risks and gets the best deal out of the sale. A clear plan on how to pay is also important for a smooth sale.
Now that the government is less involved, more shaky deals are expected. Especially in areas like shops, factories, transport, finance, health, and tech. Rules around national security and foreign investment may add more twists. Big buyers might wait a bit, but those with money to spend will be looking more closely. Even though these deals move fast, knowing the small but crucial details can really make a difference.
