We’ve been getting this question from more business owners over the last few weeks. As with many important questions, the answer is, “it depends”.
Financial distress occurs when a firm can’t generate enough profit to meet its immediate or long-term financial obligations. If your business is consistently accumulating debt, has unseasonable and sustained increase to accounts payable, or is falling behind on payroll taxes, it is likely distressed.
The potential to sell a distressed business depends on the ability to attract a buyer that believes that, based on their skills, resources and synergies, they can address the cause of distress and create a profitable future for the business. A strategic investor would look to profitably integrate the target business into their own operations. Strategic investors that can take advantage of synergies are more likely to buy a distressed business than financial buyers. However, there are well-funded “distressed investors” that specialize in acquiring and turning around distressed businesses, in good times and bad.
When assessing an opportunity to acquire a compromised business, savvy buyers will consider many factors including the cause, severity and duration of the distress. The causes of financial distress fall loosely into four categories.
Four Categories of Distress
Often, financial buyer prospects will not be able to address “unmanageable” issues any better than the current business owner. This makes the business inherently difficult to acquire and turn around.
However, even in an extreme event like a world-wide Covid 19 pandemic, there are exceptions. For example, a strategic buyer may be able to redeploy the assets of a whiskey distillery that lost its restaurant and bar customers to manufacture a product in exceptionally high-demand, like hand sanitizer. A good broker or intermediary can help to identify these opportunities and bring buyer prospects that can capitalize on them to the negotiating table.
Manageable causes of distress may be event-driven (like loss of a key customer) which often results in an acute crisis for the business. Or there they may be systematic causes of distress (like poor cost structure) which slowly impairs the business over time, as per the diagram below. Left unresolved severe distress will eventually lead the business to bankruptcy.
Path to Bankruptcy
Generally speaking, the less enduring and less severe the distress, the easier it will be to find a buyer that can turn the business around. Initiating the sale process early enough is critical. Waiting too long is a common mistake.
The likelihood of selling a distressed business depends on the circumstances. If you own a business showing signs of distress and are considering selling, please contact me at firstname.lastname@example.org or (707) 781-8744 for a confidential, no-obligation assessment of your situation.