Opportunities and Threats by the Acquisition of Distressed Companies - Mazars - Germany

How can you optimize your transaction?

Distressed companies may be very interesting targets. And the insolvency of a company is only the extreme form of a crisis. However: 'Discretion is the better part of valour'. The acquisition of a distressed company is frequently connected to quite an array of difficulties and risks which must be considered during the transaction management and the analysis of the target.

Transparency of the causes of the crisis

The following four key questions have to be asked and thouroughly answered:

1. What are the basic causes of the crisis?

2. Is it possible to overcome these causes efficiently and successfully?

3. Do the essential assets of the company still exist?

4. Does the necessary will to initiate changes exist?

If these questions can be answered positively, it is worth your while to consider an engagement. The next step would then consist in clarifying such issues as the financing and the structuring of the transaction.

Possibilites of external financing

The quality and the completeness of relevant information is frequently poor. Furthermore, the beginning disintegration of the company's organisation causes substantial financial risks which appear to be considerably higher than in the case of the acquisition of a successful company. However, particular financial opportunities could arise which may more than compensate the risks.

Stakeholders are interested in the financial stabilisation of the distressed company and in its sustained existence. If, to achieve this, the financial power and the know-how of another company are necessary, the buyor is in a strong position during the negotiations.

Compared to the acquisition of a healthy enterprise, the supply of fresh capital to secure the company's existence is of higher significance for the distressed company's shareholders than to obtain the maximum purchase price. This presents the opportunity of a „Lucky Buy“.

Date of the acquisition

From a legal point of view, also the date of the acquisition – before of after the filing for an insolvency proceeding – plays an important role and must be thouroughly considered. Thus, if the acquisiton is realized before filing for an insolvency proceeding, the transaction can be contested, while in the case of an acquisition after the filing for an insolvency proceeding, the buyor is not liable for existing liabilities.

Legal risks to be considered

Legal risks also subsist in connection with supplier and customer contracts. For example, do the supplier contracts have to be renegotiated in the case of an insolvency? Are customers still loyal to the company or have they already switched to a competitor? What about the inventory? Do third parties still have any rights regarding these goods?

Use of losses during the change of shareholder

Also the tax structuring, for example regarding the use of losses, must be taken into account during the acquisition of a distressed company. Thus, the loss carry over limitation has been disarmed by the so called financial restructuring clause. This has been done with the intention to facilitate the engagement of investors. Consequently, the acquisition of stock for restructuring purposes is harmless if in this case insolvency or over-indebtedness is overcome or avoided and business activities are maintained through the securing of jobs or the allocation of working capital.

Conclusions

Through the new financial and strategic power resulting from the merger with the buyer company, a clear perspective is opened for the employees and many jobs can possibly be secured. However, it may be decisive to convince the employees, managerial staff and personnel with particular know-how of the new way and, if possible, to enthuse them.