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Taking over a distressed company: what to look out for

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At a time when business bankruptcies are on the rise again, some entrepreneurs and investment funds are opting to acquire distressed companies. This can be a winning strategy, provided the target is properly identified and great care is taken throughout the acquisition process. AURIS Finance, a consultancy specialising in mergers and acquisitions, shares its advice with you.

Bankruptcies are on the rise

While the “whatever it takes” strategy and the introduction of the PGE (Plan Garantie par l’État) did a great deal to support French businesses during the pandemic, not all of them managed to survive this difficult period. According to Altares, the number of business failures rose again in the first quarter of 2022, when the government stopped granting aid. The consultancy estimates that there were 10,000 business failures in the first three months of 2022. While more than 46,000 businesses were saved from bankruptcy by government support measures during the Covid period, the situation is now returning to normal.

New opportunities for buyers

In a market under pressure, where the number of companies for sale is still lower than the number of buyers, it can be a good strategy to opt for the acquisition of a distressed company. However, it is important to respect the legal timeframe, which is often much longer than what the buyer wants it to be. When bankruptcy proceedings are initiated, an administrator is appointed. Takeover bids in the proper form must then be sent directly to the administrator. The takeover bid must be in written form and contain a number of details: the identity of the prospective buyer, a precise description of the assets, rights and contracts, business and financial forecasts, the price offered and the terms of payment, the status of the financing entities and, where applicable, their guarantors. Any loans taken out must also be disclosed. The prospective buyers are then invited to a hearing in chambers, after which the court makes its decision. The court’s decision will depend in particular on the performance guarantees offered by the potential buyer and the conditions for safeguarding jobs.

How should a distressed target be valued?

In order to determine a purchase price, each potential buyer will receive a complete file from the court, including all of the company’s accounting data. It is on the basis of these documents that the buyers will be able to draw up their takeover offer. However, figures alone are not enough to optimise the value of the target. When acquiring a company in judicial liquidation, it is important to look at the problems that led to the bankruptcy. These may be cyclical, such as the occurrence of a pandemic, or structural, such as a sub-optimal business model. The buyer’s approach will vary depending on the situation. Finally, one of the key issues remains the presence of skilled talent within the company. Who are the key people in terms of innovation, production and management? Are they willing to continue with the company? All these factors need to be considered before the acquisition, as they will play a key role in determining the purchase price.

Get the support you need

AURIS Finance’s experts assist companies and investment funds with their acquisition projects. Their multidisciplinary teams, specialised by sector, are able to advise you on all aspects of a takeover: legal, social and financial. They are particularly experienced in assisting buyers of companies in administration. From identification to integration of the target, our experts will be with you every step of the way.

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