Buying Distressed Businesses During the Covid Crisis
We’ve seen a lot this year. We’ve seen businesses thrive and have some of their best years ever. We’ve also seen businesses go under and deals fall apart. But, we’ve also had deals move on just as usual, albeit a bit more slowly due to extra diligence from the banks. But as the year comes to a close there might be some owners who are feeling particular pressure to sell now and some buyers in the market looking for a particularly good opportunity. In this article we’ll discuss a few things for buyers to keep in mind.
What’s the Distress?
All businesses faced a new landscape in March 2020, even if they were a company that could continue doing business. Their vendors and customers may not have been in the same position. Some businesses may have already been in some distress prior to the lockdowns, and the changed landscape simply made things worse. So, a drop in sales is not the only thing you want to examine as you’re exploring a purchase of a distressed business.
You’ll also want to see if there are:
- Any ongoing debt issues. Does the company need cycles of financing that has put it into a poor financial position pre-Covid?
- Any legal issues. Does the company have any liens or cases pending?
- Payroll problems. Did the company receive an EIDL or PPP loan? Will it be forgiven? Are there payroll issues that PPP did not solve or were systemic prior to March 2020?
- Any staff issues. Some key management and personnel may have had to leave in the last eight months. Are the right people in place to keep the business functional?
What Can You Do?
You need to have a strategy in place. It’s not enough to simply covet “a good deal” on a business during this time period. You need to think about what you bring to the situation.
Examples include:
- Can you do better than the current ownership?
- Do you want to strip it down to essentials and possibly run that form of the business?
- Do you want to simply buy the assets and add them to your current business?
You should think about a distressed business the same way you might when buying anything that you weren’t particularly in the market for, say a piece of clothing that’s on sale:
- It’s not the color or fabric you want (this isn’t necessarily the business or industry you were considering). But, it has a brand and employees.
- It has a nick or two (things aren’t exactly as you would like them to be). But, the business has customers and some cash flow.
- It’s not the time of year for this item (you were maybe thinking of buying later next year). But, there’s an opportunity right now.
Bring in your accountant and other members of your inner circle to look at the books and the opportunity to make sure you stay level headed and take on something that really makes sense, not just something financially attractive. The more coherent a plan you have that clearly states what you are going to do with the business, the better chances you have that such a plan would actually work.
Financing
Unfortunately this is not going to be something you can get SBA funding for.
You’ve got three options if you don’t have the cash on hand to make the purchase outright:
- Talk to the seller’s lender (if they have one). Find out if they are willing to work with you. You’re going to need to tell them what your strategy is.
- Talk to your lender. Explain the situation and see if they are willing to give you a loan; they may be willing to put a lien on hard assets as collateral. This is yet another situation in which a quality banking relationship can come in handy.
- Explore asset-based lending. This is the most expensive type of financing you’ll find, similar to some of the fintech solutions we’ve discussed in the past, but these types of lenders do deals all the time and might offer you something that works into your plan.
We’ve got all sorts of businesses available at the moment. Whatever you are looking for, give us a call and let us help you find it.
