Investors

The recent years have been turbulent and marked by great uncertainty, severely impacting the liquidity and profitability of businesses in many industries. Despite various state aid measures (such as energy cost grants), many businesses are in serious distress. This has created interesting opportunities for investors.

What are the opportunities for investors?

Acquiring businesses in distress, or a stake in them, is often a good opportunity for investors to acquire a basically sound business at a good price and thus to strengthen their own market position, win new market shares or access new sources of procurement. Acquiring individual assets or divisions of distressed businesses can also be a highly attractive option.

In such distressed M&A cases, transactions and contracts must take some specific aspects (especially of insolvency law) into account that differ from regular transactions. For one thing, a variety of often conflicting stakeholder interests must be considered – besides the interests of investors, there are those of trade creditors, of the business and its management, of shareholders and employees. Moreover, such transactions also come with special risks that must be kept in mind during preparation and implementation.
 

What are the risks to consider?

In a so-called fire sale (a sale of assets by distressed sellers), the risks for buyers if the sellers later become insolvent include:

• Avoidance risks
• Right of rescission of the insolvency practitioner
• Change in negotiator (insolvency practitioner) and initiation of a bidding process
• Loss of down payments made
• Impairment of guarantee and warranty claims

The acquisition of a distressed target entails further specific risks, such as the potential failure of planned restructuring or reorganisation, limited opportunities to conduct a due diligence review, or sellers having very little inclination to make guarantee and warranty commitments.

Given the immediate need for liquidity, all this usually has to be managed on a very tight transaction timeline.
Professional, prompt preparation and prudent negotiation of the transaction documents can help reduce or even eliminate risks at every turn. Investors can thus benefit from attractive opportunities to invest in distressed businesses and assets.