Distressed M&A: How sellers can secure the best outcome

With a growing number of companies dealing with the effects of the Covid-19 crisis and winding down of government support schemes, distressed M&A is expected to peak in the second half 2021 and onwards. Henk Roerdink and Nico Dijkstra, both partners at BOLD, share a number of tips for how sellers can secure the best outcome.

Distressed M&A describes the purchase or sale of a financially strained business. On the sell side, the motivation is usually survival and liquidity, while buyers are enticed by the chance to acquire an asset at a favourable price and/or to secure an asset of strategic importance that may not otherwise be available.

The already high complexity of M&A transactions usually intensifies when dealing with distressed assets. Expectation gaps on either side of the table, time pressure to prevent further asset deterioration during negotiations, and the resultant balancing act between due diligence and speed. In this pandemic-stricken year, each of these challenges are for many companies topped off with economic uncertainty and process disruption – realities of a global pandemic.

Henk Roerdink and Nico Dijkstra both are partners at BOLD – a Netherlands-based business advisory firm active in turnarounds, transaction and transformations. For them, ‘rationality’ is the anchor for sellers looking to develop an effective distressed M&A strategy. Within this theme, they outline six tips for sellers based on their extensive experience.

Fact-based analysis

The first and all-encompassing tip is to focus on facts. Every transaction is unique, and must be approached as such. Creativity and pragmatism are key here, although these only come into play once all the facts of a particular case have been examined. Taking stock of a business is core to all subsequent activity leading up to the sale.

Defining transaction parameters

A prime example here is deciding the specifics of a proposition. Sellers may need to sweeten the deal in order to secure a buyer in the current circumstances, while also preserving their own interests. A detailed understanding of business entities – properties, performing assets, non-performing assets, etc. – is a key part of generating value pre-deal by deciding what to include and what to leave out.

Including prime assets could leave the seller side with a crippled business, while non-performing entities could become what Roerdink describes as “poison pills” at the end of a transaction. A grip on facts and clearly defined parameters can help make these decisions in short, high-pressure timelines.

Objective insights

“It is vital to gain insight into underlying trends and distortions that cloud a proper assessment of the business,” noted Roerdink. Here too, facts are paramount, winning over a seller’s own perception of their business. Presenting non achievable business plans and/or overpromising the state of a business may lead to disappointment following due diligence by the proposed buyer and loss of valuable time. Facts and realistic business planning are therefore key.

“Being rational is the name of the game. Buyers normally base their decision on factual analysis, are conservative in taking on risk, and do not attribute so called ‘hope value’. Sellers tend to be more inclined to see upside that is not yet supported by fact,” added Dijkstra.

According to him, buyers will only seal the deal with the facts in hand. If sellers can’t provide this, buyers will price in risk and will do their own research, which might even leave sellers at an information disadvantage. In the end, complete and objective information on both sides makes for a better negotiation, and prevents unwelcome surprises that can doom a transaction at a time of uncertainty.

Realistic buyer profiling

“Our experience is that a broad scan for the one foreign strategic buyer that will pay top-dollar is in any case time consuming and often not necessarily the best way forward as effort is not directed at the most viable options,” said Dijkstra.

In most cases, potential buyers of distressed assets are already on a seller’s radar – as a competitor, partner or investor, among others. This could be a strategic buyer – who buys a distressed asset for its strategic value or to prevent own business interruption while the low price is an added benefit. For these buyers, qualitative alignment of a business takes precedent over price.

Alternatively, it could be a financial buyer, looking to buy the dip in the hope of better future returns. “Often, financial buyers are ideal buyers if they provide the financial room to manoeuvre for a business that has been run on a tight cash position, enabling it to unlock the value potential of the business,” explained Dijkstra.

Aligning stakeholders

Key to clinching a deal is to have all involved parties on board. The problem is that different stakeholders often have conflicting expectations, which can block the flow of a transaction.

“A deep understanding of the roles of stakeholders and their perspectives is required to navigate to the solution. Effective, timely and (again) rational decision making is required. In the process towards a workable transaction, it is important to acknowledge any emotions while at the same time setting all emotional contamination aside and formulating the facts with a clarity that makes them plainly visible to all,” said Roerdink.

Moving with the times

Last on the duo’s tip list is to embrace the new paradigm. Granted, boardroom negotiations, due diligence and face-to-face assurances are no longer the norm, with virtual working becoming an accepted way to drive transactions.

“Whilst personal interaction is often key in getting a transaction done, digital interaction enables a speedier process and in any case minimises the risk of competing buyers bumping into each other at the revolving doors,” concluded Dijkstra.