Monday, April 27, 2009

Buying A Struggling Company

As the economy begins to show some signs of stabilization, there seem to be more and more news articles suggesting that there are going to be bargains available for those who wish to expand their current business through acquisition. Certainly, those seeking to sell their business are finding that the prices are not at the levels that they hoped. In an article on CNN entitled It's a Lousy Time to Sell Your Business, it is reported that both the number of businesses sold and the median price have dropped noticeably on sites such as BizBuySell. Those drops are likely to lead to bargains.

Assuming a struggling company has been identified as a target, what's next? An article on BusinessWeek entitled How to Buy a Struggling Company, offers some practical business suggestions such as sticking to industries that are well known to the buyer and concentrating on due diligence. In other words, the financial and operational details of the struggling company need to be carefully and thoroughly examined.

On the legal side of the house, additional concentration on legal due diligence is also warranted. Special attention to the contractual arrangements between the target and its suppliers and customers is needed. In reviewing these arrangements, the possibility of the failure or bankruptcy of key suppliers and customers should be factored into the review. Additionally, since the business is troubled, consideration needs to be given to determining what lines, offices, divisions, etc. will need to be shut down and whether there are any legal impediments to taking such actions. It may also be the case that, in order to keep a key supplier relationship, the buyer will have to pay a debt owed by the target, which would become a hidden cost of the transaction if not known prior to purchasing the target.

Insofar as the acquisition itself is concerned, there could be issues regarding the indemnification provisions typically included in the definitive agreement. Often, particularly with smaller companies, the owners of a struggling company are themselves struggling. This may mean that the indemnifications in the definitive agreement are of little value. Accordingly, it may be the case that a significant portion of the purchase price needs to be escrowed for a period of time.

Of course there are many other legal issues that have to be settled, not the least of which is whether the transaction is to be structured as a asset or stock purchase. However, that determination, along with many others, will need to be made on a case by case basis.

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