As the economy rebounds, businesses that have survived, and even thrived, may be tempted to acquire companies that have been less fortunate. The downturn revealed the cracks in many businesses, and their owners are coming to terms with a disheartening future.
Opportunistic business owners, sensing a bargain, may be wondering if the time is right to make an acquisition. Despite the perception that these “fire sale” opportunities represent value at a deep discount, there are risks involved. Once our clients have decided upon a potential takeover candidate, we walk them through a series of considerations to arrive at a decision that’s right for them.
The first and most obvious consideration is “why do you want to acquire this company?” The purchase should be a strategic fit, allowing for benefits such as increased marketshare, an extension of products or services, the addition of talented staff, intellectual property or equipment and real estate which can be beneficial.
Another top-line question is “why is this company troubled?” The last thing a business owner wants to buy is someone else’s problems. Due diligence is required to get to the cause – and the depth — of the trouble, which can be too much debt, current or pending lawsuits, poor management, changes in the market, or overly optimistic expansion plans.
It’s important to consider whether it is necessary to purchase the entire company, or should just the most vital assets be acquired. The ownership of many troubled companies prefer to sell their firm lock, stock and barrel, and all the liabilities that come along with it. Most buyers, given the choice, would rather cherry pick or strip assets, and pay for just those promising the best return on the investment. Other non-vital parts of a business might be included in the sale solely as a bargaining chip to close the deal.
For many buyers and sellers, this is where the negotiation begins. To make the best decision, acquirers need to understand the risks and value of a “whole company” purchase vs. just the key assets.
Even though acquiring businesses may only want a troubled company’s specific assets, it’s important that they know the seller’s plans for the rest of the company. Is the seller going to continue to be involved in business, or walk away from the business as part of the sale? If the seller closes up shop with existing liabilities, it may file for bankruptcy protection, and that “bargain-basement” deal struck by the acquiring firm sometimes could lead to an issue later.
If a bankruptcy trustee believes the sale was made for less than fair value, the buyer could face a fraudulent transfer challenge as far as six years after the sale. It’s important for the acquiring business to document that “fair consideration” or “reasonably equivalent value” was actually paid. Not to say that waiting for the company to go into bankruptcy cannot still be advantageous.
Acquirers also need to examine the legal and tax consequences associated with the purchase of the assets vs. a purchase of the entity. An asset purchase avoids the assumption of the entities’ liabilities, including taxes, where a purchase of the entity may not.
Pursuing an acquisition involving a troubled company can be strategically sound and ultimately profitable, but only if buyers take the time to perform their due diligence and to consider certain key issues.
Corey L. Massella, CPA, is a partner with the accounting and business consulting firm Citrin Cooperman, and is the CEO of the firm’s SEC Solutions Group. He brings more than 20 years experience in counseling entrepreneurs in financial and business strategies, including structuring, negotiating and executing mergers and acquisitions, completing due diligence and preparing companies for public offerings. He is also a board member and sponsor for the Financial Executives Institute (FEI), Keiretsu Forum and the Long Island Capital Alliance. He can be reached at 212/697-1000 or firstname.lastname@example.org.
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