How to Successfully Navigate Distressed M&A Deals

How to Successfully Navigate Distressed M&A Deals

While 2024 has brought new opportunities for business owners and their partners that are looking to buy or sell a business, particularly in the lower middle market, another aspect of the broader M&A industry has been growing: distressed transactions. The increase in distressed M&A deals throughout 2024 is due to a few key and already well-known factors:

  • Interest rates that remain at high levels
  • The high cost of capital across the board
  • High levels of inflation, including wages
  • Higher material costs and industry delays
  • Continued economic uncertainty in various markets
  • Geopolitical concerns (and in an election year)

While distressed transactions are not always tied to current market conditions, the past year has revealed more activity around this deal type. According to industry research, distressed M&A activity is expected to increase throughout the rest of 2024 and into the new year. Industries that have seen more distressed M&A activity include automotive, retail, real estate, and others.

Additionally, private equity firms are increasing their focus on distressed assets, with 66% of firms reporting that they are looking to distressed M&A as part of their strategy to break into and expand in key markets.

As a business leader, if part of your growth strategy is acquisitions, it’s important to understand how to navigate a potentially distressed M&A deal. Often, the deal becomes distressed because the target company itself is distressed in some way. Whether it’s a challenge on the business side, or if a deal has already been experiencing difficulties, the recommendations below are important for achieving success.

After 25 years in business, we’re no stranger to distressed deals. Learn how supporting distressed transactions has become a core part of our services.

Key Considerations for Distressed M&A Deals

Below are just a few of the many details a business leader and his or her advisors must consider well in advance of actually pursuing a distressed target business. This list is not inclusive of everything that is needed. For a more robust understanding of navigating a distressed M&A deal, please connect with our expert team.

  • Due diligence is required across all aspects of the company — This should go without saying, but if you’re considering acquiring a distressed business, it’ll be important to assess everything from the company’s financial health and current business processes to its current legal obligations, contracts, and compliance requirements. Consider representations and warranties insurance (RWI) to ensure both your business and the target company are protected.
  • Carefully consider valuation and deal structure details — A business valuation is essential in any M&A deal, but it’s even more critical and in-depth for a distressed business. Different aspects and possibilities are evaluated in such a valuation, and there may even be potential for discounts as a result of the distressed nature of the business and/or transaction. Additionally, the deal itself must be structured to minimize risk as much as possible. An asset purchase may be more ideal rather than a stock purchase to reduce your business assuming on- and off-balance sheet liabilities.
  • Have a strong communication plan in place — As a business leader in a distressed M&A deal, you’ll likely have a variety of partners in place that include investment bankers, attorneys, insurance professionals, and other advisors. Lean on these partners throughout the process — both to ensure all parties are kept informed and to benefit from their guidance and support. It’s more crucial to the success of an M&A deal than you may realize, and especially in a distressed transaction.
  • Consider your post-acquisition strategy — When acquiring a distressed business, it’ll be essential to make improvements to the target company’s operations, processes, financials, team, and so on. Corporate restructuring may be needed for refinancing debt, pursuing recapitalization, and other improvements.

Execute Your Growth Strategy with Proven Experts

For 25 years, MelCap Partners has supported organizations in building products, construction, consumer goods, food & beverage, healthcare, industrial, retail, and many more with all of their M&A needs. As a boutique investment banking firm, our focus is on building lasting relationships with our clients. This focus has resulted in many clients coming back to us for future support, and our relentless dedication to their success has resulted in our firm winning numerous awards.

Learn more about our transactions here, and meet the expert professionals that will advise and support you here. If we can be of service to you in a potential distressed M&A deal, don’t hesitate to reach out.

By Al Melchiorre

Al founded MelCap Partners in 2000, and is responsible for managing all aspects of client engagements from proposal through closing, developing business, reviewing offering memorandums and financial models, negotiating purchase agreements, and interacting with buyers and investors.