The COVID-19 pandemic took a toll on many businesses, from restaurants and boutiques to entertainment venues and hotels. However, companies that were able to hunker down and save cash during the economic downturn may be in a position to buy competitors that are in financial distress — and revitalize them.

Turnaround acquisitions can yield sizable long-term rewards. But acquiring a troubled target can also pose greater risks than buying a financially sound business. Fortunately, a business valuation advisor can help reduce such risks.

Find Hidden Gems

Prospective turnaround targets may have untapped value-building opportunities — such as untried territories, poor leadership and outdated strategic plans — that a buyer can tap into. However, those opportunities will need to provide enough financial benefits to offset acquisition risks. If the deal will be financed, the lender may also want to verify that the potential deal is financially sound. In addition, a distressed business may have undisclosed or hidden assets which may have synergistic value.

Buyers need to comprehend their target company’s core business — specifically, its profit drivers and roadblocks. Without a clear understanding of this, the company’s financial statements and financial condition are likely to be misjudged, ultimately resulting in an ineffective course of rehabilitative action. That’s why many successful turnarounds are conducted by corporate buyers in the same industry or private equity funds that specialize in a particular sector.

Kick the Tires

Due diligence is a critical part of any acquisition, but it’s the make-or-break stage of a turnaround deal. Due diligence can help pinpoint the source of the target’s distress (such as maturing products, excessive costs or overwhelming debt) to determine what, if any, corrective measures can be taken. The success of a deal also may be hampered by unreported liabilities — such as pending legal actions or tax investigations — beyond those reported on the financial statements.

Due diligence can unearth unreported sources of potential value, such as tax breaks or proprietary technologies, too. Benchmarking the company’s performance with its industry peers’ can help reveal where the potential for profit lies.

Devise a Plan 

Turnaround plans may include cost-cutting measures, asset sales and debt restructurings. So, before the deal closes, the buyer must assess which products drive revenue growth and which costs hinder profitability. Does it make sense to divest the business of unprofitable products, services, subsidiaries, divisions or real estate? Can staff be cut to save costs?

It’s also important to decide who will serve as the chief restructuring officer (CRO). Independent outside CRO candidates not only offer fresh ideas and experience, but also add credibility to the company’s turnaround plan. CRO is a temporary position that leads the rest of management on the road to recovery. The CRO’s initial priority is creating daily cash budgets. By taking control of cash disbursements, the CRO alleviates the imminent crisis, enabling the management team to chart a short-term action plan.

Implementing a long-term cash-management plan is also critical. Each line item of the acquisition’s weekly or daily receipts and disbursements can be managed according to profit and loss projections, changes in working capital, and major debt and capital expenditures. A strong cash-management plan, along with a thorough evaluation of accounting controls and procedures, can help identify lost revenue opportunities, such as unbilled services. The buyer may even be able to pinpoint costs that can be reduced — or eliminated altogether.

Track Results

Turnaround plans require continuous monitoring and occasional tweaks. If the company’s accounting systems don’t accurately list all assets and liabilities and capture all transactions in a timely manner, it’s impossible to track progress and fully pursue growth opportunities or respond to potential problems.

One troubled manufacturing company, for example, wasn’t tracking future purchase commitments. After the company was acquired, the new owner prepared and circulated among managers a comprehensive commitment and contingency report that helped senior management renegotiate terms of the customer agreements.

Ready, Set, Buy 

Turning a financially distressed company around is a tall order. A valuation professional can help develop a strategic plan to enhance revenue growth, improve cash flow and build long-term value.



TheKFORDgroup litigation team holds extensive knowledge and experience in expert witness engagements, forensic accounting, and business valuations.  We have the extensive experience in business valuations.   We can assist you and your client in determining if they have found a hidden gem.  For more information, please call us at 210-340-8351.

Additional information included in this report was provided by PDI Global / Thomson Reuters © 2023

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