An increase in distressed businesses due to current market conditions may provide an opportunity for companies looking to grow or expand their offerings through acquisition.
HLB Mann Judd Sydney restructuring and risk advisory partner Todd Gammel said that firms could capitalise on supply chain and cash flow challenges by acquiring struggling competitors.
“Industries where there’s an inability to pass on changes in costs, such as construction and also retail and service-based sectors, will likely see an increase in distress,” he said.
“However, this presents a unique opportunity for businesses in the sector to expand and grow operations, by acquiring another business at a value lower than it would cost to build from the ground up, with the potentially added value of additional skilled workers.”
According to HLB Mann Judd Sydney, a distressed business is defined as a business that is struggling to generate sufficient revenue or income to meet or pay its financial obligations.
By acquiring a struggling competitor, Mr Gammel suggested that a business could potentially gain scale immediately while also improving the margin and market position of both businesses by operating as a single entity.
“Businesses operating in highly competitive markets have likely been undercutting each other for a number of years, which is now causing financial stress,” he said.
“In the current market, labour shortages remain a key issue, but purchasing a distressed business can afford the acquirer with a level of skills and resources they would have otherwise been unable to easily source.”
After four months of rate hikes from the Reserve Bank, bringing the cash rate to 1.85 per cent, Mr Gammel noted that prospective buyers of distressed businesses may have missed their chance to use cheap money.
But he said that the combined impact of rising rates, inflationary pressures and supply chain issues was creating growth prospects for businesses that can tackle the issues being faced.
“It’s a rare scenario. All these factors add up and impact the ability of a business to trade or trade profitably. At the same time, many small business owners in particular, have reached a point where they need an exit strategy,” said Mr Gammel.
“There are many reasons why you can get good value from buying a distressed business. It's just about how a purchaser approaches the process, understanding of vendor motivations and what issues could arise — a thorough due diligence process is crucial to ensure the investment of the acquisition is maximised.”
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.