Slowing economy presents opportunities and challenges: buying & selling financially distressed businesses


Newspaper headlines have recently declared that Canada has managed to avoid a technical recession, but there is no doubt that 2008 has seen a slowing of the Canadian economy and recent world-wide financial turmoil likely means that 2009 will not be much better. After years of fast-paced growth and ready access to financing on favourable terms, experts are predicting that the effect of the global "credit crisis" will materialize in Canada and B.C. in the form of an increased number of Mergers & Acquisitions transactions involving financially distressed targets. Specifically, as a result of banks tightening their lending standards and credit spreads and reducing their exposure in certain industries, over-leveraged companies may begin to find it challenging to secure credit on manageable terms. These and other financial constraints may threaten enterprise viability and make insolvency an unfortunate reality for such companies.

During past economic downturns, complicated restructurings and liquidations were par for the course. However, the current indicators are that distressed sales will become the preferred deal structure for addressing the problems facing financially troubled companies. Distressed M & A transactions involve the management-led sale of a financially troubled company as a going concern. The exact structure of the transaction may take a variety of forms, but the primary consideration for both the distressed company and any potential acquiror will be timing. An early and focussed strategy is critical not only for a distressed business to maximize recovery value but also for potential acquirors to gain advantage over other bidders. Given the importance of timing, it is crucial for both parties to understand the key factors set out below when considering the purchase and sale of a financially distressed enterprise.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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