Buying damaged goods How to evaluate a distressed companys potential
Buying damaged goods How to evaluate a distressed companys potential
Troubling signs
To prevent a bad acquisition, know the signs of a troubled company. During the due diligence stage, look for:
• Debt reduction programs, such as asset sales and equity offerings,
• Cost reduction tactics, including layoffs,
• Changes in senior management, especially those with fiscal responsibilities,
• Changing customer profile activity, extraordinary sales and customer refunds,
• Strained relationships with auditors, suppliers and lenders, and
• Pending regulatory matters that could trigger lawsuits related to sales and trading practices or employee issues.
Keep in mind that any one or a combination of these factors doesn’t necessarily mean that a company is in financial trouble. If you spot them, however, it’s a signal to dig deeper and evaluate the degree of the problem.
It’s also essential to pinpoint the cause of the trouble. Once you determine why a business is struggling, you can decide whether you’ll be able to turn the situation around.
For example, buyers often assume that troubled companies are dragged down by excess debt and that an infusion of cash or a debt restructuring program will reverse the situation. Debt may be one factor, but dealing with it won’t do much good if the company’s biggest problem is poor management, labor issues or mature product lines that no longer meet their market’s demands.
Shopping for value
Not all companies are turnaround candidates — or even salvageable in pieces. To determine if your target is likely to respond to either minor correctives or a major overhaul, consider its market share, demographic trends and competitive threats; financial fundamentals, such as revenue growth, cash reserves and debt; new opportunities for growth; and industry conditions and possible regulatory challenges.
Also crucial and frequently overlooked in the initial stages of a deal are the costs required to rehabilitate the distressed company. Financial and operational assessments can help you determine how much the acquisition will cost in the long run.
Finally, consider how well the target company has managed its financial distress. Has it been operating in crisis mode for some time — holding lenders at bay, stretching cash resources and employing other damage-control tactics to protect its officers and directors? If so, the business may be beyond recovery. Its short-term survival methods may have undermined its long-term prospects. For example, slashing prices to retain customers will make reverting to the previous pricing structure extremely difficult — if not altogether impossible.
Measure for success
A professional valuator can help you compare the distressed company’s current value against its liquidated value to determine if it’s worth more up-and-running or liquidated. In some cases, you may be able to sell off, or divest, the nonperforming segments of your target’s business while keeping its viable divisions running.
Valuing a financially distressed company can be challenging. Market-based valuations require analysts to compare businesses to comparable companies or transactions, which generally isn’t possible when valuing a distressed company.
Income-based valuation methods — which rely on historical performance — may be no better. The company’s future income, after all, depends on a combination of a workable strategy to return to profitability and the buyer’s ability to realize synergies and cost savings.
Typically, valuation methods depend on the selling company’s level of distress and sense of urgency. Companies that are only lightly distressed or subject to competing offers can negotiate a better price — or a valuation based on future cash flows. Because a high level of judgment is necessary when evaluating the potential of a financially distressed company, be sure you work with a valuator experienced in analyzing distressed businesses.
Rewarding … or not
Acquiring a financially troubled business can be very rewarding — as long as you choose your target wisely. To ensure you’re not buying a hopelessly distressed business, perform adequate due diligence and team up with an experienced valuator.
Buying damaged goods How to evaluate a distressed companys potential - To learn more about this author, visit David Barr's Website.
Like this article? Share it with your friends
Just because you’re paying a relatively low price for a financially distressed company doesn’t mean you’re getting a bargain. Some companies are simply too troubled to turn around. Thorough due diligence and a professional valuation can help reveal whether you’re buying a diamond in the rough or whether your potential acquisition’s flaws are fatal.
Troubling signs
To prevent a bad acquisition, know the signs of a troubled company. During the due diligence stage, look for:
• Debt reduction programs, such as asset sales and equity offerings,
• Cost reduction tactics, including layoffs,
• Changes in senior management, especially those with fiscal responsibilities,
• Changing customer profile activity, extraordinary sales and customer refunds,
• Strained relationships with auditors, suppliers and lenders, and
• Pending regulatory matters that could trigger lawsuits related to sales and trading practices or employee issues.
Keep in mind that any one or a combination of these factors doesn’t necessarily mean that a company is in financial trouble. If you spot them, however, it’s a signal to dig deeper and evaluate the degree of the problem.
It’s also essential to pinpoint the cause of the trouble. Once you determine why a business is struggling, you can decide whether you’ll be able to turn the situation around.
For example, buyers often assume that troubled companies are dragged down by excess debt and that an infusion of cash or a debt restructuring program will reverse the situation. Debt may be one factor, but dealing with it won’t do much good if the company’s biggest problem is poor management, labor issues or mature product lines that no longer meet their market’s demands.
Shopping for value
Not all companies are turnaround candidates — or even salvageable in pieces. To determine if your target is likely to respond to either minor correctives or a major overhaul, consider its market share, demographic trends and competitive threats; financial fundamentals, such as revenue growth, cash reserves and debt; new opportunities for growth; and industry conditions and possible regulatory challenges.
Also crucial and frequently overlooked in the initial stages of a deal are the costs required to rehabilitate the distressed company. Financial and operational assessments can help you determine how much the acquisition will cost in the long run.
Finally, consider how well the target company has managed its financial distress. Has it been operating in crisis mode for some time — holding lenders at bay, stretching cash resources and employing other damage-control tactics to protect its officers and directors? If so, the business may be beyond recovery. Its short-term survival methods may have undermined its long-term prospects. For example, slashing prices to retain customers will make reverting to the previous pricing structure extremely difficult — if not altogether impossible.
Measure for success
A professional valuator can help you compare the distressed company’s current value against its liquidated value to determine if it’s worth more up-and-running or liquidated. In some cases, you may be able to sell off, or divest, the nonperforming segments of your target’s business while keeping its viable divisions running.
Valuing a financially distressed company can be challenging. Market-based valuations require analysts to compare businesses to comparable companies or transactions, which generally isn’t possible when valuing a distressed company.
Income-based valuation methods — which rely on historical performance — may be no better. The company’s future income, after all, depends on a combination of a workable strategy to return to profitability and the buyer’s ability to realize synergies and cost savings.
Typically, valuation methods depend on the selling company’s level of distress and sense of urgency. Companies that are only lightly distressed or subject to competing offers can negotiate a better price — or a valuation based on future cash flows. Because a high level of judgment is necessary when evaluating the potential of a financially distressed company, be sure you work with a valuator experienced in analyzing distressed businesses.
Rewarding … or not
Acquiring a financially troubled business can be very rewarding — as long as you choose your target wisely. To ensure you’re not buying a hopelessly distressed business, perform adequate due diligence and team up with an experienced valuator.
Buying damaged goods How to evaluate a distressed companys potential - To learn more about this author, visit David Barr's Website.
Like this article? Share it with your friends
 | |
 |
No article feedback found. |
| |
Leave Your Feedback |
 | |
| |||
Staging DivaDebra Gould, aka The Staging Diva®, is President of Six Elements Inc., an internationally recognized home staging company. Inspired by many requests from aspiring home stagers wanting to start similar businesses, Gould created the Staging Diva Home Staging Business Training Program. Gould has trained over 1000 Staging Diva Graduates worldwide to start staging businesses. Buying decorating and selling six of her own homes in four years lead to an interest in real estate staging which she turned into a career with the launch of sixelements.com in 2002. Since then she has staged hundreds of homes in addition to teaching home staging training. Gould is the author of several home staging resources including a series of popular ebooks made up of a Design Guide, Color Guide and Portfolio Guide. For more information about Debra Gould visit stagingdiva.com. - Visit Staging Diva's Website |
|||
|
To learn more about the Evan Elite Author Program please contact us. | |||
 | |
|  |
Subscribe to David's articles
 | |
|
|  |
 | |
|
| |
 | |||||||
|
Referred by: http://www.franchiseopportunityspecialist.com
 | ||
 |
||
 |
||
 |
||
|
| ||
 |
| Have you written articles that would be of value to entrepreneurs? Become an expert on our site by publishing them! Expose yourself to a wide audience, drive more traffic to your website and get more sales! Click Here for details. |
|
|
 |
| Modeling the Masters: Learn the true secrets behind Walt Disney's business success factors & grow your company! Video produced by Phanta Media |
|
|
 |
"Learn straight from Evan how you can Make a Full Time Income (And More) from a Website"
Click Here To Learn More |
|
|
|
|
Get advice & tips from famous business owners, new articles by entrepreneur experts, my latest website updates, & special sneak peaks at what's to come!
|
|
|
 Networking Challenges Business Success By Design Mastering Change 9 Questions From New Marketers Managing the Unimaginable |
|
 | ||
 |
Top 50 Business Plans
Top Business Plan Blogs | |
 |
Choose A PR Topic
Press Release Builder | |
| ||
 | ||||
| ||||
|
| ||||
| ||||
|
|
|
|
|
|||||||||
|
Email us your ideas on how to make our website more valuable! Thank you Sharon from Toronto Salsa Lessons / Classes for your suggestions to make the newsletter look like the website and profile younger entrepreneurs like Jennifer Lopez and Sean Combs!
|
|
|
| ||||||||||||
| ||||||||||||
|
|
||||||||||||