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When it comes to growth, businesses have two broad options. First, there\u2019s organic growth \u2014 that is, progress made through internal efforts such as boosting sales, expanding into other markets, innovating new products or services, and improving operational efficiency. Second, there\u2019s inorganic growth, which is achieved through externally focused activities such as mergers and acquisitions (M&A), and strategic partnerships.<\/p>\n
Organic growth is, without a doubt, imperative to the success of most companies. But occasionally, or more often if you pursue M&A proactively, you may encounter the opportunity to acquire a troubled business. Although \u201cturnaround acquisitions\u201d can yield considerable long-term rewards, acquiring a struggling concern poses greater risks than buying a financially sound company.<\/p>\n
Due diligence<\/strong><\/p>\n Generally, successful turnaround acquisitions begin by identifying a floundering business with hidden value, such as untapped market potential, poor (but replaceable) leadership or excessive (yet fixable) costs.<\/p>\n But be careful: You\u2019ve got to fully understand the target company\u2019s core business \u2014 specifically, its profit drivers and roadblocks \u2014 before you start drawing up a deal. If you rush into the acquisition or let emotions cloud your judgment, you could misjudge its financial condition and, ultimately, devise an ineffective course of rehabilitative action. This is why so many successful turnarounds are conducted by buyers in the same industry as the sellers or by investors, such as private equity firms, that specialize in particular types of companies.<\/p>\n During the due diligence phase, pinpoint the source(s) of your target\u2019s distress. Common examples include excessive fixed costs, lack of skilled labor, decreased demand for its products or services, and overwhelming debt. Then, determine what, if any, corrective measures can be\u00a0taken.<\/p>\n Don\u2019t be surprised to find hidden liabilities, such as pending legal actions or outstanding tax liabilities. Then again, you also might find potential sources of value, such as unclaimed tax breaks or undervalued proprietary technologies.<\/p>\n Cash management<\/strong><\/p>\n Another critical step in due diligence is identifying cash flows, both in and out. Determine what products or services drive revenue and which costs hinder profitability. Would it make sense to divest the business of unprofitable products or services, subsidiaries, divisions, or real estate?<\/p>\n Implementing a long-term cash-management plan based on reasonable forecasts is also critical. Revenue-generating and cost-cutting measures \u2014 such as eliminating excessive overtime pay, lowering utility bills, and collecting unbilled or overdue accounts receivable \u2014 can often be achieved following a thorough evaluation of accounting controls and procedures.<\/p>\n Reliable due diligence hinges on whether the target company\u2019s accounting and financial reporting systems can produce the appropriate data. If these systems don\u2019t accurately capture transactions and fully list assets and liabilities, you\u2019ll likely encounter some unpleasant surprises and struggle to turn around the business.<\/p>\n Buyers vs. sellers<\/strong><\/p>\n Parties to a business acquisition generally structure the deal as a sale of either assets or stock. Buyers usually prefer asset deals, which allow them to select the most desirable items from a target company\u2019s balance sheet. In addition, buyers typically receive a step-up in basis on the acquired assets, which lowers future tax obligations. And they\u2019re often able to negotiate new contracts, licenses, titles and permits.<\/p>\n On the other hand, sellers generally prefer to sell stock, not assets. Selling stock simplifies the deal, and tax obligations are usually lower for sellers. However, a stock sale may be riskier for the buyer because the struggling target business remains operational while the buyer takes on its debts and legal obligations. Buyers also inherit sellers\u2019 existing depreciation schedules and tax basis in target companies\u2019 assets.<\/p>\n Reasonable assurance<\/strong><\/p>\n For any prospective turnaround acquisition, you\u2019ve got to establish reasonable assurance that the return on investment will likely exceed the acquisition\u2019s immediate costs and ongoing risks. We can help you gather and analyze the financial reporting and tax-related information associated with any prospective M&A transaction.<\/p>\n \u00a9 2024<\/em><\/p>\n <\/body> When it comes to growth, businesses have two broad options. First, there\u2019s organic growth \u2014 that is, progress made through internal efforts such as boosting sales, expanding into other markets, innovating new products or services, and improving operational efficiency. Second, there\u2019s inorganic growth, which is achieved through externally focused activities such as mergers and acquisitions […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,14,10],"tags":[8,11,12],"class_list":["post-17012","post","type-post","status-publish","format-standard","hentry","category-articles","category-business","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/17012","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=17012"}],"version-history":[{"count":1,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/17012\/revisions"}],"predecessor-version":[{"id":17013,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/17012\/revisions\/17013"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=17012"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=17012"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=17012"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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