The COVID-19 pandemic, supply chain disruptions, geopolitical shifts, and the digital transformation of business models—these are just a few of the buzzwords that have now become part of everyday life for many companies. The significance of these growing global disruptions and uncertainties is leading to sometimes unexpected and existential threats to business models that have been tried and tested over many years and were believed to be solid.
Resolving such situations often requires drastic measures that are increasingly pushing existing shareholders, financiers, and other stakeholders to their limits. Selling a company during a crisis is often the last resort.
Crisis Exacerbated by a Purely Stationary Market Position
The German market leader in sports nutrition, SNC—Sports Nutrition Company (name anonymized), found itself in increasing financial difficulty due to intensified competitive pressure in a market segment that had previously been highly attractive. In response, the owners, with the support of their financial backers, initiated a comprehensive strategic realignment. After a short preparation period, this realignment was already showing its first measurable successes when the COVID-19 lockdown took effect on March 22, 2020. However, as a result of drastic changes in consumer shopping behavior toward online retail, this led to significant drops in revenue and exacerbated the company’s financial situation.
Faced with the assessment that the pandemic and its associated impacts on operations would not change in the short term, the options for action were significantly limited, leading to the initiation of the sale of the company—the solution preferred by all parties involved. Conflicting Objectives Complicate the Search for a Solution In addition to the primary goal of ensuring the company’s continued existence, the sometimes conflicting needs of a wide range of stakeholders had to be taken into account.
While the lenders sought to ensure the highest possible recovery rate on their loans, the owners and management were focused on limiting the liability risks associated with the transaction. While the employees aimed to secure their jobs, potential investors prioritized the financial viability of the acquisition plan. Suppliers and their credit insurers wanted to prevent default and avoid any price concessions, whereas customers were looking for the most stable supply situation possible, with sales prices remaining unchanged.
Considering five factors increases the prospects for a successful process
By its very nature, every transaction has unique characteristics that must be addressed and responded to individually during the process. In our experience, however, five overarching factors are of particular importance for the success of a transaction.
1. Detailed Preparation
In the case of SNC, there were fewer than six months between the decision to sell the company and the deadline by which the transaction had to be completed—a very demanding timeline given the level of complexity.
This timeline could only be met by devoting the utmost attention to the preparation phase from the very beginning. First and foremost, therefore, a detailed process plan—coordinated with all parties and incorporating the results of professional liquidity planning—had to be developed so that all activities were aligned with the timeline leading up to the point at which the company’s financing was secured. Furthermore, managing expectations among the various stakeholders is of great importance—expectations regarding the purchase price, potential staff reductions, haircuts, etc., should be communicated openly and transparently from the very beginning.
This is the only way to avoid surprises as the process moves forward. The preparation of the sales documentation is also of great importance. A compelling case for selling a company in a difficult economic situation—including the reasons why the company finds itself in this position, coupled with an outlook on future opportunities—is central to the considerations of potential investors. Only if the investment story can convince potential investors right from the start is it likely that they will engage further with the company, and only then does it make sense to commit significant resources to due diligence.
The same applies to the documents made available in the data room. Ideally, a comprehensive vendor due diligence is commissioned in preparation. However, particularly in distressed M&A transactions, the time and financial resources for this are often lacking. Regardless, in addition to completeness, timeliness, and materiality, clear structuring, consistency, and traceability are essential.
Often, however, a structured and detailed review of these points is dismissed as a waste of time, and the market approach is launched prematurely. Yet it is precisely this meticulous preparation that determines how quickly and decisively one can act as the process unfolds, thereby significantly shortening the project’s overall turnaround time.
The professionalism of the process is another crucial factor in gaining the necessary trust from potential investors in an environment marked by uncertainty. Nothing delays an M&A process more than Q&A sessions in which the sole focus is on reconciling the contents of Excel spreadsheets.
2. Focus on Core Operations
Due to the rapidly changing market situation, SNC’s management and employees were faced with an above-average workload. In this challenging situation, the same individuals were now expected to simultaneously oversee and execute an M&A process. There is a significant risk that, in such a high-pressure environment, important operational issues will be given insufficient attention. Often, activities related to the M&A process take center stage, while day-to-day operations are neglected.
This can have dire consequences for the company; a clear focus on day-to-day operations is absolutely essential, even in such an exceptional situation. A constant stream of bad news from day-to-day operations—which further weakens the core of the company—is poison for any distressed M&A process. Loss of customers, canceled credit lines from trade credit insurers, halted deliveries, advance payments, employee departures, delayed launches of new products, and much more not only lead to an even more strained financial situation—and thus further restrict the company’s room to maneuver until the transaction is closed—but also make the situation increasingly challenging for potential investors after the acquisition.
This, in turn, often leads to purchase price adjustments or even the complete loss of investors. However, if it becomes evident during the ongoing process that the key personnel have their day-to-day operations under control, are working to eliminate major causes of losses, and are setting a strategic course that a future owner can build upon, this creates an enormous amount of trust.
3. Targeted Process
The theoretical pool of potential buyers for SNC was large. In addition to competitors, suppliers, customers, small brand companies, and large food conglomerates, many financial sponsors—such as private equity firms and family offices—were also potential candidates. The effort involved in approaching potential buyers, negotiating confidentiality agreements, explaining the teaser and information memorandum, and responding to inquiries and follow-ups would have caused the process to run over its timeframe.
Therefore, it is crucial to filter out in advance, from the large number of potential interested parties, those who demonstrate a serious interest in the company being sold—a step that also significantly increases the likelihood of a successful transaction. To this end, the transaction team should use all available information and develop a clear strategic rationale for each potential buyer.
The evaluation criteria typically include potential synergies in day-to-day operations, the potential to complement existing products and services, the development of new markets or technologies, the expansion of additional capacity, the enhancement of expertise, financial strength, and so on. In the context of distressed M&A transactions, greater emphasis should also be placed on experience with special situations to ensure, in particular, speed, flexibility, and pragmatism. Focusing on a small number of promising investors ensures that limited resources are deployed where they are most needed. This can significantly shorten the process.
4. Managing Complexity
The complexity associated with distressed M&A transactions is often underestimated at the beginning of the process. In addition to the already very challenging purchase agreement negotiations with multiple potential buyers, comprehensive ancillary terms must also be negotiated in most cases.
Focusing on just one negotiating partner is generally not advisable because, should the transaction fall through—which usually results in insolvency—there is insufficient time to resume and conclude negotiations with a new partner.
Contingent terms include, among others: agreements with customers regarding, for example, price increases, additional orders, shortened payment terms, or one-time payments; agreements with employees regarding restructuring collective bargaining agreements and transfer companies; financing concepts that take into account existing banks as well as leasing companies, the purchase of W&I insurance, the clarification of a restructuring tax relief with the relevant tax office, or the confirmation of the going-concern prognosis following the completion of the transaction.
Compounding the challenge is the fact that these agreements are always interdependent, meaning that changes to one inevitably entail changes to all the others. To manage this complexity and maintain an overview of the details, it is advisable to engage M&A advisors, auditors, tax advisors, and attorneys who have extensive experience in matters relevant to distressed M&A.
5. Stakeholder Communication
Last but not least, consistent communication with all stakeholders must be ensured throughout the entire process, and especially during the final negotiation phase. Due to the complexity of the situation, the implications for each individual are often difficult for them to grasp.
Making dependencies transparent, as well as developing and implementing appropriate decision-making frameworks, requires the transaction team not only to have the necessary resources but also to exercise sound judgment regarding what is feasible and to demonstrate tact in dealing with all parties.
The Buyer’s Experience and a Professional Process Lead to Success
SNC’s new investor had a clear understanding of the market, a realistic assessment of the implementation of the measures, and the necessary financial resources to invest in the market leader.
However, the right selection of the new investor and the successful completion of the transaction could only be ensured by taking the factors mentioned above into account at all times. In a distressed M&A process, speed and a pragmatic assessment of opportunities and risks are key. Only a process professionally managed by an experienced team can ensure this and thus achieve a viable and, above all, sustainable solution for all parties involved.
