Insider Media Limtied

Companies can build market share by bolting on distressed businesses, but don't jump in feet first.

The deals market has slowed down and the deals that are out there seem to have a common theme. Strong businesses are finding opportunities to build market share by bolting on essentially good businesses, which have fallen victim to the recession.

It’s not always that simple, though. Tony Veverka, chief executive of Ultralase, has just completed such a deal in Ireland and says: “It can appear incredibly easy on the surface, but nothing’s as easy as it sounds.”

For companies that have strong cash reserves and are confident in what they’re doing and want to expand, distressed companies create opportunities for acquisition.

But he warns potential buyers that in this economic climate businesses should consider carefully whether they want to add more debt to their balance sheet or tap into cash reserves. Turning a business around can be expensive when trading is weaker than normal and there’s large working capital requirements.

Good management information

Ultralase has completed the acquisition of Eye Laser Ireland from the Examiner. Examinership in Ireland is similar to Chapter 11 protection in the US, when an examiner is appointed from one of the big accountancy firms to try and find a solution for investment in the business. If this in not found in time the business will go into administration.

"It can appear incredibly easy on the surface, but nothing’s as easy as it sounds."

Veverka says one of the differences in acquiring a distressed company, particularly in the case of examinership, is getting hold of good management information. “During the state of examinership the business is still able to be run and traded by the incumbent management,” he says.

“You can get information from the examiner up to that point about company creditors and what our liabilities in the business would be, but between that date and the time it takes to actually complete a deal it’s trading under the incumbent management.

“The business went into examinership on 2 April 2009 and we completed the deal in July so that’s quite a period of time for things to happen in that business. It’s a leap of faith because we would be liable for any potential medical claims or anything to do with trading during that period.”

With the information that is available the acquirer needs to put together a plan for the turnaround of the company to begin as soon as the deal completes.

Happy holidays

When marine company Cosalt’s holiday homes and caravans business was bought by turnaround fund Endless, the plan was to wind it down in an orderly fashion, making sure creditors got paid and staff got their redundancy payments, says Will Arnold, corporate financier at BTG McInnes.

But sales director James Garland was still talking to customers who wanted the company’s holiday homes, so the management team decided to buy the lodges division and cease manufacturing caravans.

A lot of capacity had come out of the market so there was little choice for customers. If the company were just making the lodges, they would become viable.

"It required the willingness on the part of the seller as well, and they were keen to give the guys the opportunity to keep this bit of the business going."

Arnold says: “While it was a distressed deal it wasn’t bought out of administration. It required the willingness on the part of the seller as well, and they were keen to give the guys the opportunity to keep this bit of the business going.”

Arnold says there is more emphasis on saving businesses and jobs, partly because it is good PR: “The existing shareholders were keen to see the business carry on, and there is a PR impact of being seen to try and save some jobs.”

A full version of this article appeared in the August 2009 issue of Yorkshire Business Insider. To subscribe visit our online Shop.

---

Also in: Growing Your Business

• Developing new products
  

  Now is the time to step up new product development if you can get your hands on enough cash.

• In-house production
  

  How Surgical Innovations cut its costs in half by moving its manufacturing back into Leeds.

• Protecting your IP
  

  Yorkshire’s best innovators can protect intellectual property (IP) to maximise their gains.

• Growth story
  

  How Hull's Normandy Holiday Homes found funding in a downturn to support its diversification.

• Survival through growth
  

  The best form of defence is attack - the best way of surviving a downturn is to grow your business. But how?