Unlocking the value of distressed assets through M&A

Combining an M&A mindset with a turnaround approach creates higher valuations of distressed assets and greater efficiency in a sale scenario. 

Every cloud has a silver lining. In a distressed scenario, when temperatures rise and the sense of urgency peaks, it’s imperative to remember that all assets—even distressed ones—can be valuable to the right buyer. For our clients considering alternatives such as 363 sales and distressed asset carve-out transactions, the need to optimize the opportunity for the benefit of stakeholders is critical. 

Both the rumor on the street and respondents to our recent 2024 Turnaround and Transformation Survey suggest that distressed deal activity is on the rise. Roughly 65% of over 7,000 global respondents expect distressed M&A to increase year-on-year, and 32% anticipate current levels to continue. Bringing a value creation lens to a distressed deal can help to maximize value for the seller and drive more favorable resolutions with creditors, equity holders, and other key stakeholders. 

In an environment buzzing with M&A activity, we are helping our clients create additional value and navigate special situations. Here’s how:

Being management’s lifeline 

We understand the emotions that course through the veins of senior executives in the throes of these processes. Even veteran leadership teams with M&A experience can get overwhelmed managing a sale against a backdrop of corporate distress. As an advisor, we offer comfort through industry insight, functional expertise, and real-time, on-the-ground support, helping leaders run the business, manage their financial projections, address tightness in liquidity, respond to buyer diligence, and plan a thoughtful separation (to name just a few). In the lead-up to a sale, maintaining a focus on value creation can be difficult given the many priorities competing for attention, and the often-aggressive timeline needed to do so. As advisors we help management stay focused on maximizing the opportunity at hand and help guide the company through the accelerated pace of work that transactions require. Doing so is essential to maximizing the opportunity at hand. 

Using the diligence to sharpen the story

The stakes are always high when management presents to prospective buyers, but the pressure in a distressed transaction is even greater. Your niche pool of buyers arrive on the scene armed with a healthy dose of skepticism, and the overhang of challenging market dynamics.  Execution-related difficulties, or publicized setbacks can put leadership teams on the back foot. Fortunately, preparation can go a long way toward yielding better outcomes. 

Our team engages with buyers to understand their investment thesis, identifies where their concerns lie, and optimizes their time at working sessions. We align with subject matter experts to prioritize requests, focusing on difference-making items for the sale process and ensuring that operational priorities don’t suffer. We partner with management to make sure they have whatever they need—be it as simple as a list of focused talking points, or as elaborate as a one-on-one coaching session with a specialist—to bring the best of themselves and their organization to bear. 

Focus on the prize

When the objective is value creation, the distractions that often come with a restructuring must be managed and minimized such that no opportunity to improve the business is overlooked. Advisors can take an active role by helping management to articulate their vision for the post-sale organization, evangelizing the benefits of the sale to employees, and helping to strike the right tone throughout the process. 

Harnessing positivity is critical. By reminding the organization of the opportunities that can arise during times of transition, seeking thoughtful input from employees at the front line, and looking critically at the status quo, management teams can leverage the sale process to craft a new roadmap for the future, and unlock value for prospective buyers who are willing to listen.

In a recent transaction, we enabled management to put together a supply chain optimization plan with clear EBITDA benefit. Aligning management with this plan and talking to it during the sale process allowed the buyer to see additional bottom-line value in the company, ultimately driving the sale process forward. In a distressed scenario, finding ways to increase valuation can make the difference between a successful, actionable outcome and a total stalemate. 

Isolating the opportunity

The unique circumstances of a distressed sale—especially those in which previously consolidated business units are being sold piecemeal—can open even more doors for value creation. Advisors and leadership teams that fully assess the good, bad, and the ugly about the operations, org structure, and staffing of the current organization—and thoughtfully articulate a path for improvement—do themselves a great service in the eyes of potential buyers, who will be seeking a partner that is both future-minded and capable of driving change.  

Creating value is hard. Switching from a label of distressed to valuable can be even harder. But with the right focus—and a collaborative team—the hard things are made much easier.