Acquiring distressed companies is one of the most profitable — and most complex — investment strategies in the middle market. This guide analyses the opportunities, risks, and process from the buyer's perspective.
There is an irony in the investment world: some of the best opportunities are found where nobody wants to look. Distressed companies — with unsustainable debt, deteriorated margins, exhausted management teams — are perceived as problems. We see them as opportunities.
Not all of them, of course. Many distressed companies are simply doomed: their business has ceased to be viable and no restructuring can change that. But a significant proportion have a valuable underlying business that is obscured by financial, management, or circumstantial problems. Identifying which are which is the core of our activity in special situations.
The investment opportunity in distressed companies rests on three factors.
Price asymmetry. A distressed company sells — voluntarily or under compulsion — at a price significantly below its intrinsic value. The seller (or the insolvency administrator) needs to close quickly, potential buyers are few (because most do not want to or cannot handle the complexity), and uncertainty depresses the price. This asymmetry between price and value is the space where returns are generated.
Operational improvement potential. Many distressed companies suffer from management problems that are fixable: inadequate cost structure, lack of commercial focus, failed investments, absence of corporate governance. A buyer with operational experience can implement improvements that transform results in months, not years.
Barrier to entry. Buying distressed companies is complex — legally, financially, and operationally. It requires specialised capabilities that few investors possess. This barrier to entry reduces competition and allows returns above those of conventional acquisitions.
The buyer acquires the shares of the company. They assume the entirety of the business — assets, liabilities, contracts, employees. It is the simplest formula but also the riskiest, because the buyer assumes all liabilities, including hidden ones.
In distressed situations, equity acquisitions are usually made at a symbolic or very low price, supplemented by a commitment to inject capital to stabilise the company and execute the viability plan.
The buyer selects the assets of interest — machinery, property, contracts, brands — and leaves the liabilities in the selling company. It is cleaner in terms of risk but may be less tax-efficient and may not include automatic subrogation of contracts or licences.
The most sophisticated mechanism and, frequently, the most attractive. Within insolvency proceedings, the buyer acquires an organised set of assets and employees that allows the activity to continue. The award is approved by the insolvency court, providing legal certainty.
The advantages are significant: selection of assets and contracts, limitation of debt succession (the buyer only assumes obligations they expressly accept, with some exceptions regarding employment and Social Security), a price generally below market value, and a final court ruling.
The buyer does not acquire the company directly but its debt — normally at a discount — and uses their creditor position to convert it into equity via capitalisation or to control the restructuring process. It is a sophisticated strategy, more common in large transactions but also applicable in the middle market.
The due diligence of a distressed company differs significantly from conventional due diligence. The main additional focuses are:
Business viability. The question is not what the company is worth today, but what it could be worth if the problems are resolved. This requires deep analysis of the market, competitive position, client base, and productive capacity.
Liability map. Identifying all liabilities — disclosed and hidden — is critical. Financial debt, suppliers, the tax authority, Social Security, employment contingencies, pending litigation, environmental liabilities. In a distressed company, hidden liabilities are the norm, not the exception.
Urgency. Time is a factor. Due diligence must be fast because the company deteriorates with each passing day. But it cannot be superficial, because the risks are greater than in a conventional acquisition. Finding the balance between speed and depth is an art.
Immediate cash flow. More important than normalised EBITDA is the cash flow for the coming weeks and months. How much capital does the company need to survive until corrective measures take effect? Are there imminent debt maturities? Can the company pay salaries next month?
Key people. Who are the indispensable employees? Will they stay? In a distressed company, the best professionals are the first to receive offers from competitors. Retaining them during the transition is critical.
The acquisition does not end with the signing. In a distressed company, the first 100 days are decisive. The typical plan includes:
Weeks 1-2: Stabilisation. Liquidity injection, communication to employees, suppliers, and clients, rapid assessment of the management team, identification of urgent decisions.
Weeks 3-8: Diagnosis and immediate measures. Detailed analysis of each area, implementation of quick wins (rapid improvements with immediate impact), adjustment of the cost structure, renegotiation of key contracts.
Weeks 9-14: Operational plan. Definition of strategy, required investments, 12-month targets, team reorganisation, implementation of control and reporting systems.
At Blue Mountain, every company we acquire in a distressed situation has a 100-day plan prepared before closing. We do not improvise. We do not wait to see what happens. We act from day one.
Not every buyer is prepared to acquire a distressed company. The required profile includes operational experience (capital alone is not enough; you must know how to manage a company in crisis), sufficient financial capacity (the acquisition is just the beginning; stabilisation and turnaround require additional capital), tolerance for uncertainty (nothing goes exactly as planned), and a network of specialist professionals (insolvency lawyers, financial advisors, interim managers).
If you are a business owner or investor interested in exploring investment opportunities in distressed companies, or if your own company is going through a complex situation and you are looking for a committed partner, let’s talk. The difference between a company that is saved and one that is lost is, frequently, the quality of the investor that comes in.
By Blue Mountain Capital
By Blue Mountain Capital
By Blue Mountain Capital
If you wish to explore a potential collaboration or present an investment opportunity, we invite you to contact us. We guarantee absolute confidentiality in all our conversations.