Good Deals On Distressed Businesses?

[@rickc.3552]

As a previous broker, distressed assets were the bane of my existence. Finding buyers who are skilled at turnarounds is tough and bringing sellers down to reality is 1000% more difficult

[@DavidCBarnett]

Yup, most of the sellers don't realize they own liabilities, not assets.

[@ilapfashajackson741]

really insightful i love your content

[@DavidCBarnett]

Thank you, thanks for watching!

[@victor7530]

Thanks David. A lot of of useful and interesting information.

[@DavidCBarnett]

Glad you enjoyed it Victor.

[@ammonsequiptment9877]

Very informative video thanks

[@DavidCBarnett]

Glad it was helpful!

[@boryskay1535]

Hey David good video. Pls can you do another one about buying a business that is distressed and is having huge debts. How can the deal be done?. is it dowable?

[@filmaker256]

You may have mentioned it, of course someone can use the businesses assets to get financing from bank. Asset based Lending.

[@RomilCPatel]

Yes, but the assets would need to be bought for below the LTV of the ABL.

[@DavidCBarnett]

Bank financing and ABL are two different camps of lenders who ascribe different value levels. Watch this video: kzbin.info/www/bejne/nqDNdnmvYtV5qsU

[@DavidCBarnett]

Maybe Romil, Some asset based lenders will want to know what you paid and use that as a ceiling.

[@charlescooper300]

David, as always excellent information. Assuming you do purchase the under preforming entity and you know how to fix their challenges (maybe it has many similarities to your own but in a different geographical market, but close enough to share resources) how can you value the capital loss that under preforming business brings to the table? My business is capital intensive and I lost money for four years before breaking even year five and finally making a sizable profit year six. I know many nearby competitors are on this same voyage of discovery. At what point is is reasonable to approach them to purchase their business assuming their capital losses can be rolled into my profitable operation (off setting taxes, as well as getting their assets at a discount)?

[@DavidCBarnett]

That's a question for an accountant my friend. Their losses can shield your future profits from taxation, but are only valuable if you have future profits. To value the loss, just look at what those losses might save you, then apply a discount for the risk potential of whether or not you'll have profits to offset.

[@RomilCPatel]

You made a few errors in this video. The first is assuming that the owner will sell the assets for fair market value. If sellers are desperate to sell then they will sell for forced liquidation value not fair market value, hence you can buy the assets cheap. I currently have a deal under LOI which already has the financing ready and will close in the first week of January. The company is selling their business cash-free/debt-free for 6.6mm when their assets have a FMV of 12.7mm on third party appraisal. This is an example of buying the assets below what their worth due to owners being in a position where they are forced to sell. After the deal closes I would be willing to share more details with you, if interested. I also have another method for buying distressed businesses which is to consolidate them with more profitable companies into one large Newco. If the synergies are taken advantage of properly then the profitable business has what is needed to take the assets of the unprofitable business and make it profitable such as a special MSA with clients that the other business doesn’t. This creates a 1+1=3 scenario, which is the reason that roll ups and consolidation plays are done, to create synergies that build profitability.

[@DavidCBarnett]

Yes, a successful business would definitely have an easier time buying one of these and get financing due to the lender looking at the combined balance sheet. Please do share your details once the deal is done. Your note about seller's motivation is valid. Yes, desperate sellers will be more inclined to give a good deal, ie scenario #2. I wanted to point out in this video that people regularly come across 'distressed businesses' all the time in which the sellers don't even know they're in distress. Most of these businesses end up closing because the seller never figures out they have a problem. Examples #1, and 3.