What are the best practices for conducting due diligence on distressed assets for sale?

2 Research the market and the seller

Once you have identified some potential targets, you need to do some preliminary research on the market and the seller. This will help you understand the context and the background of the deal, as well as the motivations and expectations of the seller. For example, you can look at the market trends, the competitive landscape, the regulatory environment, and the demand and supply dynamics for the asset. You can also look at the seller's financial situation, reputation, litigation history, and reasons for selling. This will help you assess the risks and opportunities involved, as well as the potential value and synergies of the asset.

3 Conduct a thorough valuation

One of the most challenging aspects of due diligence on distressed assets is to determine their fair value. Distressed assets often have complex and uncertain cash flows, assets, liabilities, and contingencies, which make conventional valuation methods difficult or unreliable. Therefore, you need to use a combination of different approaches and scenarios to estimate the value of the asset, such as discounted cash flow, liquidation value, market multiples, and comparable transactions. You also need to factor in the costs and benefits of restructuring, refinancing, or repositioning the asset, as well as the potential upside and downside risks.

4 Verify the legal and operational aspects

Another important aspect of due diligence on distressed assets is to verify the legal and operational aspects of the asset. This involves reviewing the contracts, agreements, licenses, permits, warranties, and other documents related to the asset, as well as conducting site visits, inspections, audits, and interviews with the management, employees, customers, suppliers, and other stakeholders. You need to check for any issues or discrepancies that could affect the ownership, performance, or profitability of the asset, such as liens, claims, lawsuits, environmental hazards, compliance violations, quality problems, or operational inefficiencies. You also need to evaluate the capabilities and culture of the asset's human resources, as well as the compatibility and integration potential with your own organization.

5 Negotiate the terms and conditions

After you have completed your due diligence on the distressed asset, you need to negotiate the terms and conditions of the deal with the seller. This involves agreeing on the price, payment method, closing date, contingencies, warranties, indemnities, and other clauses that will protect your interests and minimize your risks. You also need to prepare and execute the necessary documents and formalities to finalize the transaction, such as the letter of intent, the purchase agreement, the escrow agreement, and the closing statement. You should also consult with your legal, financial, and tax advisors to ensure that you comply with all the applicable laws and regulations.

6 Plan and execute the post-acquisition strategy

The last step of due diligence on distressed assets is to plan and execute the post-acquisition strategy that will enable you to realize the value and potential of the asset. This may involve implementing some changes and improvements to the asset's structure, operations, finances, or strategy, such as restructuring, refinancing, rebranding, repositioning, or divesting. You also need to monitor and evaluate the performance and progress of the asset, as well as deal with any issues or challenges that may arise along the way. You should also communicate and collaborate with the asset's stakeholders, such as employees, customers, suppliers, regulators, and creditors, to ensure a smooth and successful transition.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?