Distressed M&A

Distressed M&A covers the purchase or sale of companies that are in financial distress. Such transactions often take place under time pressure and involve special risks. Buyers hope for bargains, but carry the risk of taking over a business with deep problems. Sales outside insolvency proceedings need to be distinguished from acquisitions out of opened proceedings. The legal framework determines who negotiates, which approvals are required and how proceeds are used. In ordinary German insolvency proceedings, the administrator generally acts for the affected assets. In self-administration, management remains in charge under the supervision of a court-appointed custodian.

The operating business is often transferred through an asset deal. This allows the acquisition perimeter to be defined more selectively, without automatically eliminating every historical risk. Warranties and recourse are usually limited, so the buyer must assess the critical risks despite time pressure. These include ownership of assets, continuation of key contracts, existing permits and the transfer of employees. Sales before insolvency proceedings may also involve a risk of later challenge. A short-term cash forecast should also show the funding required until operations stabilise.

The real pricing pressure comes from time, because liquidity, customer confidence and operating stability can deteriorate quickly. For the buyer the ability to continue operations is decisive, because an acquisition only works if customers, suppliers, employees and trade credit insurers continue to cooperate after the transfer. Outreach to these groups therefore often begins before completion. Funding working capital immediately after the acquisition also needs settling, because suppliers in such situations regularly switch to payment in advance, creating a substantial cash requirement beyond the purchase price.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.