Distressed M&A in Austria: acquiring a business in crisis and insolvency

Distressed M&A covers several stages. At the beginning stands the out-of-court crisis: the company is economically impaired but has not yet filed for insolvency. The sale is conducted by the owner, often with the involvement of the principal bank and critical creditors. Even here every quarter counts because a worsening of the situation narrows the negotiating room.

Once an insolvency petition is filed, the situation changes fundamentally. Depending on the type of proceeding, such as a restructuring proceeding with or without debtor-in-possession or a bankruptcy proceeding, a restructuring or insolvency administrator takes over the steering of the assets. The original owner largely loses the power of disposal. In the ongoing proceeding it is usually the business or parts of the business that are sold out of the estate, often as an asset deal.

Which type of proceeding is at hand shapes the entire acquisition: who is the negotiating partner, which consents are needed, which deadlines apply and how quickly can the acquisition be completed? A fundamental classification of transaction forms is provided by our topic page on share deal and asset deal.

One of the largest risks of a pre-insolvency acquisition lies in a later avoidance. If an insolvency proceeding follows the acquisition within a certain period, legal acts of the debtor can under certain conditions be unwound. The decisive aspects are above all the insolvency avoidance situations, such as creditor disadvantage or the special knowledge of the parties. The precise situations and deadlines must be assessed case by case.

In addition the liability of the acquirer can play a role. If the acquirer takes over the business as a going concern by way of an asset deal, liability rules such as section 38 UGB and section 1409 ABGB come into play. Section 14 BAO establishes a liability for certain taxes of the predecessor. Which of these norms apply and to what extent depends on the concrete structure. The concept of acquiring individual assets is explored in the glossary entry on asset deal.

A pitfall in its own right is the rapid loss of value. Key employees, customers and suppliers hesitate in the crisis and may leave the company before the transaction is completed. Anyone who does not stabilise these bonds early often takes over a hollowed-out shell. An initial assessment of the risks is provided by our M&A transaction risk profile.

The acquisition out of the opened proceeding follows its own rules. The seller is no longer the former owner but the insolvency or restructuring administrator, whose actions must respect the court-set framework and the interests of the creditor community. Often the sale is run as an accelerated auction or through direct negotiations with interested parties who can move quickly.

Structurally the acquisition in this phase is almost always an asset deal. This allows the desired business to be carved out without taking over the company together with its liabilities. The warranties of the seller are usually heavily restricted; the acquirer must put its diligence into its own, often narrow review. How a review is structured is shown by the post on the due diligence checklist.

Equally important is the transition of key contracts, permits and employees. Here the general rules on transfer of contract and transfer of business apply, although under the special conditions of an ongoing proceeding. A deeper view on the transition of employees is offered by the post on the transfer of business under AVRAG.

Valuing a crisis-stricken company is particularly delicate. Classical multipliers often do not mirror the actual situation because results are distorted by special factors and the going-concern outlook is uncertain. Common approaches are scenario based, a separate liquidity plan from the buyer and a valuation of individual business parts rather than the whole company.

The financing of the acquisition is also more demanding. Banks tend to be reserved in crisis situations; often a mix of equity, vendor financing and, where appropriate, a contribution of the existing creditors to a restructuring package is needed. The structuring of these building blocks often shapes the achievable purchase price.

In practice it pays off to involve the lender perspective early in the structural decision. How the purchase price can be reflected in the contract is explained in the post on the purchase price adjustment via net debt and working capital. The concept of vendor financing is explored in the glossary entry on vendor loan.