MEDIA RELEASE: Businesses looking for growth and opportunity are well-positioned to capitalise on persistent supply chain and cash flow issues by acquiring struggling competitors, according to HLB Mann Judd Sydney restructuring and risk advisory partner, Todd Gammel.

Mr Gammel said current market conditions, including rising inflation and interest rates, are resulting in an increase in distressed businesses, creating opportunity for those looking to grow or expand their offerings through acquisition.

“Industries where there’s an inability to pass on changes in costs, such as construction and also retail and service-based sectors, will likely see an increase in distress.

“However, this presents a unique opportunity for businesses in the sector to expand and grow operations, by acquiring another business at a value lower than it would cost to build from the ground up, with the potentially added value of additional skilled workers” he said.

Distressed businesses are classified as those that are struggling to generate sufficient revenue or income to meet or pay its financial obligations. Some distressed businesses may be in a formal process like administration, receivership liquidation, or not in a formal regime but under other pressures including supply challenges or if the business owner has passed away and there’s no succession planning in place.

Mr Gammel said businesses looking to acquire a distressed competitor can gain immediate scale, and improve the margin and market position of both businesses by operating as a single entity.

“Businesses operating in highly competitive markets have likely been undercutting each other for a number of years, which is now causing financial stress. In the current market, labour shortages remain a key issue, but purchasing a distressed business can afford the acquirer with a level of skills and resources they would have otherwise been unable to easily source,” he said.

With the Reserve Bank of Australia having lifted interest rates for a historic fourth consecutive month – the official cash rate now sitting at 1.85 per cent - Mr Gammel said prospective buyers of distressed businesses may have missed the opportunity to use cheap money.

However, the combined impact of inflationary and cost of living pressures, rising interest rates and supply chain issues are creating growth prospects for well run businesses that can manage the issues they face.

“It’s a rare scenario. All these factors add up and impact the ability of a business to trade or trade profitably. At the same time, many small business owners in particular, have reached a point where they need an exit strategy. It can then become a case of a purchaser effectively buying a pool of employees and business to expand and resolve any labour issues in their existing business.

“There are many reasons why you can get good value from buying a distressed business. It's just about how a purchaser approaches the process, understanding of vendor motivations and what issues could arise - a thorough due diligence process is crucial to ensure the investment of the acquisition is maximised” he said.