Distressed M&A, explained simply
Buyers can often pay less, but face greater risk, less time and fewer protections. Diligence focuses on survival: how much cash remains, who must be paid, and whether the business can be stabilized. The central tool is a 13-week cash flow forecast.
A transaction may be completed out of court, or through a court-supervised sale under Section 363 of the US Bankruptcy Code, where assets are usually sold free and clear of most claims and the first bid, the stalking horse, sets the floor.
13-week cash forecast
IllustrativeWestfield Plastics, closing cash balance, $ millions
Cash runs out in week 4, and the forecast shortfall reaches $1.5 million by week 13.
Two principal routes
| Out-of-court sale | Court-supervised sale (Section 363) | |
|---|---|---|
| Speed | Can be fast | Set by the court process |
| Liabilities | Buyer may inherit more | Assets usually sold free and clear of most claims |
| Competition | Negotiated | Often an auction with a stalking horse bid |
Worked example
Westfield has two weeks of cash left and a lender demanding repayment. A buyer has ten days for diligence. The team builds a 13-week cash forecast and finds that the business needs $1.5 million of additional working capital to keep suppliers shipping. The buyer bids for the assets in a Section 363 sale and plans to fund that working capital from day one.
Westfield Plastics is a fictional company. All figures are illustrative.
Why it matters in a deal
Distressed transactions reward speed and focus. Diligence must prioritize the few issues that determine survival and value.
Red flags
- Suppliers demanding cash before delivery
- Unpaid payroll taxes, which can carry personal liability
- Customers already moving to competitors