A few years ago, I thought that finding a small business that was close to bankruptcy, or in receivership or a retiring family business would be a perfect acquisition. The problem is, how do you identify a business that is in one of those circumstances? I did a lot of research and this is what I discovered.

Bankruptcy & receiverships - Banks very seldom put businesses into bankruptcy! They seize their security interest (the assets that were pledged for the loan) and try to sell them. In North America, the banks are very slow to do anything and usually by the time they seize the assets and put in a receiver there is little left of the business, employees and customers are gone. Trying to buy the security interest from a bank is usually complicated by personal guarantees issued by the previous owner. The trustee (on behalf of the creditors) must insure that he gets a fair price for all of the assets because the previous owner will probably have to make up the difference. This is one of the primary reasons that trustees like public auctions.

They can stand back and say that they received the best price they could in an open market competition. If they make a deal with an individual or company to buy the assets the previous owner could say that the trustee did not use their best efforts in obtaining maximum value for the assets and they could use that in a court to try to avoid utilizing their personal guarantee. Secondarily, there is the situation with confidentiality within banking and trustee circles. No one will tell you in advance of a potential asset seizure. Any advanced indication that a company may be on the verge of having its assets seized could in fact be stated as the reason for its demise. It is important to remember that once a bank decides to put in a trustee they have already written the loan to zero, so anything they get is a bonus.

Retiring family business and active partner - This is quite a different situation. These should be listed in the normal classified sections of newspapers and on websites. It would be advantageous to be aware of them prior to hitting the open market. I have discovered another route and that is "networking." Make sure that your accountant, insurance agent, lawyer, stockbroker, banker, and anyone else, dealing with small business on a regular basis is aware of your hunt. Send emails, write letters to all of the business accountants and business lawyers tell them of your interest and define some criteria.

This group of people are the financial confidants of small business owners, they will be the first to be aware of people considering selling or looking for partners. Although none of these people will generally give you a direct lead, a banker might tell a client that is having financial difficulties that he may know of someone who might be interested in being a partner; the same scenario applies to the others. Another method is for you to advertise in the classifieds (use a box number or secondary email address for replies).

In any case remember that due diligence is the key! I cannot over emphasize that. Over the years, I have been involved in hundreds of acquisitions and can relate horror stories with respect to businesses that have been set-up for sale, and not as advertised.