Your competitors and peers are already making millions by buying businesses out of administration. If you’re reading this, chances are you’re starting to see the money-making potential in buying a distressed business yourself.

But have how about taking things to the next level and building an entire distressed business portfolio?

It’s a route that Cyrus Investment Management took and one that’s proved very successful.

High risk, high reward

Building a distressed business portfolio is a viable route to growth and maximised profits but you need to put the right strategy in place from the get-go to ensure your success.

The rewards are high here but the risks are equally great, so take some time out, get realistic about your approach and stick to it. For Cyrus the plan was to use the might of their multi-million-pound investment fund to buy up struggling British start-up companies in the precision engineering sector and turn them around as part of a larger, profitable entity.

The business looked at everything from reinforced steel doors for high-security hangers to fighter jet ejector seats and helicopter parts. Cyrus managing director, Peter Schwabach, offers an insight on what worked for his team and why.

Why distressed?

The established route to making a profit from distressed businesses is to asset-strip. But building a portfolio of distressed businesses and making a success of it requires a complete change in mindset.

This isn’t about stripping a company of its last remaining value; it’s about discovering the value and potential that is still left in the business and not just bringing it back to life, but nurturing it to the point of previously unimaginable success. So why go to all the hassle of buying a distressed business rather than a solvent acquisition? For Schwabach and the Cyrus team, it all came down to price.

The team clearly struck at the right time. The precision engineering industry boasts some 1,500 specialist manufacturers making parts for the aviation industry and while there is risk through global upheaval – Brexit has got this sector talking like just about any other – demand remains strong.

We’re even seeing British engineering jobs being ‘reshored’ from places such as China and India, which has reportedly added hundreds of millions of pounds to the UK economy along with thousands of jobs. There is a distinct glow of optimism on the horizon.

Mitigating risk

Cyrus clearly spotted the right opportunity at the right time – surely the secret to all business endeavours. But what can you do to mitigate the risks in case your timing isn’t spot on?

One answer is to look at things from the refreshing point of view of actually growing an acquisition for the benefit involved. The goal remains profit for the group as a whole, but to reach this stage you need to consider the health and most importantly growth of each new business you bring into the portfolio.

Mr Schwabach notes that right from the start his team went in with a strong emphasis on saving skilled engineering jobs, rather than gutting businesses and cutting jobs. The fund put this approach into action when it managed to save around 100 jobs when it bought a manufacturer of parts for aircraft and nuclear power facilities, FGP Precision Engineering, out of administration in 2015. FGP formed part of Cyrus’ first fund which closed in 2015 and grew the company’s value by nine percent within the first six months.

To bring us back to the point of mitigating risk here, the key driver in securing decent levels of growth becomes keeping staff onboard and creating new life for the company. The result? A motivated, energised workforce who become all the more invested in helping ensure the turnaround is a success.

Stripping a business for its assets – both physical and intangible – is certainly a valid approach to making a great profit from buying distressed businesses. But the mindset in creating a distressed business portfolio is very different. There is, in essence, an obligation to create and preserve jobs rather than cut them down. All this comes back to the essential first step of choosing a good target acquisition that has invested carefully in the right people over recent years.

It doesn’t work for every company or every sector, but pick the right opportunities and the potential is endless. For Cyrus, precision engineering firms in the UK were a good spot because they create ultra-specialised, high-quality products; cheap imports produced on mass simply can’t compete.

So what do you need to be on the lookout for if you’re considering replicating this multi-business approach? Here are some essentials to consider with each target.

Entry price

It goes without saying that the entry price for any target acquisition should be as low as possible, but this point becomes even more important when you’re considering the purchase of multiple distressed businesses.

Look at each company’s potential as a whole when assessing value but pay particular attention to the remaining asset value in the business here to ensure that your overall risk is limited.

Nature of distress

The importance of the entry price is closely followed by the nature of the company’s distress itself. In buying a distressed business you need to proceed to with caution – we can’t emphasise this point enough. Assume nothing. Don’t take the word of the owner or management. Clarify for yourself where the problems are.

If your strategy is to build a portfolio of distressed businesses and you have cash behind you, the ideal scenario is to find a business that has hit cashflow problems it can’t resolve itself, but that is otherwise in good health.

Management issues, major swings in supply or demand within the sector, or problematic suppliers can be far harder matters to rectify and you’ll need deep pockets if you’re going to try.

Future potential

Finally, remember to consider the company’s potential. For Cyrus, the goal from the outset has been to look at merging failing businesses and turning them round as part of a successful single entity.

As Mr Schwabach – who formerly worked at Goldman Sachs – said: “We’re also not randomly investing in businesses and hoping that they grow, but merging companies into one.”

You might come across some targets that present greater potential purely for the acquisition of their assets. Keep your strategy in mind here and don’t get distracted by distressed acquisitions that don’t fit your bill. The key here isn’t the acquisition’s future potential, but rather its future potential as part of your portfolio.

Cyrus executed this strategy with success when it took various struggling single entities and turned them into a larger successful group. At every stage, the goal was the target acquisition potential function and profit as part of the group, not as a standalone company.

Due diligence

When it comes to buying a business out of administration, one stage rises above all: due diligence. When you’re considering a portfolio of distressed businesses, any legal or unknown financial problems associated with any of your target acquisitions could have a knock-on effect across your entire portfolio as you juggle the team’s focus, time, attention and of course, budget.

There are various distressed business experts in the M&A sector who can perform your due diligence with the professional caution and attention to detail it requires. This is one area you can’t afford to skimp on; when it comes to due diligence you need to give this your full attention and if the results throw up something you don’t like the look of – walk away.

Remember there are hundreds of distressed business opportunities out there, don’t overstretch your risk for one that’s not suitable.