Buying out of distress - opportunity, risk and the realities of the current market

The numbers tell a clear story. The latest Red Flag Alert data published by BTG (formerly Begbies Traynor) in April 2026 records 62,193 UK companies in critical financial distress, up 36.9% year on year. HMRC's total tax debt stands at £44 billion, almost three times its pre-pandemic level, and in October 2025 HMRC filed 423 winding-up petitions in a single month, its highest monthly total of the year. Company insolvencies in April 2026 reached 2,085, the fourth consecutive monthly rise, and 3% higher than a year earlier.

The result is a significant and sustained pipeline of distressed acquisition opportunities. For buyers who understand how these transactions differ from conventional M&A, the environment offers real value. For those who do not, it offers a swift and expensive education.

A different kind of deal

Distressed M&A differs from conventional transactions in several ways, and the most important is pace. A seller in administration, or a lender exercising security, is focused on speed and certainty. Buyers must make decisions quickly and on limited information as the data room is often incomplete, financial reporting may have deteriorated, and management is under pressure.

Where a conventional buyer might have months for due diligence, in a distressed scenario that window is often weeks, sometimes days. Diligence becomes more focused as the question is not whether every box has been ticked but whether the key risks have been identified and priced.

This matters particularly for warranties. In a conventional deal the seller has a clear incentive to disclose fully, because disclosure limits warranty exposure. In a distressed context that incentive is often absent. Buyers cannot rely on warranty protection as they otherwise would, which places far greater weight on upfront identification of risk.

What to focus on

Given the compressed timeframe, certain areas deserve disproportionate attention.

Customer and supplier relationships are frequently critical to value, and their continuation is often outside the buyer's control. Contracts may contain change-of-control provisions, assignment restrictions, or termination rights triggered by insolvency. Where key counterparties are local authorities or housing associations, as in the recent administration sale of Sussex modular housing manufacturer and certified B Corporation Boutique Modern Limited, obtaining consent to novate contracts can be lengthy and uncertain. Boutique Modern had a £41 million forward order book at administration; preserving even part of that required careful engagement from the outset.

Asset identification matters equally. Distressed situations frequently involve multiple secured and unsecured creditors with competing claims. Buyers must be confident they are acquiring the key assets free from competing security, and that no critical asset sits outside the transaction perimeter. Getting this wrong can mean operating a business with assets that belong to someone else.

Structure is everything

How a distressed acquisition is structured has significant consequences. An asset purchase through a formal insolvency process, typically a pre-pack or trading administration sale, can give comfort on historic liabilities that would otherwise transfer with the business. But it introduces process risk, requires engagement with officeholders and potentially creditors, and may limit what can be agreed commercially.

A share purchase outside a formal process may offer greater flexibility but carries the risk that undisclosed liabilities transfer with the company. The buyer inherits its history, which requires a clear-eyed assessment of what those liabilities might be and how they can be mitigated absent robust warranties.

Getting it wrong

The most common errors in distressed M&A are commercial, not legal. Misreading the nature of the distress is the most dangerous. A business facing short-term liquidity pressure from a disputed contract is a fundamentally different proposition from one in structural decline. Boutique Modern illustrates the point as it had genuine capability and significant contracted work, and its difficulties stemmed from cashflow pressures, contract disputes and relocation costs rather than a broken model. Buyers who can distinguish situational distress from terminal decline will find better targets and price them more appropriately.

Underestimating integration is the second common failure. Post-completion, a distressed acquisition often demands more management attention than anticipated as relationships need rebuilding, staff need reassurance, and operational issues obscured by the urgency of the deal surface quickly.

Looking ahead

The conditions driving distressed M&A show little sign of easing. HMRC's enforcement posture has fundamentally changed as it is better resourced, less tolerant of arrears, and increasingly willing to use compulsory liquidation. Interest rates remain elevated relative to the pre-2022 environment, and the refinancing pressures built up during the near-zero era are unresolved.

For insolvency practitioners, lenders and their advisers, the pipeline is real. Success does not depend simply on accessing opportunities; it depends on approaching them with discipline. Buyers who understand the risks, structure carefully and have a credible recovery plan will find genuine value. Those who treat distressed M&A as merely a cheaper way to do conventional M&A will find it is anything but.

Alastair Manning, Senior Associate, Devonshires Solicitors