Distressed mergers and acquisitions activity today reflects a market where opportunity and complexity coexist. Private equity firms, strategic acquirers and specialty investors are encountering businesses facing stress from elevated interest rates, operational challenges and market disruption — creating acquisition prospects at potentially attractive valuations. However, success in distressed M&A requires capabilities distinct from traditional deal execution.
The market dynamics are compelling. Middle Market Growth reports that “in 2024, more than two-thirds of PE firms reported incorporating distressed assets into their investment strategies, and this trend shows no signs of slowing down in 2025.” The factors driving this activity remain in force: companies dealing with debt from older vintages at elevated rates, portfolio companies held beyond typical investment horizons and businesses in sectors experiencing fundamental challenges.
For buyers prepared to navigate complexity, turnaround M&A offers several advantages. According to Middle Market Growth, these transactions “provide access to undervalued assets and market entry opportunities at reduced costs” while offering sellers “a lifeline to preserve value and ensure continuity.” The challenge lies in identifying situations with genuine turnaround potential versus those facing insurmountable structural headwinds.
MARKET DYNAMICS DRIVING DISTRESSED DEAL FLOW
Multiple forces are creating distressed M&A opportunities in 2025. The interest rate environment, while more favorable than peak 2023 levels, remains elevated relative to the low-rate period of 2010 to 2021. Companies that borrowed during that era to fund acquisitions or recapitalizations now face refinancing at significantly higher rates.
PwC analysis of private equity portfolios indicates that longer holding periods create additional pressure. Their mid-year 2025 outlook notes that “increased holding periods and elevated interest rates have raised the required earnings growth needed to achieve target internal rates of return.” For companies unable to achieve this growth, sponsors face difficult choices between additional equity investment, operational restructuring or sale.
The pressure is particularly acute for companies held since 2020. According to Cherry Bekaert, “private equity firms hold more than 28,000 assets, 40% of which have been held for longer than four years,” with the median holding period for private equity-backed companies reaching 5.9 years in 2024. While not all long-held companies are distressed, the aging portfolio creates circumstances where sponsors may entertain sale offers they would have rejected in stronger markets.
Sector specific challenges add to the opportunity set. Companies in certain industries face structural headwinds independent of their capital structure. Retail businesses adapting to e-commerce disruption, health care providers navigating reimbursement changes and industrial companies affected by tariff policies may present acquisition opportunities for buyers with turnaround expertise.
IDENTIFYING ATTRACTIVE OPPORTUNITIES
Successful distressed M&A begins with disciplined opportunity identification. Not every struggling business represents a viable turnaround candidate. Buyers must distinguish between companies facing temporary stress amenable to operational improvement and those confronting permanent structural decline.
Several characteristics indicate turnaround potential. First, a viable core business serves defensible markets with sustainable economics. Temporary profitability challenges can be addressed; terminal market decline cannot. Second, identifiable operational improvements can drive performance enhancement. Overhead reduction, working capital management or commercial initiatives should have clear paths to implementation.
Third, management capability matters. Even with new ownership and resources, successful turnarounds require leadership teams who can execute operational plans. Assessing existing management objectively — its strengths, weaknesses and retention likelihood — informs decisions about leadership changes needed after the acquisition.
Fourth, the capital structure must be addressable. Some distressed situations involve debt levels that even strong operational performance cannot support. Buyers must evaluate whether refinancing is feasible, whether creditors will accept restructured terms and whether the acquisition can be structured to right-size the balance sheet.
The M&A Advisor’s recognition of Atar Capital as Private Equity Firm of the Year for the 2025 Turnaround Awards highlights firms that excel at identifying and executing these opportunities. According to the award announcement, Atar Capital demonstrated “exceptional leadership and success in transforming businesses within the distressed investing and restructuring space,” with particular strength in “transforming corporate carve-outs and underperforming businesses within the lower middle market.”
DEAL STRUCTURE CONSIDERATIONS
Structuring distressed acquisitions requires creativity and technical expertise. Unlike traditional M&A, where buyers acquire healthy businesses at market-driven multiples, distressed transactions involve companies with impaired value, uncertain prospects and often limited options. The structure must address these realities while protecting buyer interests.
Asset purchases provide flexibility in distressed contexts. By acquiring specific assets rather than equity, buyers can avoid certain liabilities while obtaining operating capabilities. Section 363 bankruptcy sales offer advantages, allowing buyers to acquire assets “free and clear” of most encumbrances through court order. However, these transactions require comfort operating within bankruptcy processes and timelines.
Stock acquisitions preserve tax attributes, including net operating losses, but require buyers to accept existing liabilities. In distressed situations where liabilities may be uncertain or contested, this approach carries risk. Thorough due diligence becomes essential, though the compressed timelines typical of distressed sales may limit the scope of investigations.
PwC’s guidance on structuring distressed transactions emphasizes several strategies, including “debt for equity swaps,” where “debt holders receive equity and the potential to participate in equity returns in exchange for reducing the financial leverage.” For buyers, negotiating with existing creditors to restructure or eliminate debt through the acquisition process can create viable capital structures post-close.
Earnouts and contingent consideration are standard features of distressed acquisitions. Given uncertainty about turnaround success, sellers and buyers may struggle to agree on valuation. Earnouts that tie additional payments to achieving performance milestones bridge this gap, though they create post close complexity, including potential disputes over performance measurement.
DUE DILIGENCE IN DISTRESSED TRANSACTIONS
Due diligence in turnaround M&A differs substantially from traditional transactions. Time constraints are tighter, information may be less reliable and the focus extends beyond validation to active assessment of turnaround viability.
Financial due diligence must distinguish sustainable performance from temporary results. Historical financials may reflect poorly managed operations, one-time charges or extraordinary items that obscure underlying business economics. Quality of earnings analysis focuses on identifying normalized run-rate performance and assessing working capital requirements post-stabilization.
Operational due diligence takes on outsized importance. Buyers must evaluate current operations, identify opportunities for improvement, and assess the feasibility of implementation. This requires not just reviewing provided materials but also conducting management interviews, site visits and detailed operational analysis. For companies in distress, operational underperformance typically explains financial challenges; understanding root causes informs turnaround strategy.
Legal due diligence addresses heightened risks. Distressed companies may have allowed compliance matters to lapse, face pending litigation, or have contractual issues with customers or vendors. Investigating thoroughly within compressed timeframes requires experienced counsel and systematic processes.
Commercial due diligence validates market assumptions critical to turnaround plans. If growth projections depend on new product launches, customer research should validate market reception. If cost reduction assumes operational changes, operational experts should assess feasibility.
PwC warns that buyers should “make sure the amount and structure of your financing is consistent with the findings of your due diligence and your turnaround plan.”
FINANCING DISTRESSED ACQUISITIONS
Securing financing for distressed acquisitions presents distinct challenges. Traditional lenders may be uncomfortable with target company risk profiles, while sellers often need transaction certainty that complex financing contingencies undermine.
Private credit has emerged as a key financing source for turnaround M&A. M&A Alerts reported that “private equity fundraising may be in retreat, but private credit is rising to meet the moment” with “non-bank capital stepping in to support everything from leveraged buy outs to distressed asset plays.” The flexibility and execution speed that make private credit attractive for traditional M&A apply equally to distressed situations.
However, lenders require careful analysis before financing turnaround situations. Detailed business plans, conservative financial projections and clear turnaround strategies are essential. Lenders will scrutinize management capabilities, operational improvement plans and working capital requirements. Some transactions may require sponsor equity contributions exceeding typical LBO structures to provide an adequate cushion.
Asset based lending can play a role in turnaround financing structures. By focusing on collateral value rather than enterprise earnings, ABL can provide financing even to companies with depressed or negative EBITDA. However, stressed balance sheets may limit borrowing capacity even against asset-based formulas.
THE ROLE OF TURNAROUND ADVISORS
Professional turnaround advisors are essential participants in distressed M&A transactions. Their expertise spans operational assessment, interim management, stakeholder negotiation and oversight of implementation. For buyers without in-house turnaround capabilities, engaging experienced advisors increases the likelihood of success.
Pre-acquisition, turnaround consultants can assess operational improvement potential, identify quick wins and estimate the investment required for stabilization. This analysis informs bid pricing and deal structure while providing the foundation for post-acquisition planning.
Post-closing, turnaround professionals may assume interim management roles, including Chief Restructuring Officer positions. These engagements provide experienced leadership during stabilization while permanent management is recruited, or existing teams are developed. The hands-on involvement typical of turnaround engagements differs from traditional consulting, in which advisors assume operational responsibility for results.
Middle Market Growth notes that “distressed M&A transactions can take several different forms, including out-of-court sale transactions, 363 bankruptcy court sale transactions, sales in connection with assignments for the benefit of creditors (ABCs) and UCC Article 9 sale transactions.” Turnaround advisors with experience across these structures provide valuable guidance in navigating process options.
INTEGRATION AND VALUE CREATION
Post-acquisition integration in turnaround situations requires speed and focus. Unlike traditional M&A, where integration takes 12 to 18 months, distressed acquisitions demand immediate action to stabilize operations, reassure stakeholders and stem losses.
The first 90 days are critical. Quick wins that demonstrate new ownership commitment and capability build momentum. These might include addressing immediate cash flow concerns, renegotiating supplier terms or implementing basic operational disciplines. Simultaneously, leadership must develop and communicate a longer-term turnaround strategy to maintain employee and customer confidence.
Management changes often occur rapidly post-close. While thoughtful assessment is essential, distressed situations rarely offer the luxury of extended evaluation periods. Buyers must make swift decisions about which leaders to retain, where to supplement capabilities, and which roles to replace immediately.
Stakeholder communication deserves particular attention in turnaround situations. Customers, vendors, employees and lenders all share concerns about the company’s viability. Proactive communication that honestly addresses these concerns and articulates improvement plans helps maintain critical relationships during the transition.
Working capital management becomes paramount. Distressed companies typically have stressed working capital positions — elevated payables, inventory obsolescence and aggressive receivables collection. Developing 13-week cash flow forecasts and actively managing every dollar of working capital prevents liquidity crises that can derail turnarounds.
RISK MITIGATION
Distressed M&A carries inherent risks that buyers must acknowledge and mitigate. Even with thorough diligence and careful planning, turnarounds can fail. Several practices reduce risk exposure:
Conservative valuation recognizes the uncertainty inherent in distressed situations. Buyers should bid amounts that provide adequate return, even if turnaround takes longer or delivers less improvement than projected. Overpaying based on optimistic scenarios creates problems if reality disappoints.
Adequate capitalization ensures resources to fund turnaround initiatives. Undercapitalized acquisitions that run short of cash before reaching profitability create difficult choices about additional investment versus cutting losses. Building appropriate financial cushions at acquisition provides a runway for value creation.
Staged investment allows validation before full commitment. For larger turnarounds, structuring transactions with an initial closing followed by additional investment upon achieving milestones protects while maintaining upside participation.
Exit planning should begin at acquisition. Understanding potential exit paths — strategic sale, sponsor-to sponsor transaction and refinancing — and ensuring the business and capital structure are positioned for an eventual exit helps avoid situations in which successful operational turnarounds cannot be monetized.
MARKET OUTLOOK AND OPPORTUNITIES
Looking forward, several factors suggest sustained distressed M&A activity. PwC’s private equity outlook notes “increased reliance on liability management tools, particularly amendments and distressed exchanges,” reflecting “growing urgency to buy time, manage maturities and avoid outright defaults.” These restructuring efforts may lead to sale processes for companies unable to achieve operational turnarounds under existing ownership.
The regulatory environment may also influence activity. Expected deregulation under the current administration could facilitate dealmaking, though actual policy changes remain to be implemented. Wolters Kluwer analysis suggests that with “less burden in deals where a structural remedy can address competitive concerns,” more distressed acquisitions may achieve regulatory approval.
For private equity firms, the pressure to deploy capital and return liquidity to investors creates motivation to pursue opportunities across the risk spectrum. Cherry Bekaert notes that “rather than growing consecutively, quarterly exit activity bounced up and down throughout 2024” with the year-end rebound indicating “PE investments over the past two years into portfolio transformation and optimization strategies can, in fact, contribute to improved valuations at exit.” This suggests that firms are willing to undertake complex turnarounds when returns justify the effort.
CONCLUSION
Turnaround M&A today offers compelling opportunities for buyers with appropriate capabilities and risk tolerance. Market dynamics, such as elevated rates, aging portfolios and sector disruption, continue to generate deal flow. Companies facing genuine stress will seek new ownership that can provide both capital and operational expertise.
Success requires distinguishing viable turn around candidates from terminally impaired businesses. It demands creative structuring that aligns buyer interests with achievable outcomes. It necessitates disciplined due diligence despite compressed timelines and limited information. And it requires post-acquisition execution that stabilizes operations, implements improvements and creates value.
For the broader middle-market ecosystem, turnaround M&A plays an important role. Companies that might otherwise face liquidation can continue operations under new ownership, preserving jobs and serving customers. Creditors achieve better recoveries than they would in bankruptcy liquidation. And successful turnarounds generate attractive returns for patient capital willing to undertake complexity and risk.
The buyers who excel at turnaround M&A in 2025 will combine financial acumen, operational expertise and execution capability. They will have or develop a deep understanding of specific industries, strong relationships with financing sources and access to turnaround talent. Most importantly, they will approach each opportunity with appropriate skepticism about projections while maintaining conviction about their ability to create value through disciplined operational improvement.
Lisa H. Rafter is publisher of ABF Journal.
