The market for buying and selling distressed companies — what practitioners call distressed M&A — is one of the most complex and simultaneously most rewarding segments of transactional activity in Spain. For the well-advised buyer, it represents the opportunity to acquire productive assets at prices significantly below their replacement value. For the seller or the company in crisis, it can mean the difference between an orderly realisation and the total destruction of value.
This article analyses the Spanish distressed M&A market from an integrated perspective: insolvency law, distressed asset valuation and tax structuring. This is, in essence, the type of transaction where separating the legal adviser from the financial adviser is most costly for the client.
The Spanish Distressed M&A Market
Data from the General Council of the Judiciary (Consejo General del Poder Judicial) place the annual number of insolvency proceedings in Spain at approximately 5,000-6,500 in recent years. The figure that really matters for investors, however, is the number of productive units sold within those proceedings — estimated by the Bank of Spain and various restructuring firms at several hundred per year, concentrated in sectors such as retail distribution, hospitality, automotive supply, construction and business services.
The 2022 reform of the Insolvency Act (Law 16/2022, of 5 September) has been a turning point. The transposition of Directive (EU) 2019/1023 on preventive restructuring frameworks has created a more favourable environment for pre-insolvency transactions, with court-approved restructuring plans that allow dissenting creditors to be crammed down and asset sales to be executed before the company enters formal insolvency. The result is a more active, more transparent and, for investors, more accessible market than before the reform.
At the European level, Spain is part of a distressed asset market that, according to Deloitte estimates, moves approximately 80-120 million euros in transaction value annually in the Iberian Peninsula alone, with buyers ranging from private equity funds specialising in special situations to industrial trade buyers and alternative asset managers.
Legal Framework: From the Insolvency Act to the New Restructuring Regime
The legal framework for transactions involving distressed companies in Spain centres on two main bodies of legislation:
The Consolidated Text of the Insolvency Act (TRLC, Royal Decree-Law 1/2020, of 5 May) is the reference legislation for insolvency proceedings. It regulates the concurso de acreedores from declaration through conclusion, including liquidation or agreement. On asset sales, Articles 215 to 232 TRLC regulate disposals during insolvency, with particular relevance of Article 224 bis on the sale of productive units during the general phase. Article 224 TRLC provides that the insolvency court may authorise the sale of the productive unit at market value, with the acquirer assuming employment contracts in force (by reference to Article 44 of the Workers’ Statute) and, crucially, with the possibility of excluding certain pre-existing liabilities if so authorised by the court order.
Law 16/2022, of 5 September, which amends the TRLC to transpose the European Restructuring Directive, introduces the restructuring plan regime (Articles 583 to 703 TRLC as amended). This new instrument — substantially different from the old pre-insolvency agreement — allows a company in difficulty but still solvent to negotiate with its creditors a plan that may include debt write-downs, payment deferrals, debt-to-equity conversions and, of great relevance to M&A, the transfer of business units within the plan itself. Judicial approval of the plan has cram-down effect: it binds dissenting creditors belonging to classes where the majority voted in favour, substantially reducing process uncertainty.
Pre-Insolvency vs Insolvency: Critical Differences in Price and Process
The distinction between a pre-insolvency transaction and a formal insolvency transaction is not merely technical: it has direct consequences on price, timing, buyer risks and the negotiating position of all parties.
Pre-Insolvency Transactions
In the pre-insolvency arena, the company has not yet been declared insolvent. The transaction is negotiated directly between buyer and seller (or between the seller and its main creditors, if the buyer enters as a funder of the restructuring plan). The applicable legal regime is essentially contract law, with the option to structure the transaction as a share deal or an asset deal, and with the possibility of integrating the transfer into a court-approved restructuring plan.
The advantages of the pre-insolvency route are clear: greater confidentiality, less operational disruption, shorter timelines and greater flexibility in structuring. Discounts on going-concern value typically run in the 15-40% range, depending on the degree of financial difficulty and urgency. The main disadvantage for the buyer is the absence of the charge purging mechanism that the insolvency route provides: in a pre-insolvency asset deal, registered encumbrances and charges do not automatically disappear.
The communication to the court under Article 583 TRLC (the former “Article 5 bis communication”, now reconfigured as the initiation of the restructuring process) gives the company temporary protection against individual enforcement actions: once filed, creditors cannot initiate enforcement proceedings against assets necessary for the business during the negotiation period (up to three months, extendable). This creates a valuable window of time within which to complete the negotiation with the buyer.
Insolvency Proceedings: The Sale of Productive Units
Within insolvency proceedings, the sale of the productive unit is the flagship mechanism of Spanish distressed M&A. Article 224 TRLC allows the insolvency administrator — with court authorisation — to sell the productive unit as a going concern: tangible and intangible assets, contracts, workforce and client portfolio.
The standard process includes: (1) application by the insolvency administrator to the court; (2) opening of a bidding period with publication in the Official State Gazette (BOE) and in designated electronic registers; (3) evaluation of offers by the administrator with a report to the court; (4) court order authorising the sale and setting out conditions, including charge purging where applicable; and (5) notarial deed of transfer.
The most valuable element for the buyer in the insolvency route is precisely the purging of charges: the authorising court order can declare that the buyer acquires the productive unit free of attachments, mortgages and tax charges encumbering the assets included in the unit, provided the price obtained is sufficient to satisfy creditors with priority over those assets. This possibility — set out in Article 225 TRLC and developed by Supreme Court and Provincial Court of Appeal case law — makes the insolvency route particularly attractive when the company has a balance sheet heavily burdened with secured debt.
Discounts in the insolvency route are typically larger (30-70% on going-concern value), reflecting the greater urgency, judicial process uncertainty and complexity of negotiating with the administrator and creditors.
Buyer Perspective: Identification, Valuation and Bidding
For buyers, a distressed M&A transaction begins well before the target company enters severe difficulty. The most sophisticated investors — special situations funds, industrial buyers with consolidation strategies — maintain watchlists of companies showing early signs of financial stress: lengthening supplier payment terms, repeated refinancings, auditor changes or delays in filing annual accounts.
Valuation Under Distress
Valuing a distressed company requires a different approach from ordinary M&A. Standard methods (DCF with five-year projections, normalised EBITDA multiples) lose reliability when the company is loss-making or when going-concern continuity is uncertain. The most relevant approaches in distress are:
Orderly liquidation value: Estimates the price of assets sold individually in an orderly process with sufficient time to find optimal buyers for each asset type. This is the valuation floor: if the acquisition price for the productive unit falls below the liquidation value of its assets, the buyer is acquiring at break-up value.
Risk-adjusted going-concern value: Projects the business’s cash flows under a continuity assumption, applying a discount rate that incorporates the specific risk premium of the process (judicial uncertainty, risk of client attrition, need for immediate capital investment). The difference between this value and the price paid is, in essence, the investor’s margin of safety.
Comparable distressed transaction analysis: Uses multiples from similar transactions closed in the same sector in a comparable situation. In Spain, access to this data is limited by process confidentiality, but commercial registry filings and BOE publications allow a partial database to be reconstructed.
Bidding in Insolvency Proceedings
Participating in an insolvency sale of productive units requires advance preparation. The buyer must: (1) identify the opportunity through the BOE, public registers or direct contact with the insolvency administrator; (2) request access to the data room established by the administrator; (3) conduct due diligence within typically short timeframes (2-6 weeks); (4) submit a binding offer on the terms of the information memorandum; and (5) appear at the court hearing if the judge convenes one to adjudicate between competing bids.
The offer must be complete: price, payment terms, assets included and excluded, employees to be subrogated, contracts to be assumed, conditions precedent (if any) and maximum closing timeline. Commercial court judges particularly value consistency between the price offered, the number of employees retained and the viability of the business plan presented.
Seller Perspective: When to Sell and How to Protect Employees
For the distressed company, the decision to sell is often the most difficult in its history. The owner-manager — particularly in a family business — has invested decades building the business, and a distressed sale means accepting a price substantially below what could have been achieved under normal conditions.
When Sale Is Preferable to Restructuring
A sale is preferable to restructuring when several conditions are present: (1) debt is so high that no realistic write-down would make the business viable without fresh capital injection; (2) shareholders are unable or unwilling to inject additional capital; (3) the business has value for a strategic buyer (synergies, market share, technology) but cannot survive independently; (4) key clients or contracts are at risk due to continuity uncertainty, and a sale to a solvent buyer stops the haemorrhage.
The Pre-Pack: Minimising Disruption
The pre-pack model — pre-negotiating the sale terms before insolvency to execute quickly once proceedings are declared — is the most efficient formula for preserving value. It allows the company to enter insolvency with a committed buyer, reducing the period of uncertainty to a minimum. Law 16/2022 has strengthened the legal framework for pre-packs by expressly regulating restructuring plans with business unit transfers, although Spanish court practice is still developing the standards of transparency and competition required in these processes.
Employment Succession: Protecting the Team
The mandatory succession of employment contracts (Article 44 of the Workers’ Statute) is one of the most important protections in insolvency transactions. The buyer of the productive unit assumes the workforce with their existing conditions — salaries, seniority, professional classifications — and cannot dismiss employees solely because of the transfer. However, the buyer can negotiate with employee representatives a reorganisation plan that includes workforce adjustments, provided the objective grounds are justified.
For the seller or insolvency administrator, this means that a buyer who commits to retaining a greater number of employees has a powerful argument before the judge, even if their price is slightly lower than a competing offer that involves more redundancies.
Distress-Specific Due Diligence
Due diligence in a distressed M&A transaction is qualitatively different from that in an ordinary transaction. Timelines are shorter, available information is more incomplete, and distress-specific risks require a forensic approach.
Tax and Social Security Contingencies
Debts to the Spanish Tax Agency (AEAT) and the Social Security Treasury (TGSS) deserve priority attention. In a share deal (purchase of shares), the buyer inherits these debts with no possibility of purging them. In a court-approved asset deal, the court order may declare the acquisition free of tax encumbrances — but not always: previously declared subsidiary liability assessments, unremitted withholdings and claims against the insolvency estate are treated differently.
The review must include: (a) statement of debts with AEAT and TGSS (requested from the insolvency administrator, who has access); (b) verification of tax returns for the past four years; (c) review of inspection reports and pending verification proceedings; (d) analysis of social security status and contributions for the past twelve months.
Critical Contracts and Change-of-Control Clauses
Many commercial contracts — distribution agreements, licences, commercial leases, public sector contracts — contain change-of-control clauses or automatic termination provisions on insolvency. Early identification of these contracts is essential: if the contract with the main client terminates automatically on the insolvency declaration, the value of the productive unit may collapse.
The insolvency administrator has authority to negotiate with counterparties the waiver of these clauses, presenting the new buyer as a guarantee of continuity. This negotiation should begin before the offer is formalised.
Employment Claims and Workforce Litigation
The review of ongoing employment proceedings is critical. Unfair dismissal claims declared final before the transfer constitute insolvency debt (the buyer is not subrogated). But claims filed before the insolvency and unresolved may produce subsequent judgments with impact on the acquired business. Communication with the company’s employment lawyer is essential.
Illustrative Case Study: Acquisition of an Industrial Productive Unit
To illustrate the elements described, we present below an anonymised case advised by BMC.
The context: An industrial company in the automotive components manufacturing sector, with 120 employees, 22 million euros in annual turnover and a balance sheet with 14 million euros of financial debt (two syndicated bank loans and an ICO Covid credit facility). The company had lost a supply contract with a German manufacturer — 35% of its turnover — and entered operational losses. The banks initiated refinancing discussions, but the process broke down when an AEAT tax inspection came to light for VAT discrepancies on intra-EU transactions over the previous three years.
The transaction: An industrial group with complementary activity identified the company as an acquisition target. With BMC’s advisory support, it structured the transaction as a purchase of a productive unit during the general phase of insolvency, once the company was declared insolvent by the competent Commercial Court.
BMC’s valuation placed the going-concern value of the business — under reasonable assumptions about client portfolio recovery with the new owner — at 17.5 million euros. The orderly liquidation value of the individual assets (machinery, installations, inventory, intangibles) was estimated at 9.8 million euros.
The binding offer submitted was 9.6 million euros for the productive unit, including all productive assets, the brand, contracts with the three main clients (pre-negotiated with those clients to waive change-of-control clauses) and succession of 108 of the 120 employees. This represented a 45% discount on going-concern value.
The court order authorised the sale, declared the acquisition free of the attachments and encumbrances on the assets (the price fully covered the preferential secured credits) and rejected an alternative offer from a liquidation fund that offered 10.2 million euros but would only succeed to 60 employees.
The outcome: The acquiring group integrated the productive unit into its structure, recovered the contracts and preserved 108 jobs. The AEAT tax contingency — amounting to 1.4 million euros — was declared ordinary insolvency debt and was not transferred to the buyer, thanks to the court-approved asset deal structure. The effective price paid — considering the value of the acquired assets and the absence of contingencies — represented a real discount of 45% on market value under normal conditions.
BMC’s Integrated Approach
Distressed M&A transactions require the simultaneous integration of three disciplines that, in most law firms and advisory houses, operate separately:
Insolvency law: Process analysis, bidding strategy, negotiation with the insolvency administrator, representation before the commercial court and management of employment succession. At BMC, we work with Raúl Herrera García, an insolvency law specialist registered with the Madrid Bar Association (ICAM n.º 79.836), with experience in mid-market and large insolvency proceedings, second-chance procedures and cross-border insolvency.
Valuation and financial advisory: Determination of going-concern and liquidation values, financial structuring of the offer, synergy assessment and post-acquisition debt capacity analysis. BMC’s corporate finance team uses methodologies specifically calibrated for distress situations, where standard models lose reliability.
Tax advisory: Optimal structuring of the transaction from a tax perspective — share deal vs asset deal, taxation of gains in the insolvency context, VAT treatment of productive unit transfers (exemption under Article 7.1 of the VAT Act), stamp duty when real estate is included — directly determines the net price for the seller and the total cost for the buyer.
The integration of these three disciplines under a single advisory team is not a marketing argument: in a transaction where timelines are short, information is incomplete and mistakes are irreversible, coordination between the insolvency lawyer, the valuation specialist and the tax adviser is the difference between a well-structured transaction and a problem discovered after closing.
If you are considering the acquisition of a distressed company, or if your company is facing a crisis that may require a transactional solution, the BMC team can help you evaluate available options with rigour and real experience in this type of operation.
