In healthy M&A, conflicts can be managed and outcomes can still be acceptable. In distressed advisory, conflicts are decisive — they determine the outcome.
Why Distressed Is Different
A healthy M&A process has slack. There is enough margin in the deal that imperfect alignment between advisors and outcome doesn't usually break the result. The deal closes, the price is approximately right, the parties move on.
Distressed situations have no slack. Every percentage point of recovery matters. Every week of delay costs liquidity. Every advisor with a competing economic interest is — even unintentionally — pulling the outcome away from the optimal one. The cost of structural conflict in distressed advisory is paid in cents on the dollar of recovery, in jobs preserved or lost, and in business continuity.
Where Conflicts Hide
First: lender relationships. The advisor's firm may have lending or trading exposure to the company, or to the lender consortium negotiating the workout. This is the most common — and most often unmentioned — conflict in distressed work. It does not stop the work, but it shapes what's possible to recommend.
Second: dual mandates. The same firm advising the company may also advise creditors elsewhere — sometimes the same creditors, in other situations. League-table relationships and repeat-business incentives create gravitational pulls that are real even when nothing improper is happening.
Third: success-on-completion structures. A distressed M&A advisor paid on closing has every incentive to push toward whatever transaction can close — including transactions that are not the best for the client. In distressed contexts, this incentive is acute, because closing anything is much harder than closing the right thing.
Fourth: management replacement risk. Some advisory firms transition naturally into administrator, CRO, or trustee roles. The implicit incentive: if things go badly, the firm benefits from the deeper engagement. We are not arguing this is conscious; we are observing that the structure exists.
What Structural Independence Looks Like
Fee structure: fixed or capped fees, with no material success component tied to a specific outcome. Mandate transparency: written disclosure of all relationships with creditors, sponsors, and counterparties relevant to the situation. No balance-sheet exposure: the advisory firm has no lending, financing, or trading position with any party in the transaction. And no transition incentives: the advisor's mandate is bounded; success means leaving the situation in better shape, not extending the engagement.
These are not abstract preferences. Each is testable. A CEO or board considering an advisor in a distressed situation can — and should — ask for written representations on each of the four. Refusal or hedging on any of them is information.
Why It's Worth the Effort
Structural independence is not free. It usually costs more in fixed fees and may exclude advisors with otherwise excellent track records. The trade-off is worth it when the alternative is a process whose recommendations are systematically biased away from the client's optimal outcome.
In distressed work, the gap between the optimal outcome and the achieved outcome is the most expensive variable on the table. Reducing it by even 200–300 basis points across a meaningful balance sheet pays for any premium an independent advisor commands many times over.