"It is a truth universally acknowledged, that a private equity firm in possession of a good (i.e. not yet fully invested) fund must be in want of an investment opportunity." Apologies to Jane Austen, Mr Darcy and the Bennets.

The investment opportunity that private equity firms are "in want of" is, always has been and, we strongly suspect, always will be, a business at a good price, with upside potential, offering the prospect of a successful exit – a combination that will generate a real return on the capital employed by them, or rather the investors in their funds.

The difficulties of identifying and realising the right opportunity – turning potential into fact and then into hard cash – are exacerbated in these times of economic uncertainty, downturn or (whisper the word) recession – call the current state of the UK and global economy what you will.

The challenges facing the private equity firms are no different from those facing any buyer in this market. However, the companies they invest in will, at least initially, have little or no surplus funding and finite resources. The reality is that the private equity firms see this stage of the economic cycle as an opportunity – when will there be a better time to pick up a business at a good price? Moreover, they are the only players in the market at the moment with cash. As Henry Kravis of Kohlberg Kravis Roberts & Co (KKR) pointed out recently: "Today cash is king, so we are back in business".

So, at this stage, what is the private equity firm looking for in its lawyers – aside from a top quality service, sound commercial and legal advice and the ability to get the job done on time and under budget?

Essentially, the lawyers must protect that good price – by ensuring that there is no exposure to downside while protecting the exit and upside potential. As we all know, this is often easier said than done in the best of times. What do lawyers need to do today to protect a buyer, particularly a private equity firm/financial buyer?

There is an important additional question that you might ask yourself and your client. Is the seller – or the target – distressed, or in financial difficulties? In the early 1990s, it was much easier to identify such a company: high interest rates wreaked havoc with many companies' accounts, not to mention their relationship with their banks. In 2003, it is not always so straightforward. Of course, there are still companies whose levels of distress have reached similar heights – or should that be depths – resulting in a call to a liquidator or receiver. But the prevailing low interest rates mean that far more companies have been able to trade at a level sufficient to service their debt.

Given the current market volatility and the continuing slowdown, many believe that, for some, it is a question of when rather than if – in other words, a market ripe for picking by private equity firms.

If some sellers are in denial about their own distress levels, what precautions should the private equity firm – and, more importantly, their legal advisers – take?

In the case of a sale by a liquidator/receiver, the legal position is much simpler – the buyer will have, in reality, no comeback against the seller. There will be no warranties or indemnities on offer and no post-completion adjustment. If the acquisition is of a corporate entity or group, as opposed to assets, there will be no way of avoiding or adjusting the price retrospectively to take account of any liabilities inherited as part and parcel of the target.

Moreover, the liquidator/receiver will normally prefer to accept a lower up-front price than a potentially higher price which is payable in stages, with some element of deferred consideration. In this situation, the buyer's protection is in the price that it pays and the price alone.

In getting the price right, the focus of the private equity firm, its financiers and their respective advisers, is on the work before signing the legal contract – the due diligence. If there is time available to conduct a sufficiently thorough due diligence exercise, which can identify all of the material liabilities, then the price offered can be adjusted downwards accordingly to take account of them.

Assuming that the seller is not (yet) terminally distressed, is the buyer's position any better? The simple and honest answer is possibly, but who knows?

A buyer can negotiate all sorts of additional contractual protection by way of warranty, indemnity, completion accounts and other price adjustments. These contractual obligations are not worth the proverbial paper they are written on, let alone the effort and cost of negotiating them if, as and when a claim arises, the seller is not good for the money. That may put the lawyer in an uncomfortable position – even though he was unaware that the credit risk of the seller was part of his (direct) remit.

Again, therefore, price is the key. As before, due diligence, as well as their business plan, will be important in identifying liabilities. However, there may be more scope in this situation to protect the buyer's position by reducing the proportion of that headline price which is payable in cash up-front.

This protection can be obtained by having some form of completion accounts test to verify and, if necessary, to adjust the price accordingly to reflect the amount of net debt and net intra-group debt inherited, as well as the level of assets and liabilities and/or working capital acquired. It can also be met by having an element of deferred consideration – in whatever form – for a period at least equal to the (commercial, ie. non-tax) warranty period, or by satisfying some of the consideration other than in cash – whether it be subordinated loan stock or equity of the buyer.

Of course, if the target itself is distressed, then there are further issues to consider. Among these, remember that the banks providing the acquisition finance will require full security. If the target is not in rude health – if it does not have net assets – there will be difficulties with the financial assistance whitewash procedure (sections 155-158 of the Companies Act 1985). If these difficulties cannot be overcome, by whatever means, then the banks are not going to lend – and so the buyer will not be able to finance the deal.

It is undoubtedly the case that, for so long as the current market conditions do not improve, there will be a growing number of distressed sellers. It is also the case that private equity firms have brass in pocket, ready to invest. These private equity firms believe that, in these conditions, if they tread carefully, there are plenty of good opportunities.

The Elizabeth Bennets – or distressed sellers – out there had better beware!

Jonathan Angell and David Carter are partners in the corporate department at Ashurst Morris Crisp.