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Company Rescues Guide to how to buy a business from an
Administrative Receiver, Administrator or Liquidator.
This brief article shows you how to go about buying a business from an
insolvency practitioner acting as the “office holder”. We will not describe
in any detail what the differences are between the various methods of
insolvency here (but if you wish to know more please visit the Guides and
Options by clicking here, rather we
will assume that a business is in insolvency and you are interested in
buying it.
First some common sense advice.
Targets; we are regularly approached by people looking to buy a business out
of insolvency. Our initial question is always – “what type of business are
you looking for”? When the response is “any” I get very worried!
There are literally hundreds of different types of business out there, do
you know enough about them all to be able to save/rescue/turnaround and
drive ANY type of business? Remember this is a failed company, its future
depends an immense amount of hard work, some luck and generally your money.
So set up a target “term sheet”, i.e. what type of company do you want to
acquire, where in the country, what size and what markets it is involved in.
Set up a target price structure, make sure that you have the money or know a
good source of the funding needed. Then prepare an asset/means report, most
IP’s will look to see if you have the means available to buy their client’s
assets. Organise a letter from funders, banks and proof of means should then
be available quickly.
Make a list of advisors who can help advise you on the deal.
Who will run the company- YOU? If yes how many days a week do you want to
work in or more pertinently ON the business? If you are not going to be
available to run it – do you have people available who can run it for you?
If you require, KSA can help with our specialist turnaround teams.
Warning! Be prepared to lose all of your
investment. Secondly do not rely upon buying an insolvent business as your
only source of future income or investment!
Follow this guide and then you will have a better picture of the type of
business you are aiming to buy.
Accessing the Market for your Targets
There are many sources of such opportunities, but it will require some leg
work. Try all of the following:
1. Use http://www.business-sale.com/ to sift through opportunities
2. Subscribe to London Gazette, it lists all insolvencies daily online
3. Read the Financial Times every Tuesday – it has adverts from insolvency
practitioners (IP’s) concerning the companies they are handling.
4. Do web searches for failed companies, use RSS or subscribe to BBC, news
services and so forth.
5. Perhaps the most fruitful source will be to actually build a relationship
with a number of IP’s or indeed a large IP firm like Begbies Traynor, Grant
Thornton or one or more of the big 4 accountancy firms.
5.1. Tell them your target business types and send them a synopsis of what
you are looking for.
5.2. Every receiver, administrator or liquidator should market the assets or
business they’re working with. So if you get on their distribution list you
will get early notice once they’re appointed.
Soon you will have a flow of opportunities coming in. Make sure to have some
early discussion about what the issues are and the time frame the office
holder is working to.
Evaluation
Once you have some opportunities I would suggest using a careful evaluation
method. You may wish to design your own mini “due diligence” approach to
sift opportunities initially. NB this cannot replace proper due diligence if
you decided to make an offer!
This should include obvious questions like:
What, or more likely WHO was the cause of the business failure?
Has the cause been addressed?
What is the market for its products?
Is there a profitable niche within the market place for the company?
Can it be viable if sales are lower and costs are reduced?
Is it within easy travelling time for you?
Is the existing management capable of running the company if you are not
there 5 days a week? If not who will?
What is the business’s objectives, do they match yours (for example can it
be rebuilt and make good returns)?
What is the EXIT strategy? Yes I know you are thinking of buying it! But how
would you plan to exit? Too many people get too attached to the deal and not
the exit!
What are you buying? The assets? The name? The goodwill? The customer base?
Develop your own list and then stick to assessing each opportunity this way.
Don’t deviate from the planned target type, size and market, unless you have
wide experience. So if you identify a good opportunity that fits your
criteria then move quickly.
What is the deal?
Is it a deal to buy the assets and goodwill? Its very unlikely that you will
buy the company or the debtor book, but you should consider work in
progress, stock, assets (financed or unencumbered).
Then ask if the deal is one payment, deferred consideration or a mixture of
upfront and deferred. It’s often possible to get a time to acquire deal. But
the office holder will generally want a lump up front to cover his costs.
Get access quickly to do due diligence. This is a must, walk around the
business, feel it, touch it and ask lots of questions of anyone who will
talk to you within the business. Find out what went wrong, has the business
lost its best customers, can it supply cost effectively in future, what
HUMAN assets walked out the door when the IP came in? Will the hoped for new
product / service ever get off the ground? Is the management motivated or
simply serving their time while looking for a better job?
Working capital Required?
Do your forecasting for the new company based on sensible numbers not pie in
the sky. How much money will the new company need for working capital after
you have paid for the assets? No point in buying it and running out of
cash?!
How much?
The main question! Generally an IP will use a professional valuer to assess
what the assets are worth in a forced sale. You will not get access to that
figure, so consider using your own knowledge or that of a friendly valuer to
help assess what the assets might be worth. Then set a price that you think
is fair and that you are prepared to open at. Set a maximum price and do not
go over that if the IP comes back saying he has higher offers and are you
prepared to bid higher. By the way, they always do!
“Don’t over pay” is easy to write but hard to make work in practice.
If your offer is accepted, ALWAYS use a lawyer to advise you and check the
deal and ask about technical issues below.
Technical Warnings
Trade name Issues
S216 insolvency Act 1986 precludes the reuse of trade names unless the use
is permitted by the court or office holder, and the acquiror was not
involved with the failed company previously. Be careful of this - if you
take on the directors/managers they could face criminal charges if this is
not addressed properly.
TUPE
By acquiring a business you will probably have to honour the employment
contracts of ALL of the employees. This can be another legal minefield – so
get advice on it, early.
Financial Assistance Rules (s151 – 153 Companies Act 1986)
Make sure the deal complies.
Landlords
Make sure that the landlord is involved in discussions – will it offer a new
lease? Will you have to put down a rent deposit? How will this affect your
working capital needs?
Other “Stakeholders”
Same goes for secured asset lenders will they novate the deal to Newco? Will
major suppliers supply? Are customers prepared to work with you?
Summary
These are just some of the key issues in buying a business out of insolvency
and it’s a must to do your homework very carefully. Remember don’t get
emotionally attached to the deal.
It’s just worth repeating again that this is a failed company, its future
depends an immense amount of your hard work, some luck and generally your
money.
Finally if it smells it’s usually off! So walk away and save your money
for another opportunity.
Please call 0800 9700539 or email us for further details.
keiths@companyrescue.co.uk
© 2006. Keith Steven, KSA (NE) Ltd All rights reserved
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