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!
This brief article (and certainly not legal advice) shows you how to go about buying a business from an insolvency practitioner (IP) acting as the office holder.
We are asked this question almost every day; "How do we buy businesses in administration or liquidation"?
First some common sense advice.
Targets; we are regularly approached by people looking to buy a business in administration or liquidation, or even a CVA. Our initial question is always what type of business are you looking for? When the response is any, then we 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 on an immense amount of hard work, some luck and generally your money.
So, set up a target term sheet, i.e. what type of business 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 for the funding needed. Then, prepare an asset/means report as most IPs will look to see if you have the means available to buy their clients 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. You may need a lawyer and accountancy advice at the very least.
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.
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 https://www.business-sale.com/administrations that lists businesses for sale, in administration along with some financial data on each company and they will email them to you. See this page if you are interested in purchasing the assets from companies in liquidation
2. Read the Financial Times every Tuesday. It has adverts from insolvency practitioners (IPs) concerning the companies they are handling.
3. Do web searches for failed companies, use RSS or subscribe to BBC, news services and so forth.
4. Perhaps the most fruitful source will be to actually build a relationship with a number of IPs such as KSA Group. We have a number of such opportunities available most of the time. You can find them on our businesses for sale page. Companies that are in a CVA may also be open to offers. These businesses will be solvent but may still be keen for an investor or buyer as a way out. A CVA needs a lot of effort on the part of the directors and a proportion of them do fail.
You could also contact several IP firms like Begbies Traynor, Grant Thornton or one or more of the big 4 accountancy firms. Tell them your target business types and send them a synopsis of what you are looking for. 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.
5. Try a called IP-BID. Its website is at www.ip-bid.com/
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.
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 decide 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 are 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 diligence 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? It's 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 their 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 to 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 the 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? There is no point in buying it and running out of cash?!
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 they have higher offers and asking if you are prepared to bid higher.
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.
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 acquirer 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.
By acquiring a business you may 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 1985) Make sure the deal complies with the financial assistance rules. Don't understand what that is?! Suggest you get legal advice now.
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?
Same goes for secured asset lenders will they novate the deal to Newco? Will major suppliers supply? Are customers prepared to work with you?
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. Get advice from an insolvency practitioner or turnaround advisor, advice from lawyers and accountants and then carefully decide. From a legal perspective it might be worth looking at this page from Pitmans Lawyers that covers this area https://www.pitmans.com/insights/news/10-things-to-know-buying-an-insolvent-business/
It's just worth repeating again that this is a failed company, it's future depends on 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 08009700539 or email us for further details. firstname.lastname@example.org
Worried about poor cashflow? Covid-19?, How to pay wages on pay day? For expert advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.