Written ByRobert Moore
Marketing Manager
Rob has over a decade of experience in web and general marketing. He has extensive knowledge of the Insolvency sector and has helped many worried directors with their questions.
Rob is now working with the Board at KSA Group Ltd to develop strategic marketing programmes to support the business plan and drive more company rescues.
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.
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 (or failing) company, its future depends on an immense amount of hard work, some luck and generally your money. You have the job of business rescue!
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.
There are many sources of such opportunities, but it will require some leg work.
Try all of the following:
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 business 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:
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?
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?!
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 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.
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?
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. 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. keiths@ksagroup.co.uk
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This risk RISES the longer you don't act to put the company into liquidation.If you fail to act and the company is wound up by the creditors (compulsory liquidation) then the Official Receiver (OR) will be appointed to liquidate the business and he or she will investigate the activity of the directors and the business over the last 2-3 years. This is known as a conduct report on each director. If the OR can prove there was wrongful trading where, for instance, you have taken credit from a supplier or took deposits from customers when you knew that it was highly unlikely that you could pay them back, then you could be made personally liable.This is known as the "lifting of the veil of incorporation" that protects directors under limited liability. If this happens then you could made liable for PAYE, VAT and creditors monies from the time that you should have known the company had no reasonable prospect of surviving the problems it faced.Additionally, the directors may face disqualification proceedings under the Company Directors Disqualification Act 1986 for up to 15 years, they can be fined and may face the loss of personal assets like your home, or even personal bankruptcy.Look, if you as directors have acted naively you may not know that you have broken these laws, but now you do know, it is vital to ensure that you protect yourself as a director by acting quickly to cease trading and put the company into voluntary liquidation; or consider a company voluntary arrangement if the company is VIABLE if the problems are solved. What is Creditors Voluntary Liquidation and what does it mean for me? In short, liquidation usually means, the company's trading stops and it's assets are turned into cash or "liquidated".All other possible liabilities, like employment liabilities, landlord's rent or payments to lease companies are stopped. It really is the end of the company, but the "business" may survive if a phoenix is organised. Liquidation is a powerful way to END creditor pressure and let you get on with your life. What if I have signed personal guarantees? If you have signed personal guarantees or indemnities to lenders, then the liquidation could lead to them being called in if the bank cannot get its money back from the company. There is little that can be done about that, but you should not delay decisions on liquidation to try and prevent a PG being called in: just think what ALL of the company's debts landing on your shoulders would do. Also it should be noted that HMRC now rank ahead of floating charge holders in any liquidation since December 2020. Consequently, this may well mean that lenders that you have personally guaranteed will get less recovery hence exposing you more.All banks will agree a deal to repay the PG over time - provided you work with the bank to reduce their exposure.One great piece of FREE advice - always make sure that ALL tax returns, VAT returns and annual returns have been completed and sent in and that other "compliance" issues are dealt with wherever possible. These are important processes and will help protect you as individual directors. It shows that you have been acting properly. I have heard about directors being able to claim redundancy in liquidation If you have been employed by the company and made payments via PAYE then you will be able to claim redundancy from the government and this is in fact a very simple process (20 minutes to fill out a form and we can help with that) so there is no need really to employ a third party to make a claim. This process has been open to fraud so the HMRC are cracking down on operators that claim to be able to get money back when there is not enough "paperwork". It isn't worth the risk. If it sounds too good to be true then it probably is!You need to learn more about the options. This is clearly a general guide so, if you have any worries at all, please, just call us and we will talk you through the situation free and with expert guidance for your situation. Call one of our advisors or if you prefer, call our IPs (insolvency practitioners) now:Just one CALL will help relieve the stress and get you out of the mess.Why not call 08009700539 or 020 7887 2667 now?We could help you start the liquidation process today.(8.15am till 5.00pm; Out of hours call on 07833 240747, Wayne Harrison (IP) or Eric Walls (IP) on 07787 278527)Finally, please remember this: NO BUSINESS is worth losing your health, relationships, marriages or your children over. 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