Once a company is facing Administration (the most common insolvency process for a trading business – although see tip 2 below), the Administrators may look to sell the business and assets. This could be a pre-pack sale, or a regular administration sale and it may only be advertised to a select group of potential buyers or more widely in the market.
Buying a business out of Administration is not without risk and there are several specific factors to be aware of, some of which are highlighted below. That said, if you take the right precautions and ask the right questions, there are undoubtedly good deals to be had.
1. Seek Specialist Advice
Buying an insolvent business is very different to buying a solvent business, so it's important to seek specialist legal and accountancy advice. This can be helpful at the bidding stage too, to explain the key drivers for the Administrators and what to focus on to improve any bid.
2. Understand the Insolvency Process
Administration, receivership and liquidation can sometimes be used interchangeably but they are all separate procedures with different potential effects on a sale. For example, administrators owe a duty to obtain the best result for all creditors, whereas, receivers primarily owe a duty to the creditor who appointed them which can influence the type of deal they are able to accept.
3. Sold “As Seen”
The Administrators will generally not give any guarantees or warranties in respect of the business or the assets being sold. This is because they will have limited knowledge of the business and will not risk potentially increasing the seller’s or their own personal liability. It should be assumed there will be no right of recourse against the seller. The buyer must, therefore, rely on their own analysis of the business and any perceived risk should be reflected in the price offered.
4. Due Diligence is Key
As the buyer will be buying the business solely based on its own due diligence, it is extremely important to get it right. Do as much as possible as quickly as you can, time is likely to be tight. If possible, visit the seller's premises, speak to the main people involved, including customers and suppliers. The Administrators will assist, but as noted above, their knowledge and ability to help may be limited.
5. Establish what’s for Sale and what you want to Buy
In most cases, all assets of the company will be for sale and, whilst the Administrators may provide asset lists, it will be up to the buyer to verify what is being sold. Some assets might be subject to retention of title or lease agreements and so will not be the seller’s to sell. Debts owed to the seller will usually remain with and be collected by the Administrators, but you may want to make an offer on the debts or negotiate an arrangement whereby you collect the debts on behalf of the Administrators for a fee. When it comes to bidding, consider to what extent being selective may improve or negatively impact your offer. Can you offer anything that other bidders may not?
6. The Employees
Liabilities attaching to the employees can be one of the biggest potential costs for a buyer. The Transfer of Undertaking (Protection of Employment) Regulations 2006 (or “TUPE”) will usually mean that the contracts of employment will automatically transfer with the business. Including ongoing wage costs, there can be liability for arrears (e.g. for wages/holiday entitlements) or even a risk of employment tribunal awards being made against the buyer. Establishing the potential liabilities can, therefore, be crucial.
7. Are there any key Contracts?
Is there significant value in one or more contracts? In most cases, the seller will need the consent of the other contracting party to transfer its rights under a contract. The buyer may want to speak to the other party in advance to establish if consent will be given and the contract continued. The other party may be owed funds from the insolvent seller which could impact on negotiations. Any discussion should be had as early as possible and with the consent of the Administrators.
8. Are there any key Licences or Registrations?
Does the business need a specialist licence or registration to operate, such as a liquor licence or a goods vehicle licence? Different licences or registrations have their own specific rules on insolvency - some can lapse if not transferred within certain time scales and others may require the buyer to apply for their own licence or registration. This could prevent the business from operating for weeks or even months after the sale and so it's important to investigate the position.
9. The Premises
If the seller owns the premises, do you want to buy it or are you happy for the Administrators to sell it to someone else? If it's leased, do you want to negotiate a new lease or revised lease terms with the landlord? There is unlikely to be time to finalise an agreement with the landlord before the business sale but the Administrators may grant you a temporary licence to occupy the premises based on the terms of the current lease. The moratorium (which applies in Administration) will initially prevent the landlord from terminating a lease but if negotiations with the landlord don't go well, they can ultimately apply to court to end the lease and get the property back.
10. Speed and Deliverability
Administration sales can be hectic. Time scales are usually tight and it's not uncommon for buyers to drop in and out as negotiations progress. Often, the key factors for a potential buyer to demonstrate for a successful bid are the ability to complete the transaction quickly and the availability of funds. This is another area where having specialist advisers on board can help.
The Restructuring and Insolvency team at Brodies LLP are specialists in this area and our dedicated team are on hand to assist with all aspects of buying a business out of insolvency in the UK.