Buying a business out of insolvency – what to look for

Buying a business out of insolvency – what to look for

There’s no doubt that buying a business that has faced company liquidation can prove to be very lucrative as a company that needs a quick sale will be heavily discounted but there are a few things to look for in your new bargain.

The main point to consider is whether the underlying business idea is a sound one. For example no amount of tweaks or great management is going to solve the issue of selling snow to Alaska or sand to Dubai.

Look at the primary purpose of the business and if it solves a problem or fulfils a need then it’s probably a good one.

Looking at the basic business model can prove instructive when you are looking at a company that is insolvent or about to be so.

What was the underlying issue that forced the business to seek a sale?

It is possible that the business model itself was almost there but just requires some adjustments to make it perfect and profitable. It is also possible that no amount of tweaking will disguise the fact that model is fatally flawed and you need to walk away.

Through the sale process what you are seeking to identify is what the issues were that caused the business to fail. You need to be very level headed and analytical in your approach. By all means listen to what people say but add to this a calm analysis of the facts and where possible advice of advisors, especially those who have sector experience.

At the same time as conducting this analysis it is also important to ask what it is that you need to buy.

Although a company as such may be presented for sale it may be that the value is actually held in the intellectual property (IP) or the assets of the business.

For some deals, especially where the business has fallen into insolvency, there may be the opportunity to buy out the value creating parts and leaving the bad parts behind. In fact some companies make a habit of buying purely IP such as brands and trademarks.

No business exists without people. Even the most automated business model requires a modicum of human input and usually at the higher levels. Unfortunately when a company faces difficulty the best people tend to leave quickly.

Consider your target from a people point of view. Has it lost valuable skills along the way? Will you be able to replace or replicate the capability that has gone?

Similarly ask whether it was in fact a lack of capability and know how that got the company into trouble in the first place. Would adding one or two key people turn the company around?

Limited companies are entities in their own right. That means that the bad deeds of the people that operated them will usually live with the business even after it has been sold.

It is therefore vital that before signing on the dotted line, new owners satisfy themselves that there are no hidden surprises waiting to jump out the moment they take over.

Is the company being sued? Are there employment tribunal issues? What warranties has the company committed itself to in the past?

When looking to take over a company it is therefore important that the new buyer is going in with their eyes open and doesn’t rely upon the previous incumbents to own up to all the nasties that may be lurking.

Information is the key to success when buying a distressed business and it is vital to understand what the accuracy of that information is.

What does their accounting system look like? Are they able to back up claims about debt, customers, sales etc? Can you track back high level figures down to transaction level and do the numbers add up?

Time is likely to be limited in a distress sale but choosing three or four figures and investigating these will give you a view of whether the information you are being given is likely to be true or not.

The final thing that needs to be considered requires a pretty hard headed approach and a large amount of self knowledge.

The question that needs to be asked is a fairly stark one – if the previous owners couldn’t make this business work, what makes you think you can?

It sounds harsh, but before spending hard earned money it is important that the potential purchaser has a realistic plan for how they are going to operate the firm and what they are going to do differently.

They’ll need to show how things will change and that they have addressed the fundamental structural problems that got the organisation into difficulty in the first place.

The answers to all of these points will guide the buying in the size of offer they are willing to make and indeed whether they make an offer or not at all.

Buying a business out of insolvency can be a profitable transaction but there are a large amount of things that need to be considered. For the purposes of this article we’ve been fairly brief in identifying some of these but as always we’d recommend taking experienced and qualified advice before parting with cash or making any commitments.

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