When a business goes into insolvency there are a number of outcomes that can happen. The first is that the administrator is able to save the company and possibly the old directors resume control, alternatively, it can be wound up and formally liquidated.
There are two other options that may be of interest to entrepreneurs; the business can be sold in its entirety or the assets only can be sold.
The job of the official receiver is to get the best deal for the creditors as possible and one way they can do this is to sell off the individual assets of the firm. Buying this way has a major advantage, the administrator needs to get a good price but they also need to get things sold quickly so it’s possible to get a good deal. It may be that the distressed company has some specialised equipment that is either hard to get or was bespoke at the time and so buying will give the purchaser a competitive advantage but the sales don’t have to be confined to simply fixed tangible assets. There are companies that have made their business model out of buying brands and trademarks that have been run inefficiently in the past and turning them around.
It has to be said that it is not all wine and roses when buying assets from a distress sale. There will be no warranty of course and very often it will be impossible to get any reliable information as to the service status of the machinery. A company that has suffered cash flow difficulties will often have neglected servicing their vehicle fleet for example. Just because the company is in the hands of the official receiver doesn’t mean there will be a lack of competition and interest. It may well be that the administrator decides to sell the assets at an auction to achieve the best price, or that they decide to sell the company as a whole or to a phoenix ‘pre-pack’.
There are advantages to buying the whole of a company, either as it stands or in a phoenix or ‘newco’ arrangement. Buying a company as a whole in general means that everything is included, assets, trademarks, contracts and staff but of course also liabilities. Sometimes these will be in the form of a Creditors Voluntary Agreement which will impose conditions on the buyer. Transferring the good parts of the company into a newly formed company or ‘newco’ allows the directors to carry on business and protect jobs in the new firm.
Buying just the assets of a company can be a fairly straightforward process but purchasing the company as a whole is sometimes a little more challenging. The first thing to establish is exactly what is on offer. It may seem obvious, but actually nailing down the offer is vitally important.
Many contracts and leases have clauses that allow them to be nullified if the firm goes into administration or makes an agreement with creditors. Checking the legal documents will allow the buyer to know if they are able to continue selling to their customers on the same terms and even if they are allowed to continue to occupy their factory or offices! It also gives the new owners the chance to renegotiate onerous contracts.
The assumption that the staff will stay with the new company could be a dangerous one to make. The management, especially key staff have to be secured to ensure that the company can continue in business.
Before you take over the company the administrator will want some assurances that you have a sound business plan and sufficient funding, not only to buy the company but also to ensure that the firm doesn’t get into trouble again. Deciding how you will fund the purchase and running is an important step. Working capital will be tight as credit facilities will probably be unavailable and purchases will need to be made for cash or payment in advance. The new company will also have no debts to collect so may not have any cash income for a couple of months until the trading cycle begins in earnest. Understanding how you will get through the first few months is the key.
As we’ve already discussed there may be other interested buyers so it is important to understand who is selling the company and what their motivation is. If the distressed business is in the hands of the bank then they may well wish to see a quick return and will take a lower price. Official receivers are more used to seeing structured short and medium-term deals but are charged with getting the best price for the creditors. Consequently, they may find a higher price but with deferred consideration more attractive.
In summary, buying a distressed business:
- Offers a cheaper price
- Can provide access to specialist equipment and staff
- Can be less competitive
- Gives the opportunity to cherry-pick assets
- And can be helpful in renegotiating contracts
- You must have a clear business plan
- You need to be aware of the cash flow implications
- There may be competition
- Payment profiles are important
Specialist advice as always is important but for companies that are looking for value in the marketplace then buying distressed companies can be a useful way forward.