Looking to buy a distressed business?

Looking to buy a distressed business?

Looking to buy a distressed business? Here’s some important things to think about.

When a business gets into trouble one of the options available to the owners is to sell up. If the business goes into administration it may well be that the insolvency practitioner appointed will seek a quick sale to keep the company running and protect jobs.

Buying a business in this way has many advantages, it can be bought whilst still running and with a minimum of disruption, it can be added in to an existing company as a simple bolt on and it can prove to be exceptionally profitable in a turnaround situation.

The problem with buying a company in this way is that there may be some baggage that comes along with the firm and caveat emptor (buyer beware) most definitely applies.

The first thing for any potential buyer is to fully understand exactly what is being offered. What is the status of the company? If it is in administration then it may well be operating whilst the receiver looks to affect a sale. If the company is in liquidation then it is likely that the only things being offered are the assets and not a fully functioning company.

Make sure that it is completely clear to you what is being offered, how much you will be required to pay and when you will be expected to pay it. Extended payment terms can be agreed with stage payments, payment from profits or payments on performance all possible options.

Understand what obligations you are taking on. It is always possible that a company may become insolvent due to a potential or contingent liability such as a court claim or pension liability. Are there any nasties hiding in the woodwork and are you taking on that liability? Think also about any contracts that the company may be committed to. If there is an onerous contract that is loss making but that the firm can’t get out of then you need to factor this in to your decision making process.

A solvent sale will be conducted over a much longer period, with enough time to conduct a thorough and complete due diligence operation. An insolvent sale will, in contrast be time pressured and not everything will be able to be covered. Factor this uncertainty into any price you pay.

In an insolvent sale information will often be fairly scarce. Finding out as much as you possibly can about operations will be important. Retention of key staff will be vital if you intend to take the firm as a going concern. In a liquidation it is possible that information regarding assets, such as service histories and operation manuals for machinery will be absent so again, factor this into your pricing.

You’ll also need to make sure of the ownership of the assets. Many a new business owner has been caught out when they realise that the machinery they thought they now owned was in fact only leased or hired!

Make sure you understand any existing contracts, leases and agreements. Often these will have clauses that nullify the agreement on the insolvency or administration of one of the parties. In some cases this will be a godsend, in others it may be disastrous. Of course none of this is insurmountable with some judicious ‘stakeholder management’ but make sure you do this before signing on the dotted line or you may find yourself with notice to quit your new factory.

Remember that some licences to operate, such as alcohol licencing or regulatory licences may well lapse with a change in ownership and management so these will need to be applied for again.

Finally, before you even take possession you’ll need to have your turnaround team in place. If you are wanting to buy the business and integrate it into your existing firm then you’ll need to be aware of the many issues that can arise from this. If you are intending to run the company as a standalone then you’ll need to have a plan and a team to work the plan to make sure that the firm doesn’t make the same mistakes again.

Buying distressed businesses can prove to be a very profitable method of acquiring either a company or its assets but there are some pitfalls that can cause the unwary to come a cropper. Use the above tips and if you are in any doubt as to what you are looking at then make sure you take proper qualified advice before signing on the dotted line.

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