Buying a business out of insolvency

A guide from company rescue firm KSA on how to buy a business from an Administrative Receiver, Administrator or Liquidator.

This brief article shows you how to go about buying a business from an Insolvency Practitioner (IP) acting as the "office holder". We will not describe in any detail what the differences are between the various methods of insolvency here (but if you wish to know more please visit www.companyrescue.co.uk for full details). Rather we will assume that a business is in insolvency and you are interested in buying it. First some common sense advice.


What to Buy

We are regularly approached by people looking to buy a business out of insolvency. Our initial question is always - "what type of business are you looking for?" When the response is "any" I get very worried!

There are literally hundreds of different types of businesses 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 company - its future depends on an immense amount of hard work, some luck and generally your money.

So set up a target "term sheet", i.e. what type of company do you want to acquire, where in the country, what size and what markets is it involved in?

Set up a target price structure, and make sure that you have the money or know a good source of the funding needed. Then prepare an asset/means report. Most IP's will look to see if you have the means available to buy their client's 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.

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?
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!

Follow this guide and then you will have a better picture of the type of business you are aiming to buy.

Accessing the Market for your Targets

There are many sources of such opportunities, but it will require some leg work. Try all of the following:

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This should include obvious questions like:

- What, or more likely WHO was the cause of the business failure? And has the cause been addressed?

- What is the market for its products?

- Is there a profitable niche within the market place for the company?

- Can it be viable if sales are lower and costs are reduced?

- Is it within easy travelling time for you?

- Is the existing management capable of running the company if you are not there 5 days a week? If not who will?

- What are the business's objectives, do they match yours (for example can it be rebuilt and make good returns)?

- What is the EXIT strategy? Yes I know you are thinking of buying it! But how would you plan to exit?

- Too many people get too attached to the deal and not the exit!

- What are you buying? The assets? The name? The goodwill? The customer base?

Develop your own list and then stick to assessing each opportunity this way. Don't deviate from the planned target type, size and market, unless you have wide experience. So if you identify a good opportunity that fits your criteria then move quickly.

What is the deal?

Is it a deal to buy the assets and goodwill? Its 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 his 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 of 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 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?

How much working capital is required? 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? No point in buying it and running out of cash!

How much to pay?

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 he has higher offers and are you prepared to bid higher. By the way, they always do!

"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.


Technical warnings

Trade name Issues
S216 Insolvency Act 1986 precludes the resuse 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.

Transfer of Undertakings (Protection of Employment) Regulations 1981 - (TUPE)
By acquiring a business you will probably 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 1986)
Make sure the deal complies.

Landlords
Make sure that the landlord is involved in discussions - will they offer a new lease? Will you have to put down a rent deposit? How will this affect your working capital needs?


Other "Stakeholders"
Same goes for secured asset lenders: will they novate the deal to the new company? 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.

Its just worth repeating again that this is a failed company, its 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.


This article was written for the Business Sale Report by Keith Steven of KSA (companyrescue.co.uk) and he can be contacted on telephone number 0800 9700539 or by email at keiths@ksa.companyrescue.com

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