For business buyers, the land of distressed opportunities can be a happy hunting ground, filled with great-value deals and easy-to-acquire assets. But distressed businesses can also attract rival bidders, which is why keeping a close eye on companies served with winding-up petitions can be such a worthwhile exercise.
So what exactly is a winding-up petition?
In short, a winding-up petition, or WUP, is a serious course of action taken against a business that fails to make financial payments to creditors. This can mean that the company has broken any trust the creditor had; its cheques have bounced; or the directors have not kept their word to make payments.
A powerful weapon in a creditor's armoury, a winding-up petition is served when a business, for whatever reason, simply cannot make the payments it needs to. The fact that it can cost anything up to £2,000 just to file a WUP is an indication of the severity of the action – it is usually a last resort when an individual or business needs to get the money they are owed.
Essentially, a WUP is an early indication – before a liquidation or administration take place – that a business has fallen into financial disrepute. Moreover, a winding-up petition is the start of a process which, if ignored, leads to the Compulsory Liquidation of a limited company.
So what is their relevance to business buyers?
As stated at the top, business buyers will often look to distressed businesses as ideal acquisition opportunities because companies that have fallen on hard times usually represent better value to the buyer. But this improved value can often bring with it greater competition. Getting a head start on rival buyers, therefore, is vital if one is to secure an acquisition before others beat them to the punch or enter the fray and drive prices up in a bidding war.
Importantly, once a winding-up petition has been served, the recipient business cannot sell the company or the assets, as this could be reversed by the court. So an immediate acquisition will likely not be possible. However, if one was to use the rather unflattering metaphor of a shark hunting injured prey to describe business buyers seeking out distressed opportunities, then a WUP is the first drop of blood in the water.
Winding-up petitions are not as well reported as administrations, nor are they a guaranteed sign that a business is about to go under, but they are a clear indication that there is trouble brewing. Thus, by monitoring WUPs a buyer can put a target company on their radar long before they will come to the attention of other buyers.
This head start can be crucial – it will give the buyer valuable time to conduct due diligence into the acquisition target, weigh up any assets that would be beneficial to their existing business(es) or establish if they could viably attempt a turnaround of the entire company. Importantly, they can do this before the target enters liquidation or administration, at which point many other buyers will be alerted to the opportunities.
The window of time in question, between a winding-up petition being served and the fate of the company being decided, often in the form of a liquidation or administration, is between six and eight weeks. This gives the buyer time to not only conduct the aforementioned due diligence, but also to speak directly to the sometimes desperate owner of the troubled company and lodge their interest, therefore improving their chances of cementing a deal when the appropriate time arrives.
So, in the competitive merger and acquisition market, where any slight advantage can yield huge benefits, understanding and closely monitoring winding-up petitions can provide the all-important edge a business buyer needs to achieve the sale they're after.
The Business Sale Report tracks all the latest businesses to have winding up petitions lodged against them. Click here to view the latest winding up petitions lodged in the UK.