Buying a business out of insolvency

While buying a business out of insolvency may not seem an obvious choice, there are many advantages to it and it is increasingly becoming a preferred method of expansion by many companies. The fast pace of insolvency deals often leads to bargain prices, and the option of buying assets rather than the whole company can be an attractive proposition. However, all this must be offset against a higher level of risk. This article covers some of the main pitfalls specific to buying an insolvent business.

Firstly, the sale of an insolvent business is handled by an insolvency practitioner (IP), who will have been appointed either by the courts or by company creditor(s). Find out on what basis the insolvency practitioner has been appointed. Legal requirements and procedures vary depending on whether the business is in administration, administrative receivership or liquidation and you will need to research the differences between these states. Of the three options, administrative receivership is the more complex, but due to changes to the Enterprise Act in September 2003 these are becoming less common.

As previously mentioned, when buying an insolvent company, it is often possible to "pick and choose" the parts of the business you want. The downside of this is that it is not always clear what is included in the sale. Some assets, such as office machinery or equipment, may be subject to hire purchase or leasing agreements, which can be terminated when the IP is appointed. Likewise, computer software licenses supplied by third parties may well have ended when the company entered insolvency, and suppliers can reclaim stock.

Find out if the business premises is included, and if this is leasehold you will need to check whether the landlord is prepared to offer you a new lease and on what terms. Retaining book debts will enable you to continue relationships with customers, but these may have already been assigned through factoring or invoice discounting.

If you want to purchase the goodwill of the business, make sure you are legally entitled to use the company name. Under section 216 of the 1986 Insolvency Act (Restriction of re-use of company name), it is an offence for any director or shadow director to be involved in the company if any of its trade names are re-used. So if you retain senior staff, you need to know the procedures for complying with these regulations.

A second important piece of legislation to be aware of is the Transfer of Undertakings (Protection of Employment) 2006. This relates to the employees of the business, who you will automatically assume when buying from an IP. Although there are certain legal loopholes where you can make redundancies if they are in the interests of the survival of the business, you need to prepare for the possibility that you may need to make substantial pay-outs in this situation. On the other hand, make sure you have not paid a high price for staff who will walk away as soon as a better opportunity comes along. You need to assess whether the human assets of the business will really remain committed to it, otherwise you are wasting your money.

Sales of insolvent businesses move very quickly, with most selling within a month of the appointment of administrators and a great many in a matter of weeks or days. To increase your chances of finding a suitable business, it is a good idea to write to all the main insolvency practitioners stating your acquisition criteria, the funds you have available, and that you are ready to move on suitable opportunities. This way, you may be contacted directly as soon as the administrators are appointed, giving you a valuable head start on buyers relying on announcements in the press.

A high-speed sale also puts extra pressure on the due diligence phase of the deal, so it is sensible to have an advisory team in place so that when the ideal opportunity appears you are in a position to act on it. As well as the usual due diligence questions (see the "Due Diligence - Over 1000 key questions" resource on the Business Sale Report website), you need to examine exactly what went wrong with the business, and do your calculations for how much capital you will need to invest to turn the company around once you have bought the assets.

Remember that the insolvency practitioner is not liable for any oversights during due diligence - once you have bought the business, any claims over stock ownership, etc. are your responsibility.

Finally, when negotiating the price of the business with the IP, be aware that you may be competing with the existing management team, who are often approached first once the business has entered insolvency. To avoid a bidding war, try and negotiate a period of exclusivity with the IP to allow you to conclude the deal. On the other hand, remember that the IP wants a quick sale, and is likely to accept the lowest price he can justify to the creditors.

You can view the latest insolvent business listings here

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