FARLEYS’ Corporate Recovery team has seen a number of good businesses being forced to seek shelter through formal insolvency proceedings over the last 18 months. Frequently the reasons for doing so have been beyond their control, for example, bad debts, slow payers and over-zealous banks.
Statistics recently published by The Insolvency Service show that in the second quarter of 2009 there was a 39.1% increase in compulsory liquidations compared to the same period last year. There were also 1027 companies entering into Administration in the second quarter of 2009 compared to 938 in the second quarter of 2008.
For stronger companies, these depressing statistics represent opportunities. Sales by Insolvency Practitioners (IPs) present a chance for these companies to acquire the business and / or assets of their insolvent rivals.
The advantage for a buyer is that he buys the business free from the debts of the old company. However buyers should be cautious as there are a number of traps for the unwary. Our top ten tips when buying an insolvent business are;
- Have funding in place. Cash is usually in short supply and an IP will want to conclude a deal quickly – if there are two offers on the table, the party offering cash up front will win.
- Wait until the IP is appointed before purchasing the assets of a struggling company. An IP can investigate previous transactions and may come to you for more cash if he feels you bought the assets for less than fair value.
- Insolvent sales are usually conducted in very tight time frames. The chance to undertake due diligence will be limited however speak to the directors, visit the site, and get copies of any valuations which may highlight particular issues in relation to the assets.
- Use advisers who have previous experience in doing deals in these circumstances – they will identify the key issues and guide you around the potential pitfalls.
- When negotiating a deal with the IP remember that they will only have limited knowledge of the business and will not be prepared to give any warranties or indemnities in relation to the assets. You will not therefore have any protection from any unforeseen problems once you have purchased the assets.
- Consider incorporating a new company solely to purchase the assets – having the assets ring-fenced in this new company will protect your existing business if things do not work out.
- Check whether the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) applies, even if you are only buying assets. TUPE ensures that ALL employees’ existing contracts of employment automatically transfer to the buyer. This may cause problems if redundancies have to be made.
- Consider where the business will trade from – although ordinary debts will remain with the old company, if rent is outstanding to the landlord of premises which are crucial to the running of the business then a deal may have to be done with the landlord.
- Be ready to hit the ground running. Consider before-hand the day to day things you will need to run the business including business licences. Suppliers may claim title to goods on site and demand their return. Service providers may cut you off and hold you to ransom.
Make sure you have a good management team who will be able to integrate the distressed business quickly and smoothly.
There is no education like adversity, but out of adversity can come opportunity. Although an insolvent acquisition can be lucrative, it is also risky. Careful preparation and due diligence can minimise those risks.
Farleys have represented a number of buyers of insolvent businesses in the past 18 months, offers expert advice on avoiding the pitfalls of such acquisitions and gives practical solutions to enable the transaction to run smoothly.
Contact an expert at Farleys Solicitors now for help and advice in buying your next insolvent business on 0845 050 1958 or you can e-mail us.