Buying a business out of an insolvency process can be a great way to create opportunities for other organisations to expand while saving jobs at the same time.
However, there are many pitfalls that need to be carefully considered and a different type of expertise is required compared to normal M&A transactions. Here are just a few of the common issues that need to be considered;
- Buyer beware – Administrators sell the business as agents of the company, with no personal liability or warranties provided. Therefore, the buyer has an increased level of risk around areas such as ownership over assets and their quality.
- Due diligence – Due to the cash constraints of the seller, transactions are often completed within a very short timeframe. This means that a buyer has limited time to carry out due diligence.
- Employees – The Transfer of Undertaking (Protection of Employment) Regulations 2006 will usually have the effect of transferring employee contracts to the buyer automatically. This means that employee liabilities are taken on by the buyer and there can be certain obligations around consulting with employees that need to be carefully managed to avoid the risk of compensation claims from employees.
- Suppliers – Suppliers who are owed money may be critical for the ongoing operation of the business. While outstanding balances due prior to the insolvency will be a claim against the insolvent company, suppliers may seek to negotiate the recovery of some of these balances in order to continue supplying the buyer. In addition, the buyers will usually take the risk that some stock might belong to unpaid suppliers.
- Customers – Commercial relationships may have been damaged if for example customer have been let down by the company. Debts due from customers are an asset of the seller and pursued by the administrator, which could also have an impact on relationships. Sometimes, it may be appropriate for the buyer to purchase the debtors which could be challenging to recover if there have been issues caused by the seller.
- Property leases – There is often insufficient time for the buyer to secure an ongoing lease with the landlord. The administrators will offer the buyer a licence to occupy the premises, but this does not guarantee that a long-term deal can be agreed with the landlord to continue the lease.
- Contracts – Contracts may be terminated on the event of insolvency. Therefore, the buyer may need to renegotiate contracts.
- Licences – The business may need certain licences to trade, which may not be transferable to the buyer.
Insolvent opportunities by their nature are reactive and arise at very short notice, but now may be a good time for businesses to proactively think about what opportunities to look out for and how they might be pursued should they arise.
Thinking about these issues in advance and developing a framework to address the different issues associated with an insolvent transaction may put them ahead of competitors, where the ability to complete quickly can be a deciding factor.
Notwithstanding this, the process will largely be reactive to the circumstances and will need to be carried out at an intense pace.
Having completed many insolvent transactions, we are well placed to help businesses carry out due diligence, structure the offer, negotiate the best value and create a robust post acquisition plan, providing you with the best chance of a successful acquisition, minimising the risks and maximising the opportunity.
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Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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