Buying an insolvent business back

Buying the business back

Directors are often will placed to purchase back the assets of the business from the Liquidator, Administrator or Administrative Receiver. This is commonly known as a Phoenix business.

There are 2 possibilities when it comes to buying a business:

To arrange to do the purchase prior to the insolvency and then complete it immediately after the Administration or receivership appointment is made – commonly known as a ‘Pre-pack’.
To buy the business after appointment.

Pre-packs

These may be used by an Insolvency Practitioner where there is likely to be a limited market for the business or any period within an insolvency procedure is likely to substantially erode the value of the business.

Pre-packs are a useful tool for preserving a business but should be used exceptionally.

Advantages

No or limited competition to buy the business
Quick with minimal disruption to customers and employees
Avoids competitors finding out detailed information about the business
It is often possible to structure a sale so that the cost of the acquisition is limited.

Disadvantages

Suppliers may have a distrust of the pre-pack procedure and this may result in future problems obtaining supply.
There is a reduced opportunity to restructure the business – usually one of the first things to occur following appointment is to reduce the cost base of the business. Outside a pre-pack a purchaser would purchase a leaner business.
Directors often do not obtain independent professional advice – the Insolvency Practitioner will often provide advice but their responsibilities are not to the director but to the creditors of the business. Therefore the advice provided may not be in the best interests of the director.
The process is often rushed and there is limited opportunity to stand back and look at the business opportunity objectively.
The Insolvency Practitioner may have considerable experience in selling insolvent businesses but management normally have little experience. This places the management team at a disadvantage when it comes to negotiation.
Although lined up and terms agreed prior to appointment of the Insolvency Practitioner, once appointed the IP is required to reassess the situation and decide whether it is in the interests of creditors to conclude the sale. If they decide otherwise they can sell the business to another party as control rests in their hands.

Directors may be left with dealing with matters (and the costs) that would often be undertaken by the IP such as resolving Reservation of Title claims.

The key to whether a business should be purchased out of such a procedure is to have a good understanding and an objective review of the situation. The business will need to start generating cash and profits quickly so normally something will have changed from prior to the insolvency procedure. If nothing has changed then, unless the insolvency was caused by one event, a lot of cash will be required to undertake a restructuring of the business once acquired. If no restructuring is undertaken then the business will continue to make losses and will become another insolvency statistic.

Administration, Administrative Receivership and Liquidation sales

Once an Insolvency Practitioner (IP) is appointed they may decide to allow the business to continue to trade or may decide to close the business.

If the business is closed (virtually always the case in a liquidation) then the assets will be sold off to the highest bidder. There will usually be a delay before they are sold (due to time it takes to place a business in liquidation plus time to market the assets).

gavel IPs will often look favourably on parties wishing to buy substantially all of the assets since this is normally more cost effective.

If the IP continues to trade the business forward then they will usually market the business for sale through adverts in the FT and/or online.

Competitors, suppliers and other parties will often express an interest in the business and some will visit the site to undertake due diligence. Directors have an advantage in that they have a detailed knowledge of the business and can better determine its value.

People looking to buy the business may (or may not) require the existing management to run the business and maintain relationships. This may put the management in a strong negotiating position should they wish to work with the potential purchaser and also a strong position if non-co-operation would mean that the other parties would not wish to purchase the business.

The additional competition may result in a higher price but often only a few bids are received by the IP.

A deadline will often be set for offers. This may not give a significant length of time depending upon how profitable the business can be traded by the insolvency practitioner. This period should be used to gather any relevant information that could affect the price and discussions with future key stakeholders should be held (employees, suppliers, equipment providers, landlords, etc.)

The offer should include the amount to be paid, when the payment(s) will be made, the assets to purchase, the proposed position regarding employees, proof of funding and any other relevant information.

Depending upon the offers received there may be a short period of negotiation after which the purchaser will be expected to complete quickly. The contract is likely to be a standard Insolvency sale – this will exclude any and all liability by the Insolvency Practitioner and no warranties will be provided.