How to Buy a Business out of Insolvency

This article covers some of the main pitfalls specific to buying an insolvent business. There are many advantages to buying a business out of insolvency, although it may not seem like an obvious choice, and it is increasingly used by many companies as a preferred method of expansion.The advantages of this type of acquisition must be offset against a higher level of risk. However, 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.

An insolvency practitioner (IP) will be appointed, either by the courts or by company creditor(s), to handle the sale of an insolvent business. As a potential buyer, you must:


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    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.
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    Find out what is included in the sale. As previously mentioned, when buying an insolvent company, it is often possible to "pick and choose" the parts of the business you want. However, it is not always clear what is included in the sale. You will need to 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. 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. Retaining book debts will enable you to continue relationships with customers, but these may have already been assigned through factoring or invoice discounting.
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    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. If you want to purchase the goodwill of the business, the right to the company name will be necessary. So if you retain senior staff, you need to know the procedures for complying with these regulations.
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    Assess the human assets of the business. The Transfer of Undertakings (Protection of Employment) Act 2006 is another piece of legislation you will need to be aware of. This relates to the employees of the business, who you will automatically assume when buying from an IP. Make sure you have not paid a high price for staff who will walk away as soon as a better opportunity comes along. On the other hand, 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. You will need to ensure that you are not wasting your money if the human assets of the business will not remain committed to it.
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    Write to all the main insolvency practitioners. 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. 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. 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.
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    Have an advisory team in place, so that when the ideal opportunity appears you are in a position to act on it. A high-speed sale puts extra pressure on the due diligence phase of the deal. 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. 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.
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    Be aware of your competition. 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. Try to negotiate a period of exclusivity with the IP to allow you to conclude the deal, without a bidding war. 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.

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Categories: Buying & Forming a Business