Buying an insolvent business from an administrator (Part II)
Date: Wednesday 27th January, 2010
Author: Julian Dobbin
Buying an insolvent business from an administrator carries great risks, and potentially, rewards. A targeted due diligence is crucial to protect the buyer.
I have previously talked about the risks and potential benefits of buying a distressed company from an administrator. Such opportunities can generate substantial value for a buyer. Over the next year or so, you may be presented with opportunities to buy a business from administration. This could be a competitor, customer, supplier or a business with no connection to you.
When an administrator is appointed to a company, he is obligated to maximise the cash realised for the assets available and must act in the interests of the creditors at all times. Due to the very fact that the company is in administration, those assets are usually sold at a substantial discount to normal value, offering a good opportunity for buyers, albeit usually with no warranties or guarantees. However the acquirer will need to move very quickly, and whilst there is not time to undertake all the rigorous checks applied to a normal transaction, there is a minimum which should be undertaken:
- meetings with management/key staff to assess their strengths, weaknesses and intentions
- discussions with key customers, and other stakeholders such as landlords/suppliers
- some brief due diligence – focused on key areas
- consideration of retention of title issues, ransom payments, ongoing contractual obligations
- establishing profit viability and evaluation of working capital requirements
- consideration of Transfer of Undertakings (Protection of Employment) Regulations (TUPE)
- devising an offer and negotiating with the administrator/management team.
It is also important that the buyer can also devote time immediately after the acquisition, otherwise the business can easily hit the same problems that put it in a distressed position.
The earlier that dialogue is begun with a distressed business – even before administration – the better.
I would also recommend that you only consider investing time and money in a distressed business where you have knowledge of the sector. There is no time to gain an understanding of the area of business, given the time pressures involved in a distressed transaction.
Julian Dobbin is a partner at Mercer & Hole. The views given in this blog are personal to the author.
Keywords: 'Distressed deal', 'Buying from an administrator', 'Buying from administration', 'Distressed Acquisitions', 'TUPE', 'Insolvent Acquisition', 'Buy an insolvent business', 'Valuation of distressed businesses', 'Distress', 'valuations'
Please note that the opinions expressed in this blog represent the views of the author and not the views of Mercer & Hole.