Business administrators are often looking for buyers and a ‘bust’ business could be just the thing to add to your assets. But it can be a complex procedure to work through so this article will help you understand what to look for and how to deal with the administrator.
Buying a business from an administrator isn’t as difficult as it may at first appear. However, the process is different from buying an ‘ordinary’ business and there are a number of things you should think about before you approach an administrator. Because timing is usually important, this article will help you work through the list and avoid costly mistakes.
If you want to add value to your existing client base, then keep your eyes open for opportunities to buy businesses in administration. If a deal comes your way, you will have to be very focused on making it work and time will be of the essence. If you buy a company from administration, it’s important to make a physical inspection of the assets because any information in sales particulars will not be guaranteed. Never be afraid of obtaining as much relevant information as possible before submitting your bid.
One of the first things to do, and this may seem obvious, is to check that the administrator has been properly appointed and has the authority to sell the assets. Ask the administrator lots of questions so that you are able to understand all the issues affecting the business. Make sure you’re happy with the quality of the stock and that you’ve considered the extent of retentions of title as well as enquiring about the status of any major contracts. If there are existing funders, it’s important to make sure that appropriate releases are obtained from any who have debentures or legal charges.
One of the riskiest areas to think through is taking over a workforce. Analyse this properly so that you can assess all the risks. Sometimes, the liabilities attached to the employees will be so substantial that they outweigh the commercial advantages of going ahead with the purchase. Beware of ‘TUPE‘ which are the Transfer of Undertakings (Protection of Employment) Regulations. If you don’t know what these regulations mean then you should seek advice from a company which specialises in human resources before you go any further with your bid.
If the business wants or needs to carry on trading in the existing premises, it’s important to check the existing property arrangements. You may need to negotiate separately with a third party landlord to ensure continuity.
To buy a company out of administration, you have to be prepared to act quickly and accept you will have to take a commercial view on some parts of the deal. This means that you won’t need to stand on ceremony where the legal contract is concerned. Keep in mind that you are buying the business from the administrator, not the previous business owners. There are certain key things which your lawyer will need to check, but the administrator will not be prepared to accept personal liability for anything and will not guarantee legal title to the assets. So tread carefully and check for any gaps in the contract.
Time is critical because you won’t have the opportunity to carry out full financial, commercial or legal due diligence, so you will have to take a view on many of these assets. Assess what you think are the associated risks and reflect this in the price that you are prepared to offer because you will not be able to make any retrospective claims. In a normal transaction, warranties and indemnities and completion accounts are used effectively to adjust the price, but this will not be available in any insolvent situation.
Buying a business from administration is not necessarily for the faint hearted. But providing that you’re aware of the pitfalls and act sensibly throughout, then there isn’t any reason why you shouldn’t consider approaching an administrator to talk through a business in which you’re interested.