Buying A Business Out Of Insolvency - An Opportunity Or A Threat?

Such situations are often seen by potential purchasers as an opportunity to expand their businesses at a comparatively low cost.

However there are examples of business acquisitions out of insolvency that have placed too much strain on the purchaser’s business, ultimately resulting in the financial collapse of the purchaser. In light of that, banks need to be wary in providing financial support to a potential purchaser to acquire a business out of insolvency.

If your customer is “in funds” or has a strong credit rating and is seeking to buy a business out of insolvency, what approach should be adopted?

Many expressions spring to mind such as “let the buyer beware”, “all that glisters is not gold” and “a fool and his money are soon parted”. Clearly the watch word is “caution”. Why would anyone want to buy a business with a history of failure? Especially where the amount of due diligence that can be done on the acquisition is going to be limited, and there are certainly going to be no warranties given by the insolvency practitioner who is selling the business and or its assets.

However, in the right circumstances and with a full understanding of what is being purchased, such acquisitions can provide an opportunity for good ongoing profit. However, if such an acquisition is to be successful there are some simple rules which any purchaser should follow as outlined below;

Do not be too optimistic about the opportunity,
Do not be rushed into buying,
Understand the limitations on what the insolvency practitioner can provide,
Be prepared to negotiate hard, and
Understand the risks, in particular the cash risks, of the acquisition.

Inevitably, pre insolvency, the business will have been cash constrained and this will have resulted in a backlog of liabilities and obligations. The future impact of these needs to be fully understood by a potential purchaser - and the bank if it is providing finance to the purchaser. If not, the purchaser runs the risk of high demands on cash, over and above the purchase price, shortly after the business has been acquired.

An outline of the areas for consideration is set out below;

Reservation of title issues,
Customer/supplier issues,
Leasing and landlord obligations,
Employment issues under TUPE, and
Management issues

Many good businesses have failed trying to absorb “bust businesses” where the purchasers thought that that it was going to be a great opportunity.

Accordingly if the prospect of an acquisition out of insolvency arises for your customer, then obtaining access to sufficiently detailed information and professional advice is essential in order to mitigate the risks and optimise the prospects that the transaction will ultimately be successful.

By: Adam Shore

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FRP Advisory’s team of experienced restructuring, recovery and insolvency practitioners has a strong reputation and track record for creating, preserving, and recovering value. We work in the mid-market and focus on enhancing the performance of businesses, as well as saving businesses in distress.