BusinessBusiness RecoveryIs it worth buying a business before it enters administration?

Is it worth buying a business before it enters administration?

A knockdown price notwithstanding, it could make a lot more sense to buy a troubled business before it goes into administration, writes Nigel Stanford

Q Is it better to buy a business before it goes into administration?

A
It may be better to offer to buy a troubled business, with the
potential acquirer positioning themselves as a viable alternative owner and a
better alternative to administration.
There are valuable advantages in being able to conduct a thorough due diligence
process with help from incentivised owners and managers (as long as the buyer is
able to persuade them to be open and frank about the target’s affairs and
financial problems), to negotiate contractual protections such as warranties and
indemnities into a sale contract, and to defer some of the consideration by way
of an earn-out or an escrow arrangement. Such benefits can put the buyer back in
control and ensure that the buyer’s offer price for the business is right.

Q Are there any obstacles in buying a business from an administrator?

A
The administrator will seek to get the best possible offer for the
business, but it may be difficult for a buyer to put forward its best offer
until it has all the relevant facts and information about the business. It will
also be very difficult for a buyer to construct a purchase subject to an
earn-out – a common way of trying to ensure a degree of alignment between the
interests of buyer and seller.
This is one reason why, when buying from an administrator, it is often tempting
to cherrypick the desirable assets and leave the rest behind, especially when
the timeframe to agree a deal with the administrator is particularly short. This
is far from ideal for the administrator, who will prefer to sell the whole
business as a going concern, and the conflict between getting the best offer but
keeping the business whole can create added uncertainty for the buyer as to the
price it should offer. Even if the buyer thinks it is getting a good deal on
price, it may be taking on additional risks (which it would not have to take on
a normal sale) and have less scope to negotiate a favourable purchase agreement.

Q Should I contact the owners of an insolvent business to enquire
about buying it?
A
Once a company is placed into administration, its directors have no
authority to act on its behalf unless expressly permitted to do so by the
administrator. When looking to acquire some or all of a company’s assets, a
buyer therefore has to enter into sale and purchase documentation with the
administrator.
Although acting as the company’s agent, the administrator will at all costs
avoid any personal liability and will build into any sale documentation express
disclaimers of personal liability. Even if a buyer does obtain warranties and/or
indemnities from the selling company, they will be worthless as the company’s
likely fate is liquidation.
Compare this to the position under a share sale, where warranties and
indemnities will be offered to encourage a buyer. Or to an asset sale, where a
buyer is in a stronger position to negotiate the hiving off of liabilities from
the business.
Going into administration is now a relatively speedy process. For a limited
period, an administrator can do whatever they think fit to save the business.
The administrator’s primary objective is to rescue the company; seeking the best
possible return for all of the creditors of the company is a secondary aim.

Q Should I take extra care in process and checks into the business
before acquisition?
A
As ever when purchasing a business, due diligence is a critical
process for the buyer. However, a buyer would do well to be prepared for a
number of impediments when buying a company in administration. For example, the
existing managers will probably be disillusioned and the administrator – who is
the one running the sale process – will probably know little about the business
and only make limited information available. The owners and/or key managers are
also likely to have been removed, so their knowledge of the business, its staff
and customers will not be available to a prospective buyer. The onus is very
much on a buyer to spend time and money making their own investigations into the
business. There is no recourse to warranties from the seller, unlike in a normal
sale, where a buyer has much more leverage to obtain comprehensive information
from the sellers, with question and answer sessions, comprehensive warranties
and a full disclosure process.

Nigel Stanford is a partner in the corporates group at
Cripps Harries
Hall

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