Buying an insolvent business… the risks, rewards and everything in between
Acquiring a business in financial difficulty can seem like a significant gamble. The compressed timelines, limited information and inherent uncertainty are understandable concerns for any prospective buyer. Yet for the right buyer, purchasing a distressed or insolvent business can represent a genuine commercial opportunity: an established brand, existing customer relationships, and valuable assets, often at a fraction of their open-market value.
At Isadore Goldman, we specialise exclusively in insolvency and restructuring. We provide clear and pragmatic advice to business owners, entrepreneurs and investors considering an acquisition of this kind, helping you navigate the process with confidence and protect your commercial interests at every stage.
What does it mean to buy an insolvent business?
A company becomes insolvent when it can no longer pay its debts as they fall due (known as cash flow insolvency) or when its liabilities exceed its assets (known as balance sheet insolvency). At that point, the company may enter a formal insolvency process, most commonly administration or liquidation.
In administration, an insolvency practitioner (IP) is appointed to manage the company’s affairs with the aim of rescuing the business or achieving a better outcome for creditors than an immediate liquidation would. In liquidation, the company is wound up and its assets sold. Both scenarios can present acquisition opportunities, though the process and what you are able to purchase will differ in each case. The government’s guidance on putting a company into administration provides a useful overview of the formal process.
Why do businesses become insolvent?
Understanding why a business has failed is essential before proceeding with any acquisition. Common causes include:
- Poor cash flow management
- Excessive debt or an overleveraged balance sheet
- Loss of key contracts or significant market changes
- Mismanagement, breach of director duties or other conduct issues
- Economic downturns or sector-specific pressures
Identifying whether the cause of failure is fixable will help determine whether the business has genuine turnaround potential or whether only specific assets are worth acquiring.
The different routes to acquiring a distressed business
There are several ways to purchase an insolvent business, and each carries different implications for speed, cost and risk:
Pre-pack administration: A sale negotiated and agreed before the company formally enters administration, then executed immediately upon the administrator’s appointment. Pre-packs can move quickly, but they attract scrutiny, particularly when sold to connected parties. Independent evaluation is now required in certain circumstances under regulations introduced in 2021.
Standard administration sale: The administrator markets the business or its assets during the administration period, typically running a competitive process before accepting offers. Buyers are usually given no more than four weeks to carry out research and submit bids.
Purchasing from a liquidator: Once a company enters liquidation, you cannot purchase the company itself, but individual assets can be acquired from the liquidator.
Hive-down: The administrator transfers the business and its assets into a newly incorporated subsidiary before selling the shares of that subsidiary. This can provide cleaner deal structuring in certain circumstances.
The advantages of buying an insolvent business
Purchasing a distressed business can offer meaningful commercial advantages:
- Significantly reduced acquisition cost compared to purchasing a solvent business
- The ability to select specific assets, contracts and staff rather than taking on the whole entity
- Access to an established brand, customer base and supplier relationships
- A fresh start without the legacy debts of the insolvent company (in an asset purchase)
- Motivated sellers: insolvency practitioners have a duty to creditors and are incentivised to complete transactions without delay
The risks and challenges you must consider
The potential rewards must be weighed carefully against the risks:
Compressed due diligence timelines: The four-week window commonly available in administration significantly limits the depth of investigation possible.
Limited warranties and recourse: Administrators sell on an “as is” basis. There are minimal contractual warranties, and post-completion remedies are rarely available.
Hidden liabilities: Despite an asset purchase structure, certain liabilities, such as outstanding tax obligations or environmental issues, can follow the business.
Reputational considerations: Acquiring a business associated with failure carries inherent reputational risk, particularly where creditors, former customers or suppliers have been adversely affected.
Understanding TUPE: employee rights when buying from administration
Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), employees of the business will generally transfer to the buyer automatically, with their existing terms and conditions preserved.
Dismissing employees in connection with a TUPE transfer can give rise to claims unless there is a genuine economic, technical or organisational reason for the change (known as an “ETO reason”). Taking specialist legal advice on TUPE obligations before completing any acquisition is strongly advisable.
Structuring the deal: asset purchase vs share purchase
In most insolvency acquisitions, buyers use an asset purchase agreement to acquire specific assets (machinery, intellectual property, stock, goodwill) rather than the company itself. This structure avoids inheriting the insolvent company’s debts, which would accompany a share purchase.
Share purchases are uncommon in insolvency scenarios for precisely this reason, though they may be relevant where specific licences or contracts cannot otherwise be transferred.
The due diligence process: what to investigate
Even within tight timescales, thorough due diligence is essential. Key areas to prioritise include:
- Financial records and recent management accounts
- Outstanding contracts and whether they are assignable
- Asset condition, ownership and any charges or security interests registered against them
- Intellectual property ownership and any active disputes
- The reasons for the insolvency and whether they have been resolved
- Employment records and TUPE obligations
- Key supplier and customer relationships
How to find businesses in administration
Opportunities to acquire businesses in administration or liquidation can be sourced from:
- The London Gazette, the official public record for UK insolvency notices
- Insolvency practitioner firm websites, where available businesses are often advertised
- Specialist business sale platforms and brokers
- Direct contact with administrators appointed to a specific company
Frequently asked questions about buying insolvent businesses
Can you buy a company that is in liquidation?
Once a company enters liquidation, it will ultimately cease to exist as a legal entity. You cannot purchase the company itself, but the liquidator can sell its individual assets, including stock, equipment, intellectual property and goodwill.
What is a pre-pack administration deal?
A pre-pack administration is a sale arranged and agreed before the formal administration process begins, completed immediately upon the administrator’s appointment. Pre-packs offer speed and certainty but are subject to scrutiny, particularly when sold to connected parties. Independent evaluations are now required in certain circumstances under rules introduced in 2021.
Do I inherit the debts of an insolvent company I purchase?
In an asset purchase, you acquire specific assets rather than the company itself and do not typically inherit its debts. A share purchase, however, would expose you to the company’s existing liabilities. Deal structure is critical, and taking specialist legal advice before proceeding is essential.
What happens to employees when I buy a business from administration?
Under TUPE, employees of the business will generally transfer to you automatically with their existing terms and conditions preserved. Some dismissals may be permitted where there is a genuine ETO reason, but this area carries significant legal risk and should be assessed carefully before completion.
Can I use the same company name after buying from administration?
There are restrictions on using a similar or identical company name following an insolvency under the Insolvency Act 1986. These rules are designed to prevent directors from shedding debts through successive insolvencies, a practice commonly referred to as phoenixing.
The Insolvency Service’s guidance on phoenix companies sets out how these rules are applied in practice. Breaching the restrictions can result in personal liability and potential director disqualification.
What warranties and protections do I get when buying from an administrator?
Administrators sell businesses on an “as is” basis with very limited, if any, warranties. Unlike a standard commercial acquisition, there is typically no opportunity for post-completion claims against the seller. This makes thorough pre-acquisition due diligence all the more important.
Speak to our solicitors about acquiring an insolvent business
Buying a distressed business requires careful preparation, an honest and realistic assessment of the risks involved, and commercially minded and practical advice at every stage.
With offices in London, Norwich and Portsmouth, we are well placed to advise you without delay. To speak with a member of our team, please email us at info@isadoregoldman.com.