Buying an insolvent business…the risks, rewards and everything in between.
Could buying an insolvent business or its assets be the right opportunity for you? A company in crisis could prove to be profitable, if you have the right resources and skills to turn it around.
Starting a business doesn’t necessarily mean that you need to start from scratch. Buying a business or its assets, as it’s struggling financially, going into an insolvency process or even whilst it’s in an insolvency process, can be a valid option, but it does bring with it a unique set of challenges.
Buying an insolvent business or its assets can be a complex undertaking that requires initiative, resourcefulness, and ingenuity. It’s been done before with great success – both Apple and Marvel were on the brink of insolvency in the 1990s. If you think you’ve got what it takes, here’s what you need to know.
Let us take you through some of the pitfalls and challenges that you may face and what is helpful to know.
What caused the business to become insolvent?
An insolvent company is one that is either balance sheet insolvent and/or can no longer pay its debts as and when they fall due.
A business can become insolvent for a number of reasons. Mismanagement or a sudden break in cash flow are common. Apple’s 90s decline is often attributed to resource mismanagement. The Newton (a Personal Digital Assistant) cost $100 million to develop and wasn’t anywhere close to making that back when Microsoft stepped in and invested the $150 million that saved the company. Either way, it’s important to know how it has happened so you’re prepared for what you’re taking on.
When you look to buy an insolvent business or its assets, such sales tend to take place in three different scenarios:
1. When the business is struggling financially and looking at its options at restructuring and potentially being sold to a new company;
2. When it is insolvent and about to go into an insolvency process; or
3. When it has entered into an insolvency process.
In all of the above scenarios it is likely that the business has been receiving advice from an insolvency practitioner for some time already. Insolvency Practitioners can advise on the options available to a company.
Administration is often used by a company to facilitate sales of its assets or of the entire business as a going concern. Administration is a process whereby it can safeguard the business against legal actions whilst a buyer or a rescue plan is put in place. An administrator is appointed as the agent of the company and their job is to protect the interests of the business’ creditors.
Interested buyers are usually given a short timeframe (usually no more than 4 weeks) in which to conduct their research and make their offer. If the sale is going to a connected party there also has to be an evaluator’s report to make sure the sale is for fair value. Directors or owners of an insolvent business won’t have any say when it comes to the sale. The insolvency practitioner makes the decision on who makes the best bid based on the interests of the business’ creditors.
As any good entrepreneur will know, starting a business begins with research, and this process is just the same. You’ll need to decide what kind of business you want to buy and then look at what is currently available for purchase. Not all challenges are the same, and there will be some that do not fit with your financial limits or the level of risk you are prepared to take.
Understanding the cause of the business’ problems and what you’ll be taking on is vital to your success. You’ll need to know roughly how much you’re likely to need to spend after purchase and where the money needs to go. Therefore, the more information you can gather the better – everything from employee and client names to suppliers and compliance information is helpful.
You’ll appreciate that considering the staff of the business will be of upmost important. The process will be unlike anything they may have faced before and will be stressful for them. It likely has been for some time. Communicating with them and ensuring they are on board with any changes you must make and building back their morale will make a world of difference to the likelihood of your success.
These days it’s relatively easy to find an insolvent business, thanks to the internet. A great place to start is contacting an insolvency firm to see if they have any businesses that they’re hoping to sell. You might also know a business that is struggling personally, which would put you in a unique position of understanding.
However, always seek legal advice before proceeding. Insolvency is a complicated matter, and specialist advice will start your endeavour off on the right foot.
The Advantages of buying an insolvent business
If you don’t want to start a brand-new business from scratch, buying an insolvent company can be cheaper than attempting to buying a profitable one.
To a keen business mind, it may well be that you can find a profitable company just below the surface of another’s mismanagement. As the buyer you can pick and choose which assets you keep, as well as restructuring the business financially and operationally. With effective restructuring you can leave behind what caused the initial distress and large liabilities that may have been affecting the business.
Buyers are often met with enthusiasm from insolvency practitioners who are keen to make a sale so that there can be a return to creditors. Finding a buyer is generally the best option for them, so buying an insolvent business will be a quick process to make sure the process doesn’t affect the business.
Sometimes, buying the business doesn’t require you take on the debts – they’ll stay with the insolvent debtor. In these cases, you and your new business can have a relatively clean start.
The Risks involved
As ever in business, there are no certainties your company will be a success. This risk is slightly higher when you purchase an insolvent business. After all, you’re starting where others have already failed.
Stepping in where debt exists is risky as you may end up liable and having to pay off some aspects of the debts of the business. Doing so delays your profit even further, so you should approach the purchase financially ready to handle the risk and make sure you understand all liabilities that you may be facing.
Often insolvency practitioners are looking for immediate, up-front payment from potential buyers. It’s unlikely that you will have time to raise funds if you don’t have them, so once you’ve considered what kind of business you’d like to buy, you’ll need to be financially ready to buy a promising one as soon as you’ve found it.
You’ll need to know which aspects of the business are being transferred to you once the purchase is complete. Employment contracts are mostly always carried forward and that can cause you problems should you need to get rid of staff. In the worst-case scenario, you may be forced for a period to maintain employees who had a hand in the initial failure.
A lot of the risks involved in buying an insolvent business can be mitigated with enough research. Getting that research done properly within the short timeline of the insolvency process can be difficult. It’s likely that you will not have time to consider every aspect before you decide to take the leap.
For clear, practical advice on insolvency, bankruptcy, and restructuring – whether you are a potential buyer or a business in crisis - please speak to our expert team today. You can contact your local Isadore Goldman office in London, Norwich or Portsmouth.