Advantages and Perils of Buying a Business out of Administration

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Advantages and Perils of Buying a Business out of Administration

One inevitable result of the current crisis will be a number of businesses going into administration. This may present great opportunities for companies that are commercially viable and keen to consolidate, take over a competitor or even diversify their business, as the price paid will be a fraction of what would have been paid if the business being acquired was fully operational.

In addition, most liabilities to creditors stay with the seller and the buyer can, largely, select which assets it wants to acquire. However, there are significant risks and the potential losses and liabilities can be as significant as the financial gain, so any buyer needs to be fully aware of the potential pitfalls involved. We set out below some of the key considerations to bear in mind:

    1. The process will move very quickly. Once the administrators are appointed, they will look for someone to buy the business and assets as soon as possible. A buyer will need to be flexible and focused on structuring a deal that works for them as well as the administrators. You will not have the comfort of the usual deal process where there is significant negotiation and due diligence – commerciality and pragmatism will be the main deal drivers, but as the risk is greater so the price you offer should reflect this;
    2. Information gathering – as referred to above, it is unlikely there will be any extensive due diligence exercise, so a buyer may need to consider a physical inspection of the business and assets, and ask detailed questions of the administrators around the assets, stock, premises, employees, key issues that affect the business and key business contracts as well as any third party consents that may be required. Bear in mind, however, that any information provided by the administrators cannot necessarily be relied on and there is no right of recourse.
    3. Remember that the administrators are acting as agents of the company and will accept no personal liability in the sale contract and there will be no warranties about the assets sold, whether they are encumbered, their ownership, condition etc. Do also consider structuring the deal with a deferred consideration element, this can sometimes be agreed with an administrator who would prefer to sell the bulk of the assets to one acquirer rather than bits and pieces to a number of bidders.
    4. Encumbrances – do check that any appropriate releases have been obtained by existing funders who may have debentures or charges over the assets being acquired. You should also check the terms of appointment of the administrator to ensure they have the relevant authorities to sell the assets.
    5. Employees – this is a key area of potential risk for a non-wary buyer. You must understand the risks and what liabilities for the workforce will transfer across. TUPE may well apply depending on the structure of the business and assets you are acquiring, which means the employee contracts will automatically transfer to the buyer. TUPE will also mean that certain informing and consulting obligations arise, which if not adhered to can lead to substantial liabilities/compensation claims.
    6. Premises – it is likely that the business needs to operate from its existing premises to continue trading, at least in the short term. You will therefore need to check the existing arrangements with regard to the premises and will need to conduct negotiations with the landlord to ensure continuity. As it is likely any deal will need to happen very quickly, there is unlikely to be time to secure an assignment or a new lease, so you are likely to need the administrators to grant you an licence to occupy.
    7. Book debts – normally book debts are retained by the administrators, but they are sometimes assigned to the buyer. If this is the case, be aware that the debts may not be collected and the value attributed to them should reflect this. If they are retained by the administrators, a buyer needs to be wary that aggressive collection could upset customers.
    8. Post-completion recourse – as referred to above, it is very unlikely that you will be able to bring any claims after the transaction has completed and there are unlikely to be any price adjustment mechanisms, such as completion accounts. There will no warranties or indemnities to fall back on, in fact the administrators will insist that the buyer gives them indemnity protection against any liabilities that may arise as a result of the transaction, in particular with regard to any employee and third party title claims.
    9. Contracts – supplier and customer contracts may be terminated on an insolvency event, though there are new rules relating to this, and even if they are not, they may not be assignable. If a novation is required, the third party cannot be compelled to enter into the novation or a new contract with the buyer. It may also be that stock is held subject to retention of title provisions, and valid claims could reduce the value of stock or create cashflow issues as suppliers have to be paid in full;
    10. Intellectual property – if IP is key to the business, make sure it actually belongs to the company and any IP licences are up to date and transferable. Make sure you know what you are buying and are protected on the key assets.
    11. Prepare your forecasting carefully – in particular how much working capital will be required. Consider putting the assets in a newco so they are “ringfenced” in case of issues post completion.

This is just a brief summary of the key issues you need to bear in mind when buying a business out of administration, but is far from exhaustive. You must prepare very carefully and be prepared to walk away if the deal does not look quite right – do get legal and other professional advice as soon possible in the process, their insight and expertise is invaluable in establishing whether you have a cracking deal or a minefield of issues.

Adam Dowdney

Partner – Corporate & Commercial