The financial gains to be made from buying a business in administration can be significant. However, for the unwary, the risks involved mean that the potential losses can be equally significant.
What should you think about when buying a “bust” business from an administrator?
Below are 8 things you should know before buying a bust business:
1. Time will be of the essence. If an opportunity comes your way, you will have to be very focused on making the deal work rather than completing the normal deal process with all the due diligence and legal processes. You will have to act quickly and accept you will have to take a commercial view on some parts of the deal. The risks associated with this should be reflected in the price you offer.
2. If you buy a company from administration, the information in sales particulars will not be guaranteed, so a physical inspection of the assets is recommended.
3. Obtain as much relevant information as possible by quizzing the administrator, before submitting your bid. It is important, if possible, to establish what issues affect the business, the quality of the stock, the extent of retentions of title and the status of any major contracts.
4. Ensure that appropriate releases are obtained from any existing funders who have debentures or legal charges. Check that the administrator has been properly appointed and has the authority to sell the assets.
5. One of the riskiest areas is taking over the workforce. Analyse this properly so you can assess those risks. In certain circumstances, the liabilities attaching to the employees will be so substantial that they outweigh the commercial advantages of going ahead with the purchase. Beware “TUPE” – if you don’t know what it means, ask Truelegal.
6. If the business wants or needs to carry on trading in the existing premises, you need to check the existing property arrangements. You may need to negotiate separately with a third party landlord to ensure continuity.
7. Don’t stand on ceremony with the legal contract. You have to remember that you are buying the business from the administrator – not the previous business owners. There are certain key points which your lawyer will need to check, but the administrator will not be prepared to accept personal liability for anything and will not guarantee legal title to the assets. There will, therefore, be gaps in the contract.
8. Don’t expect to be able to make any claims after the event. In a normal transaction, warranties and indemnities and completion accounts are used effectively to adjust the price if there is a post-completion problem. This will not be available in any insolvent situation.
If you would like to discuss in complete confidence the merits of an opportunity to buy a business in administration, contact us at Truelegal.
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