A Guide To Buying an Insolvent Business
We often get involved in the sale of an insolvent business or get asked questions from potential purchasers or their professional advisers. Here are a few points;
Do a deal quickly!
Time is inevitably of the essence. Speed is vital to preserve value in the business before goodwill is eroded by the process of insolvency. Key employees, suppliers or customers could be lost. Not in the least, there may be insolvency considerations for the company that do not allow trading to continue for much longer, such as wrongful trading.
Buy the business not the shares
Buying the business leaves most liabilities with the old company. Tax losses are often a reason given for buying a company but much due diligence would be needed to be sure these would be available and there usually isn’t the time.
Beware of TUPE
If there is a significant potential for employee entitlements of the target company watch out! Even if the employees are dismissed before the sale it is quite likely that employee liabilities would be transferred to the purchasing company, however the sale is constructed.
Don’t expect any warranties from the seller
If there is a formal insolvency the Insolvency Practitioner (IP) will not know enough about the business, and won’t want to take the risk of providing representations or warranties. Specific exclusions are standard in sale contracts.
Be prepared for things changing!
Sometimes the seller does not know exactly what is included in a sale because of the company’s circumstances. An IP will sell only “such right title and interest as the company may have”. This may mean assets are subject to third party ownership and the buyer would therefore be subject to those rights.
Similarly, stocks may be subject to retention of title claims and the suppliers may be entitled to return of their goods, despite the sale.
The price has to be right!
Of course, many of the above issues may put a potential purchaser off. But, because of these issues any IP knows that there will be a very hefty discount for any purchaser prepared to take a little risk.
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