Buying an insolvent business

05 April 2011 Author: Stephen Giles

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Everyone loves a bargain – accordingly, there is a lot of interest when liquidators and other insolvency practitioners put a business up for sale. Purchasers jostle like shoppers in the Myer stocktake sale, trying to position themselves as the perfect purchaser. At the same time they try to convey their concern about the value of the business or assets – everyone expects a discount for a distressed business.

Purchasers are often disappointed. The typical process run by an insolvency practitioner is very transparent and methodical, however, there are a few techniques and strategies that can be helpful.

The insolvency practitioner has a duty to get the best price and terms, and importantly, may be called upon to prove they have done so. Therefore prospective purchasers should expect a transparent process that will probably involve advertising, and dealings with anyone that expresses interest. This can be frustrating for purchasers that see themselves as the obvious purchaser, and the process itself can sometimes lead to a lower price, or extra transaction costs. However the insolvency practitioner can be personally liable for any failure to sell on proper terms – and receivers and voluntary administrators are personally liable for trading expenses - so they will usually follow the process assiduously.

The insolvency practitioner will rarely be concerned about the interests of third parties, so any benefits offered by a purchaser to franchisees, landlords, suppliers or customers are likely to be less relevant than in a normal transaction, as the insolvency practitioner can usually walk away from these obligations. On the other hand, an agreement to take over employees could be valuable as it means more net funds to the creditors. It must be noted that this issue is not necessarily straight forward, as employee entitlements to directors may be reduced by the insolvency.

A liquidator will usually highly value unconditional offers and speed to completion, as the cost and risk of running the business during the offer and sale process is often substantial. Accordingly, it is often worth conducting due diligence early, rather than waiting until you become the approved purchaser. It is also critical to have your completion funding in order - often there will not be a lot of time between signing and completion, and an offer that is subject to finance will rarely be accepted.

If you are serious about acquiring the business, it is worth persevering through the initial stages. Insolvency practitioners are duty bound to deal with the highest bids, but some prospective purchasers know this and deliberately bid high on an indicative or non-binding basis to attempt to get in first and beat other competitors. A subsequent tactic can then be to delay the process, seek unreasonable warranties, and/or when pressed, ultimately come in with a much lower binding offer or an offer subject to numerous conditions. We recommend conducting preliminary due diligence investigations early to identify deal breakers and establish value, and making your best realistic offer rather than trying to negotiate on price too early. It is important to have completed due diligence so you can justify your offer price, and explain (even if the offer is not conditional) the basis of your valuation of the target. It will usually be possible to reduce your offer if the assets do not stack up, but a low offer may see you excluded from the process.

Insolvency practitioners do not have time to muck around, and after their initial open process dealing with everyone they will typically focus on one or two purchasers. Usually they will want a fall back plan, so hang in there even if you are not the highest bidder. If the business has value we suggest it is usually worthwhile staying in the game through any indicative offer process even if you are told that your offer is significantly under the mark, as it is surprising how many purchasers drop away.

Finally, be prepared to complete quickly. If you are a serious purchaser, we recommend conducting due diligence investigations immediately. This will not only help you to decide whether to proceed with the purchase but it will also show the liquidator that you are serious, as well as ensuring that you are able to complete quickly if necessary.

Buying an insolvent business raises unique commercial and legal issues that prospective purchasers need to be mindful of. Of these issues, ability to complete quickly is of the utmost importance to insolvency practitioners keen to minimise their exposure to the cost and risk of running an insolvent business.