It is often thought that a bargain can be had when buying assets from a business in financial trouble. Whilst this might be true, the “buyer must beware”. The Buyer will buy only such right, title and interest as the seller has in the assets, if any, without any warranties, and without any formal disclosure. It is for the buyer to physically inspect all and any assets it wants to buy to satisfy itself as to title, condition, and transferability. The focus of such transactions should not, for the buyer, therefore be fixated on price, but this does mean that such transactions are nevertheless very price sensitive and conducted at speed by seasoned and specialist professionals.
We routinely advise both Insolvency Practitioners and Buyers in constructing and completing on the purchase of the business, the assets and/or the contracts of an insolvent company or groups of companies, and pride ourselves in seeking the best possible terms for the client.
If you are contemplating buying or selling any assets from a business in financial distress we would be pleased to advise you through the process to achieve the right transaction for you. Firstly as a buyer, you must decide on whether you will buy those of its particular assets that you wish to buy or the shares of the distressed company. If you buy the shares you will buy the whole company in its present form, with all of its assets, but also with all of its liabilities and obligations. You would not then need to transfer all of the contracts in place, but check the contracts which may terminate upon any change of control of the company.
The majority of distressed transactions proceed by a sale and purchase of selected assets. We have a wealth of experience in advising parties in the sale and purchase of shares in a business, but this note concentrates on points to consider when buying assets from an insolvent company
Some key points to consider before advancing any negotiations or contracting to buy a distressed business or assets in these types of transaction are:
- The objective
A key part of such a process is a clarity of commercial purpose and understanding how the business and assets once acquired will operate differently and profitably whether alone or in association with the buyer’s existing business. The offer made will often be crucial in shaping the transaction and expectations of the parties.
- Timing: Before or after the Seller is placed into a formal insolvency process
Timing is often critical, and routinely parties want to complete sooner rather than later; however, if a sale is completed between parties before an insolvency practitioner is appointed to the seller, the sale could be at risk from a review and possible challenge if the Insolvency Practitioner considers the buyer paid less than fair value. See Antecedent transactions.
The sale will proceed from offer to completion in a matter of days or weeks. Can the Buyer accommodate the deadline with its own corporate structures, funding, appropriate VAT registration, and banking and other operational facilities. Evidence of funding may be required as part of the offer process before negotiations commences.
- Buyer Beware
The buyer will get no comfort from the Seller on the condition of the assets to be bought, their ownership, or the rights of third parties to those assets. If in fact the buyer does not get what it expects, because a third party owns a key asset, an asset is not fit for purpose, or indeed the contracts with customers the buyer so crucially wanted are terminated, the buyer will rarely have any come back on the seller – to seek to reduce the price, or have any claims for breach of warranty, as no actionable comfort was provided by the Seller. Put simply the buyer must quickly inspect all assets (including paperwork to intangible assets) to ensure they exist, work and are fit for purpose. The buyer factors in all such risks to the offer price. Often such risks can materialise only during the process and the scope of the transaction or its structure may change quickly to seek to manage those risks. That may entail parallel negotiations with other parties also.
- Employee liabilities
If a buyer buys a business (or sufficient assets to carry on that business) from a seller in Administration, there is a real chance the buyer will take over the obligations to the employees of the business (whether the buyer wants to or not). The Buyer should carefully factor in the cost of those liabilities to any deal, which could include arrears of pay, holiday pay, redundancy costs, or even for claims for unfair dismissal, or liabilities to meet minimum wage requirements. We work closely with our employment solicitors who are well versed in advising buyers quickly on the risks which ought to be considered before even advancing an offer. These liabilities can impose a significant cost, particularly if the buyer proposes to relocate it’s the seller’s, or its own business operator following the transaction!
Will the buyer trade from the Seller’s property? If so, you will need a right to occupy the property immediately upon completion. The Seller may be in arrears or rent, and maybe occupying a property without written terms or on uncommercial terms. The Buyer should consider what rights of occupation it needs, what the landlord might be prepared to offer, potential liabilities for dilapidations or environmental harm. It is often the case that insufficient comfort on the state of the property or the landlord’s position can be obtained so such commercial decisions are often key to advancing a transaction of this nature.
- Licensing and permits
The buyer will generally wish to trade as soon as possible following completion. Steps will need to be taken quickly to obtain the relevant licences for the trade. Our sector specialists are on hand to help.
- The Business Name
If the buyer wishes to appoint a director of the insolvent seller to its board, or to act in a manner consistent with a director, the buyer will not be permitted to use the name of the seller, or anything confusingly similar unless prescribed rules are followed (such as buying substantially the whole of the assets from an insolvency practitioner and the giving of prescribed notices). Failure to follow the rules can lead to criminal sanctions, and to all of the directors facing risk of personal liability for debts/liabilities of the buyer. The buyer should proceed with caution and take professional advice before adopting the sellers name or brand.
- Multiple businesses or parts of businesses
It may the case that a buyer seeks to buy only part of a business for its own strategic purposes, or to buy its operations in particular locations only. Other prospective buyers may have conflicting objectives or proposals. The seller will wish to most effectively realise as many of the assets as possible. It can often be the case that more than one transaction may be advanced in tandem or sequentially by a seller. Changes to one buyer’s proposal may mean that they are no longer the preferred purchaser.
Some such transactions evolve from larger group acquisitions where one part of the group is distressed and it may also be the case that, commercially, the buyer may require or seek associated transactions to proceed together or with associated parties. If transactions are interdependent then understanding their relationship may also be a key commercial driver.
- Pre-packs and the Pre-Pack Pool
In some transactions where existing management or their associates look to purchase the business or assets, there are recommendations that a buyer consult with third parties called the ‘Pre-pack Pool’. We can advice on your responsibilities and options in doing so.
If you would like to discuss aspects of any proposed deal, please contact a member of the Restructuring and Insolvency Team.