Top ten tips for buying a business out of administration
Due to the ongoing Coronavirus crisis, there will inevitably be an increase in businesses experiencing financial difficulty and insolvency, especially as the Government begins to withdraw its package of financial support for companies.
This may present an opportunity for those businesses that are well-funded and stable enough to purchase a business in administration and increase their market share quickly and at a relatively low cost, whilst potentially saving jobs.
Buying a company out of administration can be fraught with difficulties, especially if it is not something you have experienced before.
To help you make the most of any opportunities that arise, here are some top tips for buying a business out of administration:
1. Why is the business in administration - The first step is to establish why the company has failed. This could be the result of debt issues, the loss of important customers or the failure of a product or service. If the problem relates to underlying issues, such as poorly developed products or services, then it may be best to avoid this business. However, if you believe there is fundamentally a good business underneath these issues then it may be worth exploring further.
2. Build a profile of the business – Take time to meet with the existing management team, speak to suppliers and customers and obtain as much financial data as you can. There may be little time for detailed due diligence, but the more information you obtain, the easier the decision-making process will be.
3. Be realistic – A business will inevitably lose turnover as a result of the insolvency process. The longer the business is insolvent, the more that turnover will likely have fallen. Always work on the basis of a worst-case scenario when planning your acquisition.
4. Think about creditors – You may need to pay creditors out of the new company if debts are outstanding. Many of these creditors may be suppliers that will play a critical role in the business’s survival. Make sure this is factored into the acquisition plan.
5. Consider wages and salaries – When you acquire a business you may wish to retain talented members of staff. You need to consider the impact that paying their wages will have on income, especially if the business operates a weekly payment cycle. The administrator may also ask you to meet a wage bill, but if you do not have the benefits of regular sales or orders then it may be difficult to forecast cash flow.
6. New companies struggle with credit – Obtaining the necessary credit to trade effectively can be difficult for a new business, even if it has traded previously under different management. If you anticipate needing credit but don’t think it will be available this needs to be taken into consideration when planning cash flows.
7. Consider the tax implications – You are likely to be buying assets at lower than typical market value, especially stock. This may result in higher profits, which in turn would lead to a larger tax bill.
8. Identify “key” people within the business – Research who the key people within the business are so that they can be involved in the transaction. This will help with your due diligence and it will also give funders more confidence that a transaction will be successful in the long run.
9. Be prepared – Transactions of this nature tend to have a very quick turnaround. You must ensure that you have the necessary funds ready to complete the transaction. This will give confidence to administrators and any funders that you are serious, which is crucial in such a competitive situation.
10. Getting good advice is essential – You should use a reputable firm of solicitors and accountants that have experience in insolvency transactions, as they differ significantly from a solvent transaction. Proper advice can save you time and money.
Buying a business out of administration is not without risk and it can be a stressful experience. To help alleviate this stress and ensure every aspect of a transaction is taken into consideration, please contact Brown Butler by visiting www.brownbutler.com.