Buying an insolvent company

If you’re looking to buy the assets of an insolvent company, Keith Steven of KSA Group has the following invaluable advice.

You should tread carefully when buying an insolvent company or business. When a company enters administration or liquidation, it will already have severe financial problems. So you can’t expect to make profits from the beginning.

In the worst case scenario, the business may even fail, so you need to be prepared for this possibility. There will also be pressure from creditors and suppliers, on top of debt problems, and perhaps management issues in-house.

That said, there is every chance that you could turn things around and manage a successful company.

It is important to note that you can’t buy a company that’s in liquidation, as it’s no longer an entity, but you can still buy its assets.

What happens in administration?

When a company is struggling financially, and has been threatened or issued with legal actions, administration can safeguard the business while a sale or rescue plan is being prepared.

Control is handed over to appointed administrators to ensure that creditors’ best interests are met. If a sale can be secured, the business itself can continue running, and job contracts will usually be transferred over to the new company.

Pre-pack administration is a very quick process, whereby the company is bought by a third party or new company on the appointment of administrators.

How can I buy a company in administration?

  1. Decide what type of business you want to buy. Do your research, and use sector expertise you may already have to ensure that you’ve got what it takes to turn a business around. Managing a failing company is hard work, and needs a lot of dedication, so it pays to choose the right business before you put the effort in.  
  2. When trying to find a business to buy, research specialist websites, and ask insolvency firms for businesses that are for sale.
  3. Find the root cause of your chosen company’s problems, so you know exactly where cash injections are needed, or what areas need restructuring. What will you be taking on? Customers, suppliers, company name, employees? You may need to research the transfer of employment contracts.
  4. Organise accounts and an assets/means report, which should show insolvency practitioners how you will fund the business. Seek legal advice and help from advisors or solicitors.
  5. A failing business, or one in administration, will obviously need a significant cash injection to turn it around. There will have been areas that have been neglected in order to try and deal with the recent cashflow crunch.  Falling product quality, stemming from the cashflow problems in the run up to insolvency, as well as regulatory issues, can also present problems for acquirers.
  6. A full and comprehensive due diligence process is of paramount importance when looking at distressed assets. A professional with experience in due diligence should be taken on to examine facilities, supply chains, reputation, existing contracts, and everything else that could have contributed to the distressed state, to find out how this would affect the existing business of a purchaser.
  7. Success in any business is often down to the staff, so make sure that existing staff are on board with your new plans, and are not completely demoralised. They will be the most important people to ensure that the business succeeds.

How can I buy assets from a company in liquidation?

There is where the company ceases trading and its assets (for example premises, vehicles or customer base) are sold and turned into cash for creditors.

The company cannot be sold on, as it no longer exists. You can buy assets of the business by contacting the insolvency practitioner who is handling the liquidation. You can find the insolvency practitioner (IP) by searching sites online that provide information on businesses in liquidation, including The Gazette.   

However, the IP will often have appointed a third party, such as a chartered surveyor, to value and sell the assets on their behalf. That way, the IP cannot be accused by creditors of failing to get the best price.

Whether you’re buying a whole company, or just a few assets, always seek legal advice. Buying an insolvent business can be complex, so having guidance is crucial.

About the author

Keith Steven of KSA Group Ltd has been rescuing and turning around companies since 1994. He has worked for insolvency firms, turnaround funds and venture capital investors, and is the author of You can follow Keith on Google+.