| News & articles |
Buying bust businesses
Mar 23, 2010
Email this article
Printer friendly page
Based on previous post-recession
trends, business failures are likely to go on rising for some time to come with
an increasing number of insolvent businesses up for sale at knock-down prices.
If you have the funds to buy and the business fits with what you want, you can
make a good deal. Rob Ridd looks at
some of the practical and legal issues.
After initial contact with the
insolvency practitioner (IP) of a distressed company, the first step is usually
some form of confidentiality agreement. Its terms will probably be quite stringent,
for example including comprehensive non-solicitation provisions in relation to
staff and customers.
Often, the due diligence
material provided by the IP will be very thin, due to lack of time or knowledge.
Buyers will probably get much less assurance by way of information than they would
expect in a non-distressed sale.
It is generally accepted that the longer a
business is run by an IP, the more its value deteriorates. The IP will,
therefore, be keen to complete the sale as fast as possible so as to maximise
value for the company’s creditors. There is a potential advantage here for the prospective
buyer who can move quickly and is willing to accept a lower level of due
diligence.
On the other hand, for a number
of reasons, buyers still need enough time and information to conduct a proper
evaluation of the relevant assets before completing. For instance, there will
probably be a much lower level of warranty cover than in a non-distressed
transaction—representations and warranties are almost never provided in such sale
agreements.
IPs often go beyond merely
avoiding liability and add what have now become standard extensive exclusion clauses
covering such issues as the condition of the transferred assets and an
exclusion of the IP’s personal liability. Buyers may also be asked to provide wide
indemnities where there is any chance of the seller suffering post-completion
loss (eg where there is some risk of a time lag in the assignment of a contract
and the seller retains any liability).
The IP may go even further and insist
that the buyer provides a guarantor to cover the risk of substantial post-completion
exposure. A great deal of the risk that a seller would normally be expected to
take is, in this way, often offloaded onto the buyer.
In short, in the right
circumstances, there can be worthwhile commercial returns in buying a bust
business but it is also much more risky than a normal acquisition.
Rob Ridd trained with top international law firm Reed Smith. He
joined us last year from a Nottingham firm where he handled a wide range of
commercial work, including mergers and acquisitions. robert.ridd@willans.co.uk