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Buying bust businesses

23 March 2010

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. A Willans partner 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.


If you need clear and pragmatic legal advice, we’re here to help so please get in touch.

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Chris Wills LLB (Hons)
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Chris Wills
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