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.
Our legal experts have been busy sharing valuable expertise in their first series of free webinars for employers, and businesses across the county who missed the live events can now…
The Coronavirus Business Interruption Loan Scheme (CBILS) has thrown a much-needed lifeline to businesses experiencing cashflow difficulties as a result of the coronavirus outbreak. 17 December 2020 Today, Rishi Sunak…
The global outbreak of coronavirus (COVID-19) and the government’s resulting emergency measures have had severe implications for many businesses. Read on for answers to some frequently-asked questions on corporate &…
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept”, you consent to the use of ALL cookies.
This website uses cookies to improve your experience while you navigate through our website. Out of these cookies, the cookies that are categorised as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyse and understand how you use our website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies but it may affect your browsing experience on our website. You can find our cookie policy here.
Necessary cookies are absolutely essential for our website to function and enable core functionality such as security and accessibility. These cookies do not store any personal information. You can block these cookies by changing your browser settings, but this may affect how the website functions.
We use performance cookies such as Google Analytics to help us count the number of visitors and to see how visitors move around our website when they are using it. This helps us to improve the way our website works, for example, by ensuring that users are finding what they are looking for easily. The cookies collect information in a way that does not directly identify anyone. For more information on how these cookies work, please see our cookie policy.