Buying a business from an administrator or receiver

You have been looking for opportunities to buy a business that compliments your existing business. It could be a competitor, someone in your supply chain or a business that adds value to your existing client base. You are aware of a potential target that is in financial distress. Do you wait and make a low offer when an administrator has been appointed or when a bank has appointed a receiver?

Like any Management Buy-Out or MBO's, a buy-out from a receiver will include the setting up of a purchasing company ("Newco") but there will be a number of significant differences from a normal buy-out.

Administrators and receivers are normally under great pressure to conclude a deal as soon as possible. The fundamental rule is to focus on making the deal work rather than completing a normal deal process involving the negotiation of heads of terms, a lengthy legal and financial due diligence process before negotiating complex legal documentation. This is particularly true when they are running a business as a going concern pending a sale. Key employees may exit and customers may move their account elsewhere.

As time is of the essence you will have to take a commercial view on many aspects of the deal which would ordinarily be dealt with in the legal documentation. There are certain aspects that your lawyer will be able to check (title to property, employee terms and conditions, whether any of the assets are subject to a charge) but the administrator or receiver are not the business owners but third party sales agents. As such they will not accept personal responsibility for anything and will not guarantee legal title to the assets. Normal contractual provisions such as warranties and indemnities and completion accounts (all of which would otherwise give rise to a post-completion price adjustment in the event of an unforeseen risk arising) will not be given and so this should be reflected in the price you offer. As a rule of thumb then the business is sold "as seen."

In terms of structuring the deal a buy-out should therefore involve the acquisition of the underlying assets and goodwill of the company rather than the shares in the company itself. This is because the acquisition of a company would mean Newco acquiring that company subject to all its historical liabilities whether or not known to the buy-out team. An asset purchase should involve acquiring only specifically identified assets and liabilities.

Given the timescales, raising finance for the purchase may also be difficult. Normal fundraising or venture capital finance has been more difficult to obtain during the recession so buy-out teams have had to be more innovative. Invoice discounting companies and banks providing asset-backed lending have moved into the buy-out market in recent years which may provide a useful source of funds. Members of the buy-out team may also be asked to put their own funds into the deal as evidence of their commitment.

The stock and assets of the business in administration or receivership need careful consideration. Many suppliers incorporate "retention of title" clauses in their terms and conditions of supply, the effect of which if properly incorporated, is for the supplier to retain title to the goods until payment has been received. The buy-out team may well find the supplier or another secured creditor asserting title to an asset which the administrator has purported to sell to Newco. In these circumstances NEWCO may be bound to return the goods and indemnify the administrator or receiver against any claims that have been made against them.

These are just a few of the issues that may arise on a buy-out from an administrator or receiver. Whilst there can be sound business reasons for buying an insolvent business it is vital that the buy-out teams are aware of the risks that the process involves and take appropriate advice from a suitably qualified expert.

For further information, please do not hesitate to contact the team at ORJ Solicitors, Lorraine Smith can be reached on 01785 275380 or email Lorraine.smith@orj.co.uk or visit our corporate webpage at www.orj.co.uk/corporate.php