By Kynan West

The recent failures of high profile businesses Miss Chu’s and Pie Face highlight how a seemingly good business can fall over. Business failures are not necessarily a result of poor profitability but often poor cash flow or management. With this in mind, purchasing a business that is in Administration can be a great opportunity to purchase a business that would not otherwise come up for sale.

If the opportunity presents itself it is essential to be aware of the unique process that buying a business in Administration entails.

The Administrator’s approach

An Administrator effectively acts as a caretaker of an insolvent business. Their role is to represent the best interests of creditors and achieve an outcome that results in the highest return.

The time from the formal appointment of an Administrator through to the decision on the company’s future, is an incredibly tight time-frame for potential buyers. Buyers have less than a month to express their interest, conduct due diligence and put forward a proposal for the Administrator to consider.

As a buyer, you should be aware of the following:

  • By law, Administrators have to write a report and hold a creditors meeting that sets out what’s in the best interests of creditors all within 20 business days after being appointed.
  • In the process of preparing this report, the Administrator will seek proposals from prospective buyers and provide interested parties with access to company information.
  • During the Administration a moratorium on claims by creditors exists (including those made by landlords, an important point for retail businesses). This allows the Administrator to continue the normal operations of the business.

Consider the liabilities

One of the benefits of buying a business that is in Administration is a buyer will not have legal responsibility for past debts of the business. Keeping in mind the Administrator’s obligations to creditors, an offer you make that provides for some monies to be paid to creditors may provide a better outcome than the alternatives. In which case, an Administrator is likely to recommend to creditors that your offer be accepted.

Read the fine print

It is important to remember that any contract of sale that is drawn up for the business will be quite different to an ordinary sale contract. It will not include representations or warranties and will always be on an “as is, where is” basis. This is because the Administrator will not have knowledge of the business to be able to warrant its past or future performance. You will not be able to negotiate on this point with an Administrator, so buyer beware.

It is also important to understand that existing contracts with suppliers might be void when the company entered Administration. This is because supplier contracts often include special clauses that give them the right to terminate the contract if the business becomes insolvent.

So before making your offer, talk to key suppliers to firm up their continued support of the business on essentially the same terms and conditions. The outcome of these discussions can have a material bearing on whether you will in fact make an offer and/or the value of your offer.

Practical steps

  • If you’re interested in buying a business in Administration, make contact with the Administrator as soon as possible to express your interest and to stay involved in the sale process.
  • Engage quality lawyers and accountants from the start who understand the nuances of buying a business out of insolvency.
  • Understand the Administrators time frames if you are serious about buying the business.
  • Our tip is to put forward your best offer from the outset to increase your chance of success. The Administrator will not waste time with tyre kickers.
  • Sales of businesses in Administration can be surprisingly competitive. If you are a serious buyer let the Administrator know you can move quickly and have the resources to fully finance the deal.

Have you ever purchased a business or assets from an Administrator or Liquidator? Tell us your experience in the comments below.

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