In the second of our series of articles (see our first article here) looking at buying businesses from administrators we look at some of the acquisition issues that you should be aware of when doing so.
- Speed of the Transaction – for those of you used to traditional M&A you will be used to the usual 3 month or so time period to effect the transaction. Acquisitions from administrators will typically be undertaken in a matter of weeks, if not faster. You will appreciate the effect that will have on the time to undertake due diligence (see further below) and to carefully consider the issues arising.
- Due Diligence – a typical M&A process will allow for time for issuing enquiries, having time to consider properly and fully prepared responses and then issuing further enquiries and so on. When acquiring from administrators there will be far more limited time to raise enquiries and the quality of the responses will not be the same as the administrator will either not have the time or the information to respond. Accordingly, the buyer will have to make a decision on less information and be more reliant on what third party due diligence can be undertaken.
- Sale Agreement – the agreement will be mechanical in nature, simply recording what is being bought and on what terms. A buyer will not receive the suite of warranties and indemnities that would be obtained in a traditional M&A transaction. Accordingly, it is very much on a buyer beware basis – there will be no come back against the administrator if things are not as expected. Indeed, with some matters (such as stock and employees) the buyer will be asked by the administrator to provide some assurances and indemnities to it.
- Stock – careful consideration needs to be given to the stock of the business. Much of it may be subject to retention of title claims by the supplier. There is therefore a risk that a buyer may find itself having to either hand back stock that it had acquired or pay the supplier to be allowed to obtain title to it. Accordingly, pricing the stock will be critical.
- Employees – they will transfer to the buyer under TUPE meaning that they will come across with continuity of service and their terms and conditions intact. Some employees may have been made redundant on or about the start of the administration. It is possible that TUPE may impact on the effectiveness of the redundancies so advice should be taken to assess the risk.
- Customers & Suppliers – bear in mind that they may have been adversely impacted by the administration and as a result may expect the buyer to make good certain losses. The buyer may not be legally obliged to do so but may have to in order to retain the commercial relationship.
- Debts – a discussion will need to be had with the administrator about whether the debts will be sold to the buyer or retained by the administrator and possibly collected by the buyer.
- Leasehold Property – quite often the transaction will happen too quickly to get landlord consent to an assignment. Whilst the administrator can give a licence to the buyer to use the property, a buyer needs to have regard to the risk of not obtaining a new lease from the landlord following completion.
- Equipment – careful due diligence will be required to ascertain whether any of the equipment is leased, hired etc rather than owned by the company in administration. If so, consideration will need to be given to the risk of not being able to come to an arrangement with the owner of the equipment.
Buying from an administrator can give a great opportunity to acquire a business at a significant discount to what it would have cost in a solvent sale. However, it comes with risks that need to be factored into the decision to go ahead and the pricing of the acquisition.
