The UK Government has supported Businesses throughout the COVID-19 outbreak with the introduction of new support measures, including CBILs, Bounce Back, Furlough, VAT deferral, supplier, and landlord concessions.
These schemes have been introduced to support those Businesses that are losing revenue and seeing cash flow disrupted as a result of the coronavirus. Although these products have been effective in supporting Businesses throughout the outbreak, it is likely that as the support measures are eased and pressure mounts on cash flow, some Businesses will unfortunately fail. Business failure will be an unfortunate consequence of COVID-19 however opportunities will arise to facilitate acquisitions.
Good deals can be achieved when acquiring from an Administrator and this approach should not be neglected. The key to acquiring from Administration is to plan effectively to ensure the best deal is achieved and risk is minimised, all whilst working to a tight deadline. Quick decision making is imperative and as a buyer, you must be confident in your abilities.
There are a number of advantages to acquiring from Administration including the opportunity to remove a competitor and take over key customer contracts, acquire trade and assets at a lower cost than would otherwise be paid, and restore profitability to Business units through the removal of debt servicing costs.
Deals with Administrators are generally for the trade and assets of a Business and provides for a more flexible buying strategy, allowing buyers to either ‘cherry pick’ the assets of the target, leaving behind onerous contracts and unprofitable business units or even bid for the Business as a whole. Although this allows buyers to leave behind the targets liabilities, Administrator will not provide for warranties and so a Buyer Beware approach should be taken.
In our experience the immediate requirement is to assess the insolvent group, identifying the key areas you wish to acquire and distinguishing it from any parts you wish to leave behind. Buying trade and assets rather than shares means you only buy what has been recorded, so extra care should be given to ensure all items are properly documented. The easier part of buying from an Administrator is that they are not emotionally attached to the business and decisions are financially driven.
Administration provides a stay of execution to protect insolvent businesses whilst seeking a solution. Administrators will either choose to be appointed and continue trading the company whilst considering its options, or choose to negotiate a pre-pack, selling the company immediately upon appointment. Not all Administrators will choose to trade therefore there can quite often be time pressure on placing a bid.
Trade acquisitions, MBOs and MBIs provide possible exit solutions to an Administrator. Trade & MBO will already understand the market the business operates in and an MBI should either be from the sector or establish very quickly whether there is any credible Management within the failing group to support an MBI bid. Having credible incumbent Management who are willing to invest their own cash provides extra comfort to funders.
Buyers need to understand the customers, markets, and key drivers of the target business in sufficient detail and have a robust plan ready for post-completion. A key part of the process is to liaise with key customers and suppliers in the period prior to completion so that the business can trade post deal. The buyer will need to convince their funders that they understand why the business failed and that this won’t be repeated.
Deciding on a price to bid in an insolvent scenario is different to that of a solvent trading entity. A number of factors will influence the price and whilst a group can be insolvent, individual business units within the group may not be. Knowing how much the charge holders are owed can provide a good steer on price however any offer should reflect the inability to complete full due diligence, the lack of warranty cover from the Administrators, and the potential for ransom payments from suppliers for unpaid liabilities.
Above all be prepared with your advisors for a very fast rollercoaster ride remaining level headed throughout so clear quick decisions can be taken.
