hat risks should be considered when buying an insolvent business
You must make sure your due diligence establishes the quantum of employee liabilities you are taking on. Employees who work in the insolvent business prior to completion will transfer to the buyer under the Transfer of Undertaking (Protection of Employment) Regulations 2006 (TUPE) (as they continue to apply after Brexit). If you want to make employees redundant as part of the deal the redundancy costs will fall on you. You will want to consult with staff on the business, the transfer and on redundancies, whereas the directors of the seller will be concerned about you destabilising their workforce. Often TUPE liabilities and risk are a key negotiating point on price, with the buyer looking to reduce the headline figure by the amount of the TUPE liabilities they may incur.
Stock you believe you are buying may be subject to retention of title claims, and you should look for this as part of your due diligence. You also need to think about where future stock will come from. A trade buyer may have its own supply chain that it can bring in but if you are relying on the seller’s suppliers you may have to make ransom payments and clear the seller’s arrears to be taken off stop.
Click here to read more about retention of title claims.
The seller is likely to operate out of leased premises. The administrators can grant a licence to occupy that allows you to continue trading from the same premises for a short period, usually three months, on the basis that you pay rent accruing during the licence period. This gives you time to either agree terms with the landlord to take over the lease or to move the business into other premises. The landlord may demand payment of the seller’s rent arrears before it will agree to assign the lease to you.
Important contracts may terminate on administration of the seller, or the counter-party may not agree to assign or novate contracts to the buyer. You need to review this as part of your due diligence, including software and other licences.
Intellectual property and trademarks
You must confirm whether important intellectual property rights and trademarks are assets of the seller. They are often held by, or registered in, the name of a parent or group company and you must make sure there is an agreed mechanism for them to be assigned to the buyer.
Accruals and pre-payments
It is important that your due diligence identifies accruals and pre-payments. If a customer has paid in advance for goods or services you will want that payment transferred to the buyer if it is going to fulfil the order.
Transitional Services Agreement
You will need to think about how you are going to operate the business on day 1. You need to work out what practical support you may need to trade in the short term and agree with the administrators how the seller or its group can continue to provide those services until you can make your own provision. Merchant services are a typical example.
The administrators are unlikely to sell the book debts to you but they may agree you can collect them. This avoids the risk of aggressive recovery action being taken against your new customers.
Do you want to acquire and continue to use the same business name? If the distressed business is only one division of the seller’s group this might not be possible, and you must consider how much of the goodwill you are paying for is attached to the name. If the buyer is a company owned or run by the directors or management team of the seller, or if you wish to employ all or some of them in senior positions, you will need to think about the pre-pack regulations and restrictions on the use of a prohibited name.
Click here to read more about re-use of company names.