Rachael Jenner, Senior Associate at Leonard Curtis Legal, reflects on how a purchase of a distressed business differs from buying a solvent one and how to be on the front foot in complex situations
Whilst many businesses are facing increasingly challenging economic conditions at the moment, there are others that will see those challenges as an opportunity for growth, with the chance to acquire a distressed business at an often reduced price.
Buying a distressed business however, which is likely to be insolvent and facing the appointment of formal administrators, comes with risks to the buyer. It is a complex process and there are many factors to consider throughout.
How does a distressed sale work?
Speed is the key to distressed sale transactions. The whole deal can often be completed within weeks, compared to a normal solvent sale which generally takes many months to get over the line. Understanding how a proposed administrator will approach each of the issues that may arise and the unique changes a sale by administrators brings to the overall acquisition process, is key to staying on the front foot. This is a lot easier when you are working within an experienced restructuring organisation like Leonard Curtis.
Navigating a distressed sale involves managing the buyeres expectations over any due diligence - which is normally limited - and the lack of warranty and indemnity protection.
This often flows the other way in a distressed sale situation, with the administrators looking to the buyer to indemnify them and the insolvent company against any risks arising from the sale.
Ites a game of nuances, identifying and making the buyer aware of the issues that are usually non-negotiable for the administrators, given their statutory and personal liabilities. This has to be balanced against ensuring the buyeres exposure on the deal is limited as far as possible and is usually based on knowledge of what a reasonable administrator will typically accept.
Insurance can provide some measure of protection to a buyer and reduce the risk that it may be exposed to. However the costs and coverage can be prohibitive.
Crucial advice also comes in here about the practical issues the buyer will face on day one after acquiring the business. Achieving a pragmatic solution for all parties involves acting quickly and proactively, anticipating problems with practical solutions, and understanding what can be negotiated as well as what cannot.
Not only does this benefit the buyer in minimising costs, but also the administrator, who will usually want to complete the transaction as quickly as possible to safeguard jobs, the future trading outlook of the business and to deliver the best outcome for creditors.
What sort of distressed sales look likely to take place?
Given the economic climate and the projected increase in company insolvencies generally at the moment, there are opportunities for well-established/cash rich businesses to purchase competitors or complimentary businesses in the particular market they operate in for a reduced price.
That target business may have a lucrative contract which the buyer wants to acquire or a key piece of equipment, or people with unique skills which the buyer needs in order to expand its operations or enhance its business offering.
A good example of this in recent years is when an investment company purchased the Laura Ashley brand from its administrators and partnered with NEXT to sell its homeware products.
It is likely that we will see further cases like this in the coming months, particularly in the retail and manufacturing sectors which have been seriously affected by recent supply chain issues and increased energy costs.
What are the benefits of a distressed sale for the buyer and seller?
The main benefit of any distressed sale is its ability to save jobs. This typically happens when the business is rescued in an administration, as opposed to a liquidation where the doors shut and everyone is told to go home.
These sales can help keep a tenant in premises where a liquidation might have seen the premises closed, and help maintain supplier relationships, continuing to serve the same operation under new ownership.
It is often the case that independent third-party purchasers can put fresh eyes on the business and effect a turnaround, with an injection of critical working capital funds giving the firm a new direction and lease of life.
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