Selling distressed businesses

Restructuring and Insolvency

Richard Pinder, Director LC Barlborough comments for Yorkshire Business Insider March feature in part 3 of series DEALS:  Turnaround selling distressed business.

If your business is experiencing financial distress and youre looking to sell it, our first piece of advice is not to be afraid of the insolvency process. Rescue is always the priority. 

However, confusion surrounding it - and fear of repercussions from seeking advice from a corporate recovery professional - means that many owner managers often leave it too late to get help. We really do need to debunk the myth that asking an Insolvency Practitioner (IP) for guidance will automatically lead to the closure of the business. It absolutely doesnt.

Even at the later stages, distress doesnt mean disaster. From time to time, we are all faced with a situation or posed a question that we dont know the answer to. By working with specialists, however, youre best placed to find a solution. 

Our priority - and that of all restructuring firms - is always to try to save a business if possible.  Where we are referred early enough, we can usually develop a practical strategy to put the company back on a steady footing and into the best possible position for sale.

The earlier we are contacted, the more non-insolvency options are available, as the business is often showing less signs of financial distress.  We are often able to assist with sourcing finance to effect a turnaround strategy, or restructure existing debt to alleviate a short term cash flow problem.  We can also negotiate with potential problem creditors on behalf of the Company and seek time to pay in respect of outstanding amounts or arrears, this is often used to deal with HMRC and give the Company time to trade out of their current financial position, and restructure the creditor position without the need for additional funding.

If a formal restructuring process is required, a Company Voluntary Arrangement (CVA) procedure is suitable for many more businesses than just high street brands and large multiple retailer chains. As well as engaging creditors up-front, a CVA offers flexibility to be tailored towards very particular circumstances such as future lockdowns and the constraints of the tier systems. Ites a helpful recovery option to buy time until business picks up and can also offer some debt forgiveness.

Pre-pack administrations can also be the right option in some circumstances. They are, however, now subject to increased external scrutiny - particularly where business sales to connected parties are involved.  

In October last year, rules around pre-packs and the sale of businesses to connected parties were tightened and the government is to update associated legislation to ensure that deals with connected parties face independent scrutiny. Ites intended that this will improve transparency after a series of high-profile deals that involved industry moguls and private equity firms buying back assets - leaving creditors nursing heavy losses.

In certain circumstances, we sometimes find there are no other interested parties in a distressed business, so a sale to a connected party is a better realisation than a forced sale of the assets at auction. In addition, when there is third party interest in a pre-pack, the incumbent management is usually so intrinsic to the previous success of the business, ites recognised that without their involvement, ites often not worth purchasing. 

Value preservation is key and whilst transparency is good it can also sometimes lead to a reduction in value once key competitors learn of an impending problem.

Pre-packs do remain a viable option in many cases but, if this is a route that youre thinking of taking, make sure you take advice from a reputable and licensed Insolvency Practitioner who can help you steer the correct path. Those who get it wrong could face ongoing - and often costly challenges.


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