Buying a company that’s under administration

Buying a company that’s entered into administration can seem like a quick and easy win, with a lowered asking price, a sale actively being sought and liabilities to creditors remaining with the seller.

In the current climate especially, cash-rich, acquisitive entrepreneurs may never again have such a good opportunity to buy companies in administration and potentially reap the rewards of reduced competition and revived consumer confidence in the post-coronavirus economy.

However, it is important not to dive straight in and make a hasty decision just because the price seems too good to resist. In this week’s blog, we list five things that you should bear in mind when buying a business that’s under administration.

Is it the type of business you want?

It’s easy to look at the price tag of a business that’s in administration, then at your bank balance, and decide to proceed based on that alone. However, running a business in a distressed state is not easy, especially if you have little or no experience in this regard.

If you acquire a distressed company in a sector in which you have little experience or interest, then you might quickly find yourself in over your head, and potentially out of pocket. If you don’t know the sector very well, then it will be more difficult for you to know how best to turn the business around.

For this reason, when exploring the possibility of acquiring a company out of administration, always take the time to consider whether it’s really the company for you and whether you have a solid turnaround plan. Consult with advisers who have experience in the sector and make sure it’s the right acquisition, rather than the wrong company with the right price tag.

Why did the company fail?

Finding out where and why the company you’re interested in ran into problems is vital and can help you get a step ahead of the game if you do decide to proceed, helping you pinpoint the areas that require work or restructuring ahead of time.

Ensure you look into the company’s accounts to see when and where it struggled and quiz the administrators as much as possible before making your move. This will help you identify the key issues the business has faced, is facing and, most importantly, could face again going forward.

Identifying mistakes that the previous owners have made along the way is a priceless opportunity to learn from mistakes without making them yourself and can help you to succeed where others might have failed.

Do your due diligence

This is of the utmost importance when taking on a distressed company and a key part of helping you identify the areas that brought it into that position in the first place.

In order to get as full a picture of the company’s position as possible, it is highly recommended that you hire a professional due diligence expert to look into the company’s facilities, its supply chains, contracts, reputation and anything else that may conceivably have lead it down the road to administration.

This is not only important for your plans to turn the business around, but it can also show up things that might mean you shouldn’t proceed. After all, administrators are merely agents of the selling company and will accept no personal liability and will not provide warranties for what they sell.

Acquiring a company without doing due diligence can not only make a turnaround difficult, it can come to hit your wider business.

The workforce

The workforce of a company in administration will be one of the trickiest things to deal with when taking it over. Those employees that have remained with the company will have been working and living under a great deal of stress while the company has been in administration and probably longer.

They will likely be concerned for their future livelihoods, demoralised from the company’s decline and perhaps hurt by the possible losses of their former colleagues through redundancy.

Therefore, communicating your business strategy and vision to them clearly and positively could be incredibly important to you re-establishing success and ensuring your acquisition proves to be worthwhile.

What’s more, from a legal standpoint, you will need to factor employee liabilities into your plans, with the Transfer of Undertaking (Protection of Employment) (TUPE) regulations likely transferring employee contracts to you, the buyer, automatically. This will mean you’re obligated to inform and consult with employees regarding the transfer of, and potential changes to, their contracts.

Be prepared to prove yourself

Finally, once you’ve made a decision to proceed with buying a company that’s under administration, you need to make sure that you can show that you are able to fund a takeover. Be ready to organise your accounts and prepare an asset/means report to show the company’s administrators or insolvency practitioners that you can fund it.

It is highly recommended that you seek legal advice from advisors and solicitors when undertaking this step.