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Buying an insolvent business from an Administrator

View profile for Matthew Fretten
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A sorry fact of the downturn in the economy is the fact that many previously thriving companies have been forced into insolvency. Although this is distressing for the company and all associated with it, it means there are some shrewd purchases to be made. Not all distressed businesses are unprofitable – many are well managed. Bad debts , changes in terms or protracted disputes can easily lead to cash flow problems thereby pushing the company into insolvency.

When an administrator is appointed he is obliged to maximise the monies realised from the sale of assets and must act in the interest of the creditors. These assets are usually sold at substantial discounts when a company is insolvent and offer good opportunities for potential buyers. However, be aware that there will be no guarantees or warranties and as the buyer usually has to move quickly there is not time for the rigorous checks that would normally be made. At a minimum there are several points which should be given some consideration:

  • Meet with management and staff so that their strengths and weaknesses can be assessed
  • Examine profit viability and working capital required
  • Meet with major customers
  • Consider the retention of title and contractual obligations
  • Be aware of TUPE Regulations – the rights of employees
  • Negotiating with administrator and management team

Matthew Fretten, Head of the Commercial Team at Frettens, says ”Purchasers of insolvent businesses can expect to pay low prices but should be prepared to accept that there is an increase in risk. Because of the time pressures involved in a distressed transaction it is advisable to have knowledge of the sector you are buying into, as there is no time to gain an understanding of the area of business. Please contact me or my team if you would like to discuss any potential business purchases.”