It goes without saying that we are going through some challenging times in business.
Whether it is inflation or interest rates, war in Ukraine or political instability at home, lots of people and businesses are facing the unexpected, and that can sometimes lead to a word that strikes fear into the hearts of many business owners...Administration. But Administration is not necessarily the end.
It does not always mean failure. It could mean rescue, or rejuvenation. Countless businesses, from Apple, to Marvel, to Tesla have come back even stronger after facing these challenges.
Lets take a look at the facts about the economy and the process of business rescue.
What is the current economic climate?
The current economic climate presents extraordinary challenges for many businesses across the UK. Inflation reached its highest level for over 40 years in September 2022 and sits at approximately 10%.
Many businesses that benefitted from the government’s financial support measures during the height of the COVID-19 pandemic are repaying bounce back loans, whilst simultaneously facing soaring energy prices and supply chain issues resulting from Brexit, the pandemic or both.
Therefore, it is no surprise that there is an increasing demand for insolvency practitioners and the use of administration as a business rescue mechanism.
What are the objectives of an administration?
The main objectives are to:-
- rescue that distressed company.
- achieve a better result for its creditors than if were liquidated.
What are the opportunities for business rescue?
Some adaptable entrepreneurs and businesses are viewing the current economic climate as an opportunity to make strategic investments of the business and assets of a distressed company.
This is on the basis that the business of the distressed company has the potential to thrive but has been adversely affected by circumstances largely out of its control.
Jason Elliott, Partner and Head of Business Recovery at business recovery specialist Cowgills, described recent events as a “perfect storm” but added “although insolvencies were 5% higher in October 2022 than September 2022 and they are expected to rise consistently over the next 18-24 months entrepreneurs are seeing viable businesses across a range of sectors that can be rescued on the basis they have a solid customer proposition, have the potential to navigate the foreseeable headwinds and have not simply been propped up by financial support since the spring of 2020”.
Why purchase out of administration?
In addition to taking over a failing competitor’s business and the consolidation and diversification of existing workstreams, there are many advantages for the buyer of the business assets.
- The purchase price for the business assets is often significantly less than would otherwise be paid in a traditional merger and acquisitions transaction as those business assets are sold ‘as seen’ due to the need for the administrator to conclude the sale process quickly.
- The potential positive effect of the short sale process is that the buyer may potentially gain quicker access to new markets and new customer bases.
- In most circumstances, debt and creditor pressure is removed as the liability of the distressed company does not pass to the buyer.
In this series, Glenville Walker and Partners will explore the rationale and process of acquiring the business and assets of a distressed company and discuss the factors that need to be considered by a prospective buyer. Our next article on the agenda will focus on the risks of buying business assets and how a business purchase can be funded, which will be posted on Monday the 21st of November.