In part 2 of our business resilience series the Glenville Walker and Partners team take the bull by its horns and look at the risks of business rescue square in the eyes, whilst discovering just how a business owner may fund the buying of a business.
What are the risks of rescuing a business out of administration?
Buying the business assets is not without its risks and there are several factors that a buyer should be aware of.
- The administrator will have limited knowledge of the distressed business and its assets – stock, plant, machinery. Generally, there will not be any guarantees or warranties in respect of the business assets.
- Under the Transfer of Undertaking (Protection of Employment) Regulations 2006 (“TUPE”) may mean that the employment contracts of those employees will transfer automatically with the business protecting those employees’ rights to continue to be employed.
- Key contracts may require the consent of the other party to transfer the distressed company’s rights under the contract. However, the Buyer may find that that other party is owed funds from the Distressed Company which may lead to a renegotiation of contractual terms.
How can the business purchase be funded?
Given the time-sensitive nature of acquiring the business assets, most insolvency practitioners will insist on seeing an asset/means report as proof that the buyer has the funds to make the acquisition. Therefore, it is essential to have funding in place to complete the transaction in a timely manner. But what options are available to buyers?
- Personal FundsAs the purchase of the businesses assets is usually at a significantly reduced price, many entrepreneurs or businesses may utilise their own funds to finance the acquisition.This method of finance is generally the most attractive option for administrators who can use the cash received at completion to quickly satisfy more of the debts owed to creditors post-completion. However, the Buyer should ensure it has access to the necessary available funds in order to maintain good cashflow post-completion and integrate the assets acquired from the distressed company into its business.
- Traditional Business Bank LoanBuyers may obtain a traditional business bank loan to finance the acquisition. Generally, the bank will take security over some or all of the business assets and it is unlikely that the bank will negotiate its lending terms with the buyer.
- Non-traditional Third-Party FinancingThere are a growing number of ‘non-traditional’ sources of third-party financing that can provide funding to make/assist with the acquisition. Typically, these sources can be private equity firms or cash-rich individuals who expect equity and involvement in the business’s management decisions in return for providing the finance.
ConclusionAcquiring business assets is usually completed under tight timeframes with buyers required to move quickly if the right business rescue opportunity is presented to them. It is crucial to be prepared, clear about your intentions, understand the potential risks and rewards and have adequate funding in place to acquire and run the business post-completion as administrators are, in many instances, under pressure to conclude a sale in weeks rather than months.
Need assistance?If you would like any help and advice on purchasing out of administration and funding, please contact our specialist corporate team on 0151 305 9650 or email firstname.lastname@example.org.
This article is not intended to be interpreted as advice.
Our next article in this series, will explore the importance of due diligence when buying a business in administration.