If you are considering the purchase of a business in financial difficulties your best option might be pre-pack administration. Pre-pack administration has made it in the news in a number of high-profile cases, including the Paperchase brand being saved this way. For more details on administration see here.
When purchasing a company by way of pre-pack administration, you should consider the following points:
1.Timing
Time is one of the most important factors in a sale of this kind. The longer the business is teetering on the edge of administration the greater the risk to its reputation and financial position. This pressure though can work in favour of the buyer when negotiating the price.
2. Sale publicity
Given the nature of a pre-pack sale it is possible that there is no publicity at all. Potential buyers may be identified by the company prior to the appointment of the administrator and approaches made.
3. Price
The administrator is required to try to obtain the best price they can even on a pre-pack sale where terms are agreed prior to their appointment. Therefore, it is imperative when attempting a pre-pack purchase that the price agreed is not unduly low. If the buyer is in the same industry as the company in question it is likely they will know whether their offer is the best price that could be expected under the circumstances.it is difficult though to make a firm offer without having the time to do thorough due diligence on the business.
4. Warranties
On a normal sale the buyer would expect the seller to give significant warranties as to the condition of the business. If any of these were then found not to be true, the buyer could reclaim part of the purchase price from the seller.
However, when purchasing a business out of administration the insolvency practitioner will be likely to refuse to give any warranties. On completion of the sale of the business the administrator needs to distribute the proceeds to the creditors, if they were obliged to give warranties, they would be unable to do this in case there is a claim later.
5. Liability of the administrator
A prospective purchaser needs to be aware that the administrator is unlikely to have any personal liability for the sale. this means that they might not be able to bring a claim against either the company or the administrator if there is a problem after buying the business. This risk should be reflected in the price paid.
6. Title of the insolvent company to its assets
The buyer should make sure that the company owns the business and assets it purports to sell. Where there is a group of companies involved, assets may have been moved around the group. This should, though, have been properly documented.
It is also possible that the company has bought assets which it has not yet fully paid for. Often in this situation the supplier will include terms that it owns the assets until the supplier has been paid. In reality this may mean the buyer has to deal with the supplier after purchase of the business to obtain title to these assets. This risk should be reflected in the price the buyer is to pay for the business.
7. Discharge of security over sale assets
If any of the assets of the business are subject to a fixed charge the charge will continue over the assets if sold to the buyer unless a court order has been obtained to the contrary. Therefore the buyer should obtain the consent of the holders of the charges to release them on payment of the outstanding amounts from the purchase price.
8. Employees
One of the benefits to buying the assets of a company rather than the company itself is that the majority of the liabilities remain with the company. However, when purchasing a business as a going concern the Transfer of Undertakings (Protection of Employment) Regulations 2006 (more commonly known as TUPE) may apply, which would mean the employees would also transfer along with the business. The purchase price should be adjusted to reflect any liability the buyer is going to assume in relation to these employees.
9. Property
The timing constraints inherent in a pre-pack purchase mean that it unlikely the buyer will be able to carry out the normal searches to confirm ownership of any properties. It is possible though that the seller will be able to provide copies of the title deeds for inspection by the buyer and site visits should be undertaken where time permits.
If any of the properties are leased consent may be required from the landlord to assign the leases to the buyer. Often consent cannot be obtained prior to the sale due to the lack of time and to ensure the sale remains confidential. For this reason, it may be possible to negotiate withholding the amount attributable to the leases from the purchase price until consent has been obtained but this exposes the buyer to the risk the landlord may not consent.
10. Book debts
The company’s book debts may be one of its most valuable assets and if so, their inclusion should be negotiated as part of the purchase of the business. However, the buyer should consider whether they is likely to recover all of these debts when agreeing the price.