Buying a Business to Turnaround Outside Insolvency

Businesses in difficulty will usually be showing signs of it such as receipt of a County Court Judgement or CCJ or a company statutory demand, well before failure, that may lead its owners to seek a sale. This article looks at the issues involved in buying a business outside of a formal process.

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Buying a business which is in trouble but has not gone into a formal insolvency procedure will involve essentially the same process of investigation, assessment, negotiation and planning and execution of the post acquisition strategy as any normal purchase. Issues such as the transferring of employee liabilities under TUPE will be exactly the same as in any other business sale.

Of course given that you know that the businesses in difficulties this general approach needs to be subject to the added degree of caution as discussed in this chapter so far.

Such transactions may also in practice be more difficult to finance as:

you may find difficulty in raising finance against the assets being bought as not only will lenders be concerned about lending into a business in difficulty (no bank likes to simply take on somebody else’s problem loan) but you may also find a more fundamental
problem in that you may have difficulty in obtaining a whitewash agreement in order to deal with the issue of financial assistance
against this in some cases sellers, particularly if they are large corporates who are looking to dispose of under performing subsidiary in a way that avoids bad publicity for the main group may be prepared to offer a ‘dowry’ to a new owner to take the business off their hands. It is rare but it does sometimes happen.

But for a business in difficulty finance is a serious issue and you will have to look very carefully at how much investment it will take to restore a business to solvency. In particular, a business that is in difficulty is likely to have stretched its creditors who will have been unwilling to give the credit terms that it is currently taking. You will generally find that as soon as you have bought the business, suppliers will seek to be paid up to date to recover their position. So in your working capital requirement planning you may have to allow specifically for funds to bring overdue creditors up-to-date to deal with this rush for payment.

To ensure that you raise the maximum amount of funding in as efficient and timely manner as possible you need to ensure you work with an appropriate finance broker as set out in Chapter 10. In addition, as the Turnaround Equity Finder service mentioned above operates to introduce investors into turnaround situations you could use this to attempt to raise further turnaround equity for the business.

Given that there may well be issues of insolvency at the time that you buy the business be there are also number of potential insolvency issues on which will need to take advice:

What is the risk that the sale can be voidable in the future? If you buy the business and assets from Company which is insolvent at the time and which within two years of the deal goes into liquidation or administration, the IP appointed may be able to challenge the sale as a transaction at an undervalue. To do so they will need to prove both of the business was insolvent at the time and that the sale price was significantly less than what the assets were really worth.
What is your potential exposure as the new owner and director of a business in difficulty to personal liability for its debts as a result of wrongful or fraudulent trading? If as a director you allow the company to continue to trade past the point where you know, or the court holds that a director should have reasonably known, that there was no reasonable prospect of avoiding insolvent liquidation then a liquidator can apply to make you personally responsible for contributing towards the company’s debts through an action for wrongful trading. If you’ve traded the business in a way designs to defraud creditors you can also be personally liable as well as facing criminal penalties.
What is your potential exposure as a director of the business to any deficit in the company’s pension scheme? Under legislation that is currently being introduced at the time of writing it appears that directors may be at risk of being made personally liable for any deficits that final salary pension schemes may suffer in the event of insolvency.
How can you protect your existing businesses from any risk of being dragged down by a poor purchase? This is a case where ensuring that you have a strong bulkhead defence in place is vital. You should for example try to ensure that there are no cross guarantees between the company that you use to buy the business in difficulty, and the other companies in your group.