It can be tempting to buy a company in administration. The prospect of a low price can be alluring but, remember, it failed for a reason.
For that reason, you should tread very carefully when considering whether to purchase a business in administration. While you may be experienced in buying companies, the process is not the same when it comes to administration.
So, what should you look out for? In order to answer this, we’ve compiled a list of essential dos and don’ts when it comes to buying a company in administration.
Do: Research the Market
When launching a new business, most people expect to make a couple of mistakes. Speaking simply, this is not a problem if you have more successes than mistakes.
The difficulty of buying a company in administration is that it’s already in a position where too many mistakes have been made. That means it can’t really afford anymore, so the question you have to ask yourself is, “Can I turn this ship around”?
Keeping this in mind, you shouldn’t really target any businesses in industries that you don’t have experience in, unless you’re comfortable with losing money until you’ve caught up.
This is not the only consideration, though. You need to think about the size of company you want to take on, along with its location, the role you’re going to play and how you’re going to finance it.
Turning a business around takes a lot of hard work and can sometimes feel like a luck of the draw. Are you prepared to work every night? What if it takes longer than you expect? Do you have a clear idea of how you can access additional funding?
Launching a business allows you to mould it as you wish over a longer period of time, but buying one in administration comes ready made. Are you sure you know what you want to buy?
Don’t: Expect Assurances
Being confident you’re the right person to save a company is just half the battle. You also need to be comfortable with the risks you’ll be taking.
Unlike purchasing a typical business, you won’t be dealing with the business owners, you’ll be negotiating with an administrator. As a result, you’ll be purchasing the business from someone with little knowledge of it.
That means everything you buy will be “sold as seen”. The administrator won’t be willing to take any personal liability, so things like warranties, representations, indemnities and titles for assets generally will not be available.
Either way, the responsibility will be on you as the buyer to inspect the assets and ensure you have the correct title. This is just one of the reasons buying a company in administration is considered riskier. If you make a mistake, there’s no one to go after.
Do: Quiz the Administrator
While the administrator will not be an expert in the business you are buying, they will, nevertheless, have some information you need, so don’t beat around the bush.
Remember, you’re not dealing with the owners, so don’t let politeness get in the way of the tough questions you need to ask about exactly what you’re getting into.
The length and quality of the answer you receive may vary, but try to ask the following:
- What are the main failings of the business to date?
- Have these failings been addressed?
- Could the business be viable if sales and costs were reduced?
- How many staff did the business loose when it entered administration?
- Are the remaining staff capable of running the business?
- How much stock does the business hold?
- What is the quality of the stock?
- What is the status of major contracts?
As said, the quality of answers you receive may vary, but you won’t know until you ask. Regardless of whether you’re happy with the answers, you’ll need to do your own independent research.
Don’t: Ignore TUPE
Buying a company in administration can be appealing if you’re targeting a business with an established brand that you can gut and relaunch. If this is your plan, then make sure you understand whether TUPE will impact your plans.
TUPE stands for Transfer of Undertakings (Protection of Employment) and is used to protect employees rights when a business is sold.
The result of TUPE is, in short, that you may have to protect the employment of everyone who works at the company you’re buying, on the same contract terms that they previously enjoyed.
This can present a big obstacle if your plan was to cut back on staff to reduce overheads or start again with a brand new team.
Regardless of TUPE, the transfer (or non-transfer) of existing employees is always a minefield, so it’ll be something you definitely want to seek legal advice about.
Do: Understand Sale Structure
A business can be sold in one of two ways, whether by a sale of shares or sale of assets.
If you’re buying a company in administration, it’s likely you’ll be buying assets, not shares, but the latter does happen. The structure of the sale will have a significant impact on the offer you put forward, so it’s always worth double checking exactly what you’re buying.
Alongside what your buying, you’ll need to consider how you’re paying for it. Ask whether the deal is one payment, deferred consideration or a mixture of upfront and deferred.
Don’t: Forget to Plan Your Exit
It seems crazy to talk about planning your exit in an article about buying a business, but the reality is you have to plan for the worst case scenario. After all, you’re buying a company that’s struggling, so the possibility you won’t be able to fix it does exist.
Unfortunately, lots of people plan for getting into a business, but forget to have a plan to get out. What are the key indicators you need to miss before you consider an exit? Are you buying a business with assets that could be resold easily?
Do: Get Professional Help
Buying a company in administration comes with its own (fairly sizeable) set of risks.
As they say, though, risk comes with reward, so purchasing a failing business could be a very clever move.
To do so successfully you need to get as much research done as you can and perform as much due diligence as possible. The latter especially is incredibly important in buying a normal business, nevermind one in administration, where you’ll have less access to key information.
Such a task should not be taken on without professional help. It’s okay knowing the process, but that is no substitute for expertise and experience.
The last “do”, then, is finding a solicitor you can trust to guide you through the process and protect your interests.
