The most important things first.
• Be prepared to lose your investment!
• Do not rely on buying an insolvent company as your only future income or investment
• If it smells off it usually is! Save your money!
Businesses in trouble refer to those in that are struggling to pay their debts, needing saving. Buying a company in trouble is very different from buying a profitable one that you expect to make a living from it.
1. Identify your target
Before launching straight into a deal, be sure you know what kind of business you are looking for. Do not just say you are looking for anything!!! Not knowing would be extremely worrying! You’re not just buying a business, if you buy a distressed business, it is your responsibility to turn it around. The future of it will depend on your hard work, luck, and money.
Perhaps creating a target term sheet will be helpful. Ask yourself the following questions:
• What type of business do I want to acquire?
• What county/state do I want to buy in?
• What size company do I want to buy?
• What market do I want to be involved in?
• Do I have a target price structure?
• Do I have the money available to fund the purchase?
• Do I have a source of finance to help with the purchase? Or do I need to find one?
• Will I run the company? If so, how many days a week?
• Do I have someone who can help me run the company? Will someone else run it?
2. Prepare an asset/means report.
If the company is in administration, most Insolvency Practitioners will look to see if you have the means available to buy their clients assets. Ensure you have this made so that you can acquire the business faster. Organize a letter from funders, if funding is required. This allows banks and means of proof to be readily available.
3. Create a list of contacts.
Find some contacts who can help you to find the insolvent businesses to purchase. A lawyer or accountant will be needed at the very least.
• Strike up relationships with licensed insolvency practitioners, to find buying opportunities. This can quickly be done by just searching online. Tell them your business target types and send a synopsis of what you’re looking for. Each insolvency practitioner/administrator will market the asses of firms they’re working with – so keep a close eye. Be aware though that they often outsource the sales process to a Chartered Surveying/Valuer firm.
• Check the National Newspapers as they release Insolvency Practitioners adverts of all those companies they are handling,
• Create links with companies looking to fall into administration they will need you!
• Do google searches
• Check the news
4. Evaluation
Design your own due diligence to sift opportunities initially:
• What/Who caused the business failure?
• Has the cause been addressed?
• What is the market for its products?
• Is there a profitable niche?
• If sales decrease/cost decrease, can the business be viable?
• Is the company in travelling distance for you?
• Is the existing management capable of running the company? If not who will? Can you be there 5 days a week?
• What are the business’s objectives? Do they align yours?
• What is the exit strategy?
• What exactly are you buying? Just the name? the goodwill? Assets? Customer base?
Stick to your own due diligence when assessing each opportunity. Do not deviate from the planned target type, size, market – unless you have wide experience! As soon as you see a good opportunity, so long it matches your criteria – move fast!!
5. Ensure you understand the deal.
What are you buying? It is likely that you’ll be buying the debtor book – stock, work in progress and all sorts of assets (financed and unencumbered) should be considered.
Is the payment in one? Or can you get deferred consideration? A mix of both? Usually, a time to acquire deal can be made. Generally, the office holder will want a lump of the sum up front to cover their costs.
Walk around the place, touch it, ask questions, what went wrong? Did the best customers leave? Can it supply cost-effectively in the future? Did human assets walk out as insolvency practitioners walked in? will the hope for new products or services ever come off the ground? Is management actually motivated or are they just serving time whilst looking for something better?
6. Is working capital required?
Forecast sensibly. How much money is required, after buying the company? What working capital is needed? – there is no point buying a business and then running out of cash!
Use a valuer to assess the assets. The business itself will do this, however, you will not get access to this figure. Instead, use your own knowledge and links, to assess the assets worth as best you can. This will allow you to get a fair price to open at. Ensure you have a maximum value in mind. Lawyers should be used to advise you at all times.
• Under S2.16 Insolvency Act 1986, it is not allowed for the reuse of trade names, unless permitted by the court or office holder and the acquirer was not involved with the failed company previously.
• When acquiring a business, be sure you know that employment contracts of all employees will need to be honoured, usually – due to TUPE.
• S 151 and 153 Companies Act 1985 ensure that the deal complies with the financial assistance rules.
• Involve landlords in all discussions, also secured asset lenders. Will new leases be offered? Will working capital needs be affected? Will deals be novated? Will suppliers still supply? Are customers still prepared to work with you?
If you do buy a business in trouble, it may be helpful to set benchmarks for growth – goals to stick to. Think strategically!
In summary, as you can see, buying a business in trouble has HIGH RISK and is NOT EASY. You must do your research, be prepared and be patient. Always seek help if you are unsure. Remember…it is up to you to save the company you buy – or else it will be a wasteful investment. Think it through thoroughly.
