Statistics show that more businesses go bust during a recovery than during a recession. Insolvency practitioners (IPs) are certainly busier now the economy has “turned a corner”. Over the last five years insolvency rates were kept low as mainly tired businesses with no future failed.
But now, healthier businesses are struggling as a direct consequence of the upturn: businesses need to grow to meet increasing demand, yet banks are loathe to provide capital, for example. The result is that more businesses will go bust. These business failures will provide opportunities for thriving businesses to expand through acquisition.
Businesses that fail during a recovery rather than a recession fail for very different reasons, namely lack of capital and bad management. They are not bad businesses and have every chance of making a successful turnaround.
Investors have always been attracted by the idea of picking up assets at fire sale prices and flipping the purchase to make a quick profit. But as “Homes Under the Hammer” viewers know, there are frequently complications post sale and anyone looking to dabble in this market should do their homework and go in with their eyes open.
Most, if not all, pre-packaged sales follow a period of negotiation between the would-be purchaser, the vendor, the IP and Administrator elect. If a purchaser can get involved at this stage, there are numerous advantages although there may be a premium on the price. The main advantage is time to conduct some level of due diligence. Time will still be of the essence and there won’t be time for a full due diligence exercise, but you will probably have time to properly appraise the business; approach key staff; have the assets valued; speak to key customers and suppliers, and plan the first two to three weeks/months trading.
Purchasers looking to buy the business after this stage and direct from the IP won’t have the time to conduct the same level of business appraisal. They are also likely to find themselves in a competitive tender process and may put in a lower bid than competitors with a more thorough understanding of the business.
Preparation and control are the two greatest allies when looking to purchase a struggling business. Find out as much as you can about the business and the reasons for its failure. Find out about key contracts, key suppliers and key personnel. Have a clear plan for how you are going to turn the failed business into a good one.
There is a presumption that the business and/or its assets will be sold at knock down prices. If you want to be taken seriously by the Insolvency Practitioner, then be realistic with your offer. Time will be tight and the IP will not have time for nuisance bids from “tyre-kickers”.
On the other hand, once in the negotiation process do not be tempted to overpay just to be successful. Have a good idea of your maximum price and stick to it. Look out for skeletons in the closet and be mindful of the liabilities that you may assuming either directly or inadvertently. Most employers are aware of their obligations in respect of employees’ rights under TUPE, but there may be less visible liabilities, for instance: customers may have paid a deposit or pre-paid for goods not yet received; contracts may be only partly fulfilled; suppliers may hold retention of title over goods they have supplied and want payment or return of the goods, or they may require a ransom payment before they recommence supply.
Finally, know who you are dealing with. IPs are commercial animals whose main aim is to achieve the best result for creditors in the shortest available time. Be aware of this when dealing with them and constructing the offer. It may be that an offer with the fewest strings and the shortest tail is more attractive than one for a greater consideration but over a longer period of time and with many caveats.
To find out when and where struggling businesses are for sale in a particular industry or geography, entrepreneurs need to get close to the coal face by hooking up with Turnaround Managers , or contacting IPs direct to get on their mailing lists. Let IPs know that you are interested and a potentially serious buyer.
Related topic: Buying a Business
John Dickinson is partner at Carter Backer Winter.
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