Do you make an offer now or wait until the company has gone under and make a cut-price offer when an administrator has been appointed or where a bank has appointed a receiver? Imagine now, that the target company is your current employer!
This scenario occurs with increasing frequency during recession. The number of buyouts from administrators and receivers has increased substantially in the last twelve months.
Like all MBOs, a buy-out from an administrator or receiver will include the setting up of a purchasing company (or “Newco”). But there are a number of significant differences.
In structural terms, buy-outs from administrators or receivers will usually involve the acquisition of the underlying assets and goodwill of a company rather than the shares of the company itself. This is because the purchase of a company would mean Newco acquiring that company subject to all its liabilities, whether or not known to the buy-out team. In an asset purchase, only identified liabilities should be acquired, provided that the matter is handled properly.
The structure of the sale of the target’s assets and/or business will also need to be considered from a tax perspective to ensure that stamp duty, which can be up to 4%, is minimised. Administrators and receivers do, however, sometimes package sales in different, often inventive, ways to address practical and commercial issues.
Administrators and receivers are, invariably, under significant pressure to conclude the administration or receivership as soon as possible. This is particularly true where they are continuing to run the business as a going concern pending a sale and in all probability operating at a loss. Key employees become unsettled and major customers may well make other arrangements. The practical effect means that there will be very little time to reach a deal from the date that the company goes into administration or receivership.
Perhaps the single most difficult aspect for the management team to deal with, given the short time scale involved, will be raising the finance for the purchase. Management teams often employ corporate finance specialists to assist with this process.
Venture capital is likely to be problematic in the timescale and other sources of capital will need to be considered. In recent years invoice discounting companies and banks have moved quite aggressively into the buy-out market and it may be possible to fund the acquisition with the help of asset-backed finance. Managers may be asked to put personal money into the deal to show their commitment, so raising their own personal funds is also an issue.
Generally, an administrator or receiver will sell the assets and business of a company “as seen”. This means that there are unlikely to be any warranties given by the administrator or receiver as to the ownership or condition of the assets, or for example, the terms and conditions of important contracts or even the terms and conditions of employment of the employees.
If employees are still engaged in the business, the management will need to be aware that, under UK law, the contracts of employment and accrued rights of the employees will automatically transfer to the purchaser of that business. Implementing a post acquisition redundancy or reorganisation of the target business workforce or alteration of terms of employment can be a complex process. It will inevitably take up a significant amount of management time and can result in serious difficulties if not handled correctly.
If contracts with customers and suppliers, or indeed any other contracts, are to be taken over by Newco, thought will need to be given as to how this is effected. For example, there may be change of control clauses or prohibitions on transferring the agreements. The situation is often further complicated if the contracts are already partially completed, where there is accrued work-in-progress or advance payment has been made.
The stock and assets of the business in administration or receivership may need careful consideration. Aside from the aspect of establishing the quantity, condition, location and control of the assets, many suppliers incorporate “retention of title” clauses in their documentation.
The effect of this type of clause, if properly incorporated into the original contract, is for the supplier to retain title to the assets until payment has been received. Furthermore, the management team may well find that, if a supplier or secured creditor asserts a right to a stock or other asset which an administrator or receiver has sold, Newco may be bound under the terms of the agreement to return those goods to the administrator or receiver and to indemnify the administrator or receiver against the claims.
If it is necessary to take over the premises from which the business operates, the management team will need to establish quickly the ownership and condition of the building and the existence or otherwise of potential environmental problems associated with it or the surrounding land. If the property is leasehold, the landlord may decide to ask for security for rents as a condition for agreeing to its assignment. Alternatively, he could even seek to forfeit the lease.
These are just a few typical issues that arise on a buy-out from an administrator or receiver. Whilst there can be significant advantages to buying an insolvent business, it is vital that the management team is aware of the additional risks of this type of buy-out and proceeds with caution. The prudent management team should ensure that its advisers have the necessary insolvency expertise and, critically in view of the inevitably tight deadlines, the personnel resources to handle the funding and the buy-out within a demanding time-scale.
For further information regarding this article, please contact Daniel McCormack.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.