Comments from Paul Stringer, corporate finance partner at Cowgill Holloway, for the Bolton News Business Doctor column.
6th August 2008
Q: I am the managing director of a retail company, and have the opportunity to take over a small business that’s recently gone into administration. Could you tell me what factors might lead a company into this situation, and whether it is something I should be wary about?
A: “There has been a significant rise in the number of businesses that are running into financial difficulty. As the economic conditions worsen, both small and larger businesses are facing a downturn in profits, pressure from creditors to pay promptly and increasing bad debts as customers fail to pay. Those businesses which are highly leveraged or don’t have reserves of cash can soon find themselves unable to pay creditors or their funders and are soon faced with no option but to consider some form of insolvency proceedings.
“Before you consider buying a distressed business, it is essential that you understand the reasons why it has run into trouble. In some instances, a company can fail due to poor management or being geared too highly for the business to cope. However, if the underlying business is sound, there is some scope for turning it around. If you are the owner of an existing business, there is always the possibility that you can integrate products and services to provide you with new customer or complimentary products or the opportunity to reduce costs by creating synergies.
“Once you’ve confirmed that you are happy with your reasons for buying the business you need to consider how you will make the acquisition. There are two common methods to make your purchase. The first option is to purchase the shares of the company, which will require you to take over all of the assets and liabilities. In turn, you will have to sort out the reasons for the administration by settling creditor arrears or re-financing the company. The alternative is to buy the assets and goodwill of the business from the administrator. This route ensures that you buy all of the assets required to run the business whilst leaving the known and unknown liabilities of the old trading company behind for the administrator to deal with. This is generally the more appealing option, but varies from case to case depending on the business’ dependency on its suppliers and the damage that an asset sale will do to the goodwill of the business.
“Funding for these types of deals can vary, whether through asset-based lending, traditional loan financing or through your own cash injection. Whatever the acquisition or financing route you take, you must ensure that sufficient due diligence is undertaken to confirm your understanding of the prospects and running costs of the business to make sure that the acquisition does not fail at the first hurdle.
“Regardless of what you choose to do, it is advisable to seek professional guidance from the very beginning, as the routes to acquiring from an administrator are hazardous and a good advisor will see you safely through the process and ensure that you get the deal you want at the right price and the most efficient form to suit yours and the business’ needs.”
The information was correct at time of publishing but may now be out of date.