Buying a Business Well Below the Market Value

For commercially astute entrepreneurs, the increasing number of businesses falling into financial trouble post Covid-19, presents a unique opportunity to strategically acquire businesses that add value to the core business.

Mike Dyer of Begbies Traynor - the UK’s leading corporate rescue and recovery practice explains exactly what you need to know and how to spot a great opportunity.

Buying a business out of administration: What you need to know

Administration is a formal insolvency process which gives a distressed company the time and breathing space needed to consider their next move, safe from the threat of legal action. Just because a company is in administration, however, does not necessarily mean the underlying business is a bad one. On the contrary, it is often possible to turn around the fortunes and performance of an ailing business, and placing the company into administration - or an alternative restructuring process - is often the best way of achieving this.

Understanding company administration

Administration is not a long-term solution in itself; sooner or later the company will need to exit this process. There are a number of exit routes out of administration, one of which is the sale of the company as a going concern. This can be done in two main ways; either as a pre-agreed sale known as a ‘pre-pack’ administration, or alternatively on the open market when the appointed administrator markets the business for sale.

- Pre-pack administration – A pre-pack administration involves the sale of a distressed company whereby the purchase is negotiated and agreed before the company enters administration. As soon as the company enters administration, the sale to the new company will complete immediately, allowing for a seamless transition with little to no disruption to trade, customers, or employees.

- Administration – When a company enters administration, the appointed administrator takes control of the company while a route forward is plotted. Depending on the financial and operational position of the company, they may continue to trade the business while a buyer is found. When buying a business out of administration, you will be buying directly from the administrator rather than the previous owners.

Purchasing a company out of administration

As a buyer, there are a number of advantages in buying a distressed company out of administration rather than opting for one which is in a stronger current position.

- Cost – Administrators have a duty to maximise the value of the company and achieve the best returns possible for all creditors. While administrators are obligated to sell the business for the best price, the fact is that as soon as a company enters administration, it’s value instantly decreases. The uncertainty surrounding the future of the company has an immediate effect on its desirability and this can work in your favour if you are looking to negotiate a deal. Chosen correctly, buying a business out of administration can represent incredibly good value.

- Profitable areas – When buying a company out of administration or an alternative formal insolvency process, you can ‘cherry-pick’ the desirable assets of the business you would like to purchase, leaving the liabilities ad any non-performing elements behind in the existing company. When you consider that the reason for the company’s current issues could well be as a result of burdensome debt or lease agreements, knowing you can purchase the business free from these, could put you in a great position to right the current wrongs.

- Challenge – Turning around a once ailing business, can in many ways be just as rewarding as seeing success from a new venture you set up from scratch. While there should be no underestimating the work involved in this, the rewards can be well worth the effort expended.

As with any significant purchase, ensuring you have done your due diligence before signing on the dotted line is of paramount importance. When it comes to purchasing a distressed company out of an insolvency process, however, the ability to move quickly is vital as the longer a company remains in administration, the greater the damage is done to its reputation, goodwill, and ultimately its value. Ensuring you know the reasons why the company has failed in its current incarnation – whether this is down to poor management, legal issues, financial challenges, or a changing marketplace – will go a long way to ascertaining whether you are buying a business which stands a good chance of bringing you long-term success going forwards.

You should also be aware that you will be buying the business directly from the administrators rather than its previous owners or directors; this may mean the information available regarding the background and history of the company is limited and there will be no right of recourse once the sale completes. Ultimately, as a purchaser, one of the biggest questions you will need to answer is whether this risk is worth the deal you are getting.

At Begbies Traynor our experts are on hand and committed to providing sound and actionable advice to business owners.

For immediate help and advice, please contact Mike Dyer on 0787 039 1342 or mike.dyer@btguk.com.