If you are considering buying companies in liquidation or administration there are various important considerations to make, especially as an insolvent company will have been facing financial problems, leaving you with a raft of challenges to overcome before you can think about getting the business back on track and start making a profit. With this in mind, here’s a look at everything you should be bearing in mind when buying companies in liquidation and administration.
What is the difference between administration and liquidation?
Administration has the aim of helping a company repay its debts so that insolvency can be avoided wherever possible. Liquidation however is the sale of a company’s assets in order to repay its debts before dissolving the company once and for all.
Administration creates legal protection around an insolvent company to safeguard it from further creditor threats. If it can be established that the company has the potential to return to profitability, the appointed insolvency practitioner can go ahead with a business restructuring plan or with selling a business as a going concern, so that it can continue trading.
During administration, control is handed over to the appointed administrators to ensure all creditors’ best interests are met. If a sale can be secured, then the business can continue, with employment contracts transferred to the new company.
Insolvent liquidation, however, involves the sale of a company’s assets to repay as many of its creditors as possible, ahead of dissolving the company once and for all. Liquidation is the route that is taken when there is no realistic means of paying a company’s debts and getting it back on track financially.
Therefore, whilst it is possible to buy a company in administration, buying companies in liquidation is associated with buying their assets, rather than the company generally.
What to consider when buying a company in administration?
Firstly, be aware that managing a failing company is no mean feat. It is going to be a challenge to get it back on track financially, so be prepared for a lot of hard work, and financial investment.
Take a good look at the root cause of the company’s issues so that you can see where you’ll need to invest your cash, and where restructuring may be needed.
Was there a problem with service or product quality? Was a key account lost to a competitor? Were there staffing issues? Supply difficulties? A lack of machinery, plant or sufficient or affordable premises? Did the company fail to stay competitive in an evolving market? Was there a threat of legal action or reputation damage?
Whatever caused the company to get into financial difficulty, you’ll need to be in a position to resolve it.
It’s important to be clear on exactly what you’re taking on. Will you be buying a company with established customers, work in progress, a strong supply chain and contracted employees?
You’re going to need to show the company’s insolvency practitioner how you will fund the business, so you’ll need to prepare accounts and a means and assets report, for which you’ll need to get your own company’s accountant involved.
A thorough due diligence process is vital. Bringing in a specialist to undertake this is a wise move, as the likes of assets, liabilities, supply chains, contracts, facilities, competition, market potential and brand reputation will all need to be scrutinised.
Finally, ensure that the existing employees of the business you are looking to buy are all happy with the new plans. A demotivated workforce will never be an asset, and you’ll need them all on side if you are to succeed with your venture.
What about buying companies in liquidation?
It is not possible to buy a company that has gone through insolvent liquidation, as that company will no longer exist. However, it is possible to purchase the assets of a company in liquidation. Those assets could be the stock, the client base, the goodwill, the premises and the company name.
The first step is to make contact with the Insolvency Practitioner who has been appointed to deal with the liquidation. They will usually then put you in touch with a third party agent who will be handing the sale of the assets.
It is important to be aware that there are strict rules around the reuse of an insolvent company’s name, so you will need to take specialist legal advice before you proceed.
Buying the assets of companies in liquidation can be highly beneficial, and is usually more cost effective than purchasing an existing business, or starting a new company from scratch. You will however need to be prepared to invest considerable resources, and engage specialist advisers.
Looking to buy an insolvent company?
Whether you are looking to buy a company in administration, or the assets of a liquidated company, you are welcome to get in touch with Insolvency Online. We’d be happy to discuss your requirements and introduce you to our latest liquidations which may be of interest.