Eight Common Mistakes When Acquiring Or Restructuring A Distressed Business

Here you can download our Eight Common Mistakes When Acquiring Or Restructuring A Distressed Business booklet. An example of the useful information you can find in the booklet is featured below.

 

Introduction

In a report published by the Department for Business Innovation and Skills in July 2012 on the effects of employee ownership on business performance has shown that employee owned businesses have a stronger long term focus, invest more in human capital and prefer internal over external growth. This is encouraging news to the would-be business owner.

If you do not want to start up a business from scratch or if you want to expand your business quickly, you may be interested in acquiring an existing business which would bring with it the advantages of an existing market share, customers and contacts, skilled employees, equipment and operational premises. Acquiring an existing business in difficulty could prove to be an excellent opportunity as quite often a distressed sale means the business is very keenly priced. Alternatively you may already be involved in a business that has hit a rough patch but that, with some strategic changes made by you once in charge, could be restored to profit.

There are many positives from any of these courses of action but there are also a number of issues to be wary of. As many of these sales are conducted in a very short time frame, in particular distressed sales, it is important to ensure you carefully navigate your way through the transaction to avoid the common pitfalls which could seriously hamper the early days of your new business. In its study of employee owned businesses, BIS also noted that they face more obstacles, particularly raising capital and dealing with regulations. FWJ has extensive experience of dealing with the sale and purchase of distressed business and can assist you with this process.

1. Failing To Properly Understand The Sale Terms

A full business and asset sale agreement will usually be prepared for solicitors acting for the sellers. In cases where the business is in difficulty, the sale is through the agency of insolvency practitioners, usually administrators appointed in respect of the distressed business (in the case of a company or limited liability partnership) or the trustee in bankruptcy of one or more partners or a sole trader, who only have limited knowledge of the business, and the terms of the agreement are heavily weighted in their favour.

If you are not legally represented, make sure you fully understand the terms, in particular;

  • The price: not just how much are you paying, but how: a single lump sum, in instalments, from earnings? If you are purchasing through a company rather than as an individual, are you giving a personal guarantee for the purchase price?
  • What obligations of the old business are you taking on: to complete existing contracts, to honour warranties, to collect debts due to the old company on behalf of the seller?
  • Indemnities: these are promises by you to the sellers to ‘make good’ financially any losses they suffer from specified events; can you limit your liability?

In complete contrast, a solvent sale may be conducted over a longer period of time, and one of the key tasks for you and your advisors will be to conduct ‘due diligence’ of the business to ensure you get full disclosure about the business and adequate indemnities and warranties in the sale agreement from the seller in respect of any areas of significant risk or concern for you.

We can help you through this difficult but important exercise.

2. Failing To Find Out All You Can About The New Business?

What do you know, and what can you find out about the business?

In a solvent sale this is an important, but time consuming process known as ‘due diligence’. You need to think about how you deal with the information you are given and any problems which it presents. In an insolvent sale, the seller will provide very little information and you buy at your own risk, possibly with little time or means to make any enquiry. There is not even any assurance that the assets being sold belong to the seller: assets used in the business could be owned by or subject to rights of third parties. How can you protect yourself against loss in these situations?

If you are entering into a new area of business, do you have all the necessary qualifications and authorisations to carry on the business? You will not want your new business crippled by a failure to navigate all the red tape or worse face a criminal prosecution.

3. Not Having The Right Team To Help You Restructure Your Business

As the owner of a business or a director of the company you will not want to see your hard work lost or for employees or customers to suffer whilst you struggle to cope with all the administration of the business. While you will know its strengths and weaknesses, you may not know how to solve your immediate problems.

FWJ’s extensive professional network can introduce you to accountants, insolvency practitioners or financiers who can provide practical and commercial solutions to your business problems.

A widely used restructuring tool for companies in difficulty is for the business and assets to be sold to a new company and for the value received from the sale to be applied towards the liabilities of the seller. The purchaser can either take over the business as a going concern or simply acquire the assets for use in another business. In the take-over of the business as a going concern it is not uncommon for the purchaser to include persons who were involved in the business previously, an arrangement commonly associated (wrongly) with the term ‘pre-pack’. However, it is important to realise that this process is not a foregone conclusion. To ensure creditors of the old business are properly protected, it is necessary (amongst other things) for the business and assets to be valued and marketed; don’t be surprised if someone else wants the business and outbids you.

4. Reusing A Company’s Name

A very serious mistake, but one that is very common and easy to make is to re-use an insolvent company’s name in a successor business. If you were the director of company that went into liquidation it will be a criminal offence if you act as a director or are involved in the formation or management of a company or involved with the carrying on of any business with or using a prohibited name at any time for a period of 5 years after the liquidation of the first company. A further penalty is that you will be personally liable for all the debts of the second company.

A prohibited name is one that is the same or so similar to the name of the insolvent company to suggest an association with it. This is a very easy offence to commit if, after one business failure you start another business with a similar name, for example incorporating your name, the area you operate in or describing the nature of the business.

There are 3 exceptions, which if you fall within them, will avoid liability under this section of insolvency law. FWJ has experience in assisting former directors of insolvent companies restarting in business avoid this very serious hazard.

IN ORDER TO FIND OUT MORE ABOUT THIS SUBJECT AND THE ANSWERS TO THE QUESTIONS LISTED BELOW, DOWNLOAD OUR HANDY TIPS BOOKLET HERE.

ALTERNATIVELY, CONTACT THE TEAM ON 020 7841 0390

5. Not Fully Understanding Licences, Customers and Contracts

6. Not Considering All Relevant Funding Options

7. Not Ensuring You Take Account Of Data Protection Issues

8. Avoiding The Hard Decisions: Employees And Premises

Should you require any further assistance at all with these matters, then please contact one of our corporate specialists on 020 7841 0390 and we will be happy to discuss this with you.