A race against time

Buying a company out of administration may prove to be a fantastic bit of business, but the speed of the deal means you really can get more than you bargained for. James Harris reports

Buying a company out of administration may prove to be a fantastic bit of business, but the speed of the deal means you really can get more than you bargained for. James Harris reports

Buying a company out of administration may prove to be a fantastic bit of business, but the speed of the deal means you really can get more than you bargained for. James Harris reports

From initial courtship to signing on the dotted line, it took just three weeks for HR specialist Penna Consulting to acquire the Barkers Group for £8.6 million. ‘It all happened so quickly,’ reflects Penna’s chief executive Gary Browning.

In June, Browning received a call from the chief executive of Barkers, who invited him to his office for a chat. ‘Two days later I went over with some colleagues and the chief exec told us that Barkers was in advanced discussions to raise money. He also said that if the talks were not successful, the company would be forced to go into administration.’

Days after the conversation, it became obvious the company was going to struggle to raise that finance and Penna put in a competitive bid. ‘We gained exclusivity quickly. It was a straight cash deal. We had money in the bank and a management team that was ready to act and we went for it.’

Penna had little choice but to move swiftly. ‘When a business starts losing money, value can dissipate very fast. You also have to remember that administrators represent creditors, so they are always going to go for the easiest option.’

In the first quarter of 2009, the number of companies falling into insolvency increased by two per cent to 1,311, according to figures released by the government’s Insolvency Service. As the rate of insolvencies continues to soar, healthier companies are looking to pick off their weaker, distressed counterparts.

Time is of the essence

‘There are more of these deals around and speed is the key,’ says Steven Cottee, partner at law firm LG: ‘A purchaser has a steep learning curve and has to move quickly. In many cases, finance must be available in a matter of days. The buyer will also have very little time to get a hold of what liabilities it is taking on. It’s not a traditional corporate deal as there simply isn’t the time to linger on due diligence. You have to take a leap of faith.’

Owing to that intense time pressure, there are many ways a deal can unravel. Cottee warns: ‘It is very important to know what liabilities will be transferred. You may be lumbered with old employment contracts and long leases with unfavourable terms.’

The relationship with the recovery bank is also crucial: ‘When a company is insolvent, the banks own the assets, so in order to recover them they need to be comfortable that the buyer can come up with the cash on completion.’

‘It is also very important to communicate with key suppliers and stakeholders. Contracts may be terminated on administration, so it is essential to retain as much business as you can.’

Browning can testify to the above. ‘Without our cash reserves, it would have been difficult to structure the deal because debt finance would have been too slow,’ he says. ‘We had to be careful about communicating with trade creditors too. In some ways, it was a matter of fighting emotion as much as reality. Many of them had taken a big hit so we had to emphasise the fact that we were trying to save the business and were the white knights.’

The saying “you got more than you bargained for” is never truer than when buying a struggling business at a knock-down price. Mark Moss, chairman of Dhais, a Cardiff-based company that specialises in hearing products, had doubts about whether to purchase rival Hearsavers. ‘Initially, we thought the business was not worth buying because of the amount of debt it had,’ says Moss. ‘Then the company went into administration.’

That made the decision far easier and Hearsavers was acquired for £100,000. ‘The beauty of pre-pack is that you don’t take on liabilities. It’s an agreement with creditors to forgo debt in order to safeguard jobs and the business.’

It wasn’t entirely plain sailing. ‘Apart from dealing with suppliers, who were understandably angry about losing money, we ran the risk of not retaining the service of key staff,’ he says.

Taking a chance

In addition to this, there was the uncertainty surrounding the company. ‘There is always that niggling doubt about whether you can change a loss-making business into a profitable one. You can never do enough due diligence, but this time we were as satisfied as we could be.’

One of the most unusual aspects of the deal is how it was funded. Moss explains: ‘We used supplier finance. After the banks shut their doors in October, we began looking for alternatives, and eventually we asked our suppliers for help and they obliged. We have two of the top five hearing aid manufacturers behind us. They’re also easier to deal with than banks.’

The gamble appears to be paying off. ‘Revenue per month has gone from £200,000 to £1 million in a year. It has worked out very well for us,’ comments Moss.

At Penna, Browning too seems pleased with himself. ‘The business we’ve bought has a phenomenal history and a fantastic client base. We also took some comfort from the fact that we bought the net assets of the business, so come what may, we would be left with something. So far, it has gone very well.’

Nick Britton

Nick Britton

Nick was the Managing Editor for growthbusiness.co.uk when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

Related Topics

Early Stage Funding