Buying a distressed company has its pitfalls. Here are the traps to watch out for when you’re bargain-hunting, writes Teri Hunter, a partner at corporate law firm Moorcrofts.
Being rushed into a deal
A liquidator will be trying to realise value for the creditors as soon as possible and therefore the timescale of the purchase will be tight, often as short as a week. This will not allow proper due diligence to be undertaken, and so in effect you are buying blind and may be taking on more liabilities than you realise. There will be little scope for negotiation of the purchase contract, as the liquidator will want to impose the terms and not take on any liabilities. In particular, you are unlikely to gain the benefit of warranties. Therefore, you must find out as much as possible before the purchase. Be prepared to get on the phone and badger people for information, speak to suppliers, customers and if possible the old management team.
Getting saddled with unwanted staff
It’s likely that employees of the business you’re buying will automatically transfer to you under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). This applies even if they have previously been dismissed by the liquidator. It creates particular problems when purchasing without detailed information on the employees’ terms of employment or what employee claims there may be. In many cases dismissals made by you after completion will be deemed automatically unfair, and existing terms and conditions must be preserved, although in some circumstances the TUPE rules may be less onerous where the transfer is from an insolvent employer.
Losing the business premises
If you require the premises of the target business, you may need to negotiate with the landlord directly. How you handle this will depend on the circumstances and how key the property is to the business. In some cases, it will be prudent to contact the landlord in advance of the purchase and begin negotiations at an early stage. In other cases, you may be better advised to enter the premises for a short period under licence, sorting out the finer details with the landlord later. Either way you need a clear plan, a good idea of the cost of the premises and the cost of relocating if this proves necessary.
Not taking stock
Check carefully what assets are included, and make your own inventory. Check for stock held off site e.g. moulds, tooling and software codes. If these are in the custody of a disgruntled third party, you may have to pay to get them released. If there are assets on a hire purchase agreement, you may need to negotiate with the relevant companies. In addition, check for any retention of title obligations in stock or assets being purchased.
Alienating customers and suppliers
Despite the fact that you have no legal obligation to pay old debts, if there are unpaid suppliers you wish to use going forward, you may have to cut a deal with them to procure supply going forward. Similarly, disgruntled customers may not want to deal with you – if possible talk to key customers before finalising the purchase.
Funding running dry
Finally, think carefully about how the deal is to be financed both in terms of purchase price and working capital. Banks are rarely enthusiastic about this type of purchase, as it is difficult for them to assess their risk. You will therefore need cash reserves and/or be prepared to give personal guarantees.