Buying or selling a business in trouble

Buying or selling a business in financial distress

Not every business achieves the level of success its owners initially expect.

Maximising the sale value is a priority for sellers, but this may be balanced against the need to complete quickly. Buyers may seek to negotiate a lower price to reflect the risks involved. Distressed transactions therefore require careful management, often within extremely tight timeframes.

Tactics, risks and opportunities of a distressed sale of a business

A distressed sale or purchase is not a standard corporate transaction. Alongside the usual deal considerations, several additional factors can significantly influence its structure and outcome.

• Timing and transition – Time is critical when a business is running out of cash. A delay can change the nature of the transaction. For example, a proposed share sale may become an asset sale, allowing the buyer to acquire the business or selected assets while leaving certain liabilities behind.
• Solvent vs insolvent – The company’s financial position affects the available options. A solvent business may be sold through a share sale, whereas an insolvent business is often sold through an asset sale, potentially as part of a formal insolvency process. Read more about share and asset sales.

Selling a solvent business

Where a business is experiencing financial difficulties but remains solvent, early action is essential. Directors must manage cash flow, address underlying problems and prepare the business for scrutiny by potential buyers.

Key considerations include:

• Demonstrating value – Identify valuable assets, viable operations and opportunities for recovery or restructuring. See our case study on restructuring before a sale.
• Forecasting finances – Monitor cash reserves carefully and understand how long the business can continue operating.
• Management team – Ensure the team is aligned and able to support the business through the sale.
• Employees – Consider employee issues, potential complaints and whether TUPE may apply.
• Directors’ duties and legal risks – Transactions at an undervalue or transfers to connected parties may be challenged and can expose directors to personal liability. Directors must consider their duties, including the interests of creditors where the company is insolvent or nearing insolvency.

A timely sale or restructuring may preserve value that would otherwise be lost. Identifying the cause of the financial difficulties and addressing it early can improve the available options.

Selling an insolvent business

Insolvency does not automatically mean that all trading must stop immediately. However, directors must understand their duties and take appropriate professional advice. Depending on the circumstances, an insolvency practitioner may need to be appointed and may arrange the sale of some or all of the business assets.

Where an asset sale is considered, directors must take particular care over the price and the identity of the buyer. Selling assets at an undervalue or to a connected party may result in a transaction being challenged and directors facing personal liability. Read more about the risks of intra-company transfers.

Buyers of insolvent businesses often prefer an asset purchase, which can help limit the liabilities they assume. However, buyers must establish precisely what is being acquired and which obligations may transfer.

Key issues include:

• Whether employee liabilities may transfer.
• Whether the buyer can occupy the relevant premises.
• Whether licences and permits are in place to continue trading.
• Whether contracts can be transferred or suitable replacements arranged.

Speed is important, but due diligence remains essential. Buyers should understand the assets, liabilities and practical requirements involved before committing to the transaction.

Warranties, indemnities and Warranty & Indemnity Insurance

Distressed sales often allow less time for due diligence than conventional transactions. Sellers may also be unable or unwilling to provide the warranties and indemnities normally expected in a share or asset sale.

Buyers should therefore assess what information is available, identify the principal risks and negotiate protections appropriate to the circumstances. Warranty and indemnity insurance may be an option, although availability and cover depend on the transaction, the information disclosed and the risks involved.

Buyer tactics

When acting for buyers, we identify potential risks and use the available negotiating leverage to seek an appropriate purchase price and contractual protections. A distressed transaction requires a clear strategy, rapid decision-making and careful attention to the terms of the deal.

Distressed sales can present unexpected challenges under significant time pressure. We help structure and negotiate transactions efficiently, with a focus on protecting your commercial interests. Call our team on 0207 438 1060.