Selling an insolvent business: What are your options?

Is it possible to sell an insolvent or distressed business?

If your business is in financial distress or already insolvent, selling it may seem daunting, but it’s a common practice. Various parties, including turnaround specialists and entrepreneurs seeking struggling businesses, often purchase insolvent or distressed businesses.

So, if your business is on the brink of insolvency or you believe it’s inevitable, what are the key considerations? How can you sell your business under these challenging conditions?

 

Potential Achievable Price

1. Pre-pack sale

In a pre-pack sale, the administrator must demonstrate that it yields the highest returns for creditors to prevent potential abuse of this rapid process. Often, existing directors use personal funds to acquire the underlying assets, creating a ‘newco’ with minimal job loss and service disruption.

While third-party buyers may also show interest, pre-pack administrations attract attention due to their speed and reduced competition compared to open-market sales. Quick finalisation, typically in days rather than weeks, aims to maximise business continuity, minimise adverse publicity, and retain key staff.

2. Sale on the open market

If there’s enough working capital, the administrator might opt to trade the company briefly before putting it up for sale on the open market. This approach could fetch a higher price due to increased competition. However, having sufficient cash available to trade in such a dire financial position is a critical consideration.

3. Sale Type: Shares or Assets?

In various circumstances, a buyer might consider acquiring either the shares or only the assets of a company. Experienced individuals focused on turning around businesses may find your profitable past appealing. Opting to buy shares, with a solid plan to enhance the business, allows them to offset losses against anticipated profits.

 

 

Factors Adversely Impacting the Sale of an Insolvent Business

The lack of time for the usual due diligence process in a business sale can lead to various issues negatively affecting proceedings. These may include, but aren’t limited to:

• Absence of warranties or indemnities: A prospective buyer lacks the additional confidence these provide in a business purchase.
• Transfer of contracts: Assumptions about certain contracts being included in the purchase price may prove incorrect later.
• Claims under TUPE: The Transfer of Undertakings (Protection of Employment) regulations, or TUPE, protects employee contracts under specific conditions, and claims against a new company, such as constructive dismissal, may arise.

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When the Business Is Solvent

If your company is in severe financial distress, acting swiftly is crucial to enhance the chances of completing a sale before reaching insolvency. Finding a buyer becomes more challenging once insolvency sets in, leading to a natural drop in the company’s value.

A professional valuation of the business and its assets, considering both liquidation and going concern scenarios, provides valuable insights and aids in negotiation. Factors like the business type and market conditions influence the final valuation.

For more information on selling an insolvent or distressed business, our licensed insolvency practitioners at Vanguard Insolvency can provide the necessary professional guidance. Contact us for a free same-day consultation, as we operate from a network of 100+ offices.