What happens when a company is bought out of administration?
When a company is bought out of administration, another party—possibly linked to the previous business—has agreed to acquire specific assets of the company and carry on trading. The former company, now without its valuable assets, will be liquidated and cease to exist as a legal entity in the future.
What does a sale out of administration mean for a company and its employees?
In these tough economic times, it appears that almost every month another well-known high street name seeks the help of administrators.
But what does administration entail, and what implications does it hold for the future of these retailers resorting to this rescue procedure in a bid to survive?
What is the intention of company administration?
Administration is a temporary situation for a company, not a long-term fix. Once in administration, a company is protected from legal action while efforts are made to exit it. Depending on the company’s financial position and prospects, this could involve a sale out of administration, ensuring business continuity and job preservation—a preferred route for shareholders and stakeholders. Alternatively, if recovery seems unlikely, closing the company is an option.
Recently, HMV, L.K Bennett, and Pretty Green were all acquired after entering administration. Some by those already linked to the company, and others by unrelated parties eager to obtain a well-known brand and its customer base.
When a Company Enters Administration: What Happens?
The administrator takes control of the company upon appointment, and decisions made thereafter must prioritise the interests of outstanding creditors. Typically, the administrator seeks ways to streamline the business and reduce operating costs to a minimum.
During administration, the business often continues trading, especially if a future sale is likely. Businesses sold as a going concern tend to fetch higher prices compared to selling the assets of a closed company.
If the company is deemed salvageable, the appointed insolvency practitioner, acting as administrator, actively seeks a going concern sale. The business is marketed for sale, offers are considered, and the administrator’s role is to accept the offer best satisfying the company’s creditors. The buyer may be an unrelated third party or a new company established by existing directors and shareholders.
This process differs from a pre-pack administration where a sale is negotiated and agreed upon before the formal appointment of administrators.
What Does the Buyer Get When a Company is Bought Out of Administration?
The specific terms of any deal will vary for each transaction. However, in a typical sale, the buyer usually obtains the business and its tangible assets, the brand, goodwill, online presence, wholesale operations, and stores. This method of selling the company’s tangible and intangible assets enables a distribution to be made to outstanding creditors from the proceeds. Simultaneously, it provides the new venture with a considerably improved chance of survival, unburdened by the weight of accumulated debt.
What Occurs After the Completion of the Sale?
Just because the company has successfully emerged from administration through a sale, it does not guarantee smooth sailing ahead. While debt levels may have decreased, the underlying issues that led to the debt accumulation are likely still present. Unless these issues are addressed, there’s a genuine risk of a recurrence.
Issues may include low-profit margins, a shrinking customer base, or high outgoings such as expensive long-term leases on large premises—a common challenge for physical retail businesses.
Other areas where failed companies face criticism include a lack of product innovation, failure to keep pace with changing customer demands, and an inability to adapt the business model in a retail landscape that is increasingly shifting online.
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Changes on the Horizon
When acquiring a company out of administration, a substantial cash injection is essential. This is not only to buy the business but also to revitalise its cash flow and finance any necessary changes to its current operating model.
The brand image, positioning, and product or service offerings may require revamping to better appeal to the target market, and outgoing expenses must be carefully scrutinised.
While a sale out of administration can be the optimal path for a company’s continuation, only time will reveal whether the new owners can execute a turnaround significant enough to guide the company back to stability and maintain a lasting presence on our high streets.
I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.