During these unprecedented times, where the situation is changing on a daily basis, we are aware that individuals and business owners will have many questions and uncertainties about how these developments impact on them.
Here, through a series of Q&A with expert lawyers from across our firm, Sintons hopes to be able to answer some of those pressing questions, and provide some certainty and clarity for people who are unsure how to proceed.
We will bring you a question and answer per day for the next few weeks.
Q – I am looking into buying a business I know is struggling – would you suggest now is a good time to make such a purchase? Can I still access funding, will my bank lend?
A – Buying a struggling business referred to as ‘distressed’ or ‘accelerated sales opportunities’ can have its advantages and be for the commercial benefit of a similar or competitive business. It is, however, vital that any potential buyer takes legal advice to avoid risks and protect their position as much as possible.
One of the advantages of purchasing a distressed business it that the purchase price is usually discounted to reflect the risks being assumed by a buyer and this can be attractive to potential buyers who are prepared to take a punt. The reason for the reduced price is that any prospective buyer will be expected to take on any commercial risk associated with the business and assets. The principal ‘caveat emptor’, meaning ‘buyer beware’, applies, as any potential buyer will be buying the assets ‘as seen’, subject to any defects (including defects in title, physical condition or claims by third parties).
Another advantage is the time scales (and therefore the associated costs) in purchasing a distressed business. Because of the lack of available cash to fund the trading of a business (and the risk for an administrator in trading a business whilst insolvent) the sale process is usually accelerated and takes between 5-10 days from an offer being accepted to completion, compared to solvent acquisitions which can take months. Time is of the essence and therefore any potential buyer needs to take a commercial view on the transaction and rely on pragmatic due diligence which focuses on the key issues at a very high level. Such a high level review will reduce the professional fees associated with an acquisition.
A combination of sound commercial judgement and legal knowledge is needed to understand the opportunities and risks for the buyer. The key risks are:
- Commercial risk – as noted above the risk is always with the buyer in an insolvent acquisition
- Ongoing contracts – sellers will want buyers to assume responsibility for performing ongoing contracts, even if loss making. Poorly/unreasonably drafted arrangements may fix the buyer with responsibility for historic product/service warranties.
- No warranties or title covenants will be given in relation to the business and/or assets. This approach is in complete contrast to a purchase from a solvent seller where the buyer can expect the seller to warrant that it owns the assets, they are in good order and that there are no unexpected liabilities and where a buyer can bring an action against the seller if the warranties are untrue
- Employees – the Transfer or Undertakings (Protection of Employment) Regulations 2006 could apply which could mean employees transfer to the buyer, which means the seller’s obligations and liabilities associated with these employees will transfer and become the legal responsibility of the buyer
- Retention of title clauses over the stock – many suppliers incorporate retention of title clauses into their terms and conditions of supply. The effect of this is that a buyer may pay good money to a distressed seller to purchase the stock only to find that the seller has no rights in it, as the supplier has not been paid and they have a retention over the stock.
We are being told that the banks are still open for business but would anticipate that it will take longer than usual to access funding which may present difficulties if you need an accelerated completion.
* For any advice on this matter or any other acquisition or insolvency purchase matters, please contact Matt Collen or Emma Pern in the corporate team at Sintons on matt.collen@sintons.co.uk or emma.pern@sintons.co.uk. For assistance or advice with any banking or finance matters, please contact Jane Meikle, head of banking at Sintons, on jane.meikle@sintons.co.uk
