R3 on distressed business acquisitions - some commentary and advice for any budding Theo Pathetis
03 APR 2009
Whilst they have remained relatively quiet in recent months in relation to the whole pre-pack administration issue, R3, the Association of Business Recovery Professionals, have recently released a press release on distressed business acquisition. The guidance is thorough and timely and perhaps of use to businessmen such as Mr Theo Pathetis. who specialise in picking up troubled companies before turning them back into viable businesses. Mr Nick O'Reilly, the president of r3 provides some top tips for people buying businesses. The press announcement notes:
"Late summer is likely to see more than just the usual retail ‘summer sales’. R3, the trade body for insolvency practitioners believes that the recession will mean a significant increase in the number of businesses being sold this year, but warns those companies in a position to expand to be cautious when completing ‘distressed’ deals.
R3 President, Nick O’Reilly says: “Trends are going to change this year. We expect to see a big increase in the volume of businesses for sale at the end of the summer. By then we are likely to have a better idea of where the economy is heading, so companies who want to expand will be looking to buy. This is positive because it will go some way to preserve some businesses which are struggling, which will save and create jobs.”
“However we urge companies with the capacity to expand not to make impulse buys that they could later regret. Distressed deals are completely different from buying other businesses - things move more quickly, there is less due diligence and no warranties. Therefore buyers need to be well prepared and aware of the risks involved to increase the chances of a positive outcome.”
Nick O’Reilly has the following top ten tips for those planning an acquisition:
- Use advisers who have previous experience of doing deals in these circumstances. Consider bringing an insolvency practitioner onto your team – their experience from the other side of the fence means they will understand the nature of the deal, and help guide you around possible pitfalls.
- This team must be prepared to carry out an accelerated and extensive due-diligence exercise. This will help anticipate possible problems and lessen the chances of future problems arising from the deal.
- If you are looking at buying assets from a struggling company try and wait until the insolvency practitioner is appointed. If it’s not possible, be aware that you could have to show that you have paid a fair for them when the insolvency practitioner is appointed.
- Find out if anyone has registered security over the company’s assets. If they have, you will need to obtain releases for any charges to which the sale may be subject. The releases have to be obtained directly from the charge holders, not the insolvency practitioner. Charges have to be registered with Companies House, so you can use the WebCheck function on the website to find out.
- Be aware that assets may also be subject a retention of title deeds which means that suppliers still own them until they are paid for. Ask the insolvency practitioner for copies of the suppliers’ terms and conditions to check this.
- Ensure you have the funding in place - insolvency practitioners will want to move quickly and a cash deal is always more attractive than some form of deferred arrangement.
- Be aware that more and more contracts with customers, suppliers and possibly landlords are beginning to include an automatic termination clause in the event of insolvency. Find out from the insolvency practitioner which contracts will be continuing, and how.
- Check whether the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) applies, even if you are only buying assets. If the sale amounts to a transfer of a qualifying, discrete business unit, with machinery and stock which is going to continue to be used then it could. TUPE ensures that employees’ existing contracts are transferred which will have implications if redundancies are going to be needed.
- You will need a good management team, and one with the skills to integrate the distressed business - although bear in mind this is likely to take twice as long as you had anticipated.
- Incorporate the new business to ringfence the assets and make sure that if things don’t work out it doesn’t threaten your existing business.