K2 Business Rescue The Emergency Service for Business

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The journey for every business is different. We listen to you and your objectives before proposing a plan for survival and growth. We work alongside you and your team and focus on protecting and improving your wealth.

Published on 8 July 2011by Tony Groom

Many Companies for Sale turn out to be Insolvent

Many companies are being listed for sale through brokers with high price tags based

on very tenuous valuations, where the owners have been deceived into thinking

they will be paid a huge amount for their equity.

However, on closer inspection it turns out that many of them have a Time to Pay (TTP)

arrangement with HM Revenue and Customs (HMRC), or are in arrears with HMRC

and trade creditors. A great many of them turn out to be insolvent. This only tends to

surface as a result of due diligence by an interested buyer and this situation is

becoming a serious concern among potential investors who are looking at these

companies on the basis that they might be a perfect fit with their existing businesses.

Realising that a target company for sale is actually insolvent leaves the investor

struggling to see how they can protect their own interests if they wish to proceed

with the acquisition or takeover, particularly if there is a risk they will contaminate

their existing business.

Very often buyers, even those experienced in business, do not have the knowledge

to assess the potential of a company even if they may be still be interested after

carrying out due diligence.

The company for sale might be characterised by a failing TTP, creditor pressure,

contractual obligations, asset finance agreements, onerous or unwanted leases, all

of which have been ignored while the owners try to sell. Often owners are trying to

protect their personal guarantees from being triggered as would occur in liquidation

or an asset sale via pre-pack administration.

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

It is possible, however, for the potential investor to work with the incumbent directors

to reach agreement with creditors and in doing so protect their own business from

cross contamination or inter-company liabilities.

The traditional method of buying a business in financial difficulties is via a pre-pack

administration. While this is promoted by the insolvency profession as offering a clean

break that leaves behind creditors, it is rarely clean. Finance providers and suppliers

are often common when the acquiring party is in the same industry. This provides

scope for ransom demands against the acquiring party. Neither does it deal with

employee liabilities that transfer under TUPE.

One way of limiting cross contamination is a share transfer with the buyer agreeing to

invest conditional on approval of a CVA by creditors. The advantage is that the

finance agreements and any liabilities remain in the target company such that these

can be treated as creditors of the CVA. It also allows creditors’ issues to be

addressed where they are not normally consulted in a pre-pack.

In addition to the commercial challenges, pre-pack administrations are being

scrutinised following outrage by unsecured creditors. While there is no requirement to

consult creditors the perception of abuse has put them under the spotlight. This may

result in CVAs becoming more popular, especially as they involve consultation with

creditors whose approval is needed.

Another consideration is the sales agent’s commission which can get in the way of a

deal. If the agent is introducing the interested parties they will still expect to be paid

an introducer’s fee, even if the company is insolvent. The fee is normally highlighted

as a percentage of the sale consideration or investment but in the small print there is

often a minimum fee which tends to be between £10,000 and £25,000 plus VAT.

This becomes an issue especially where the investor is not prepared to pay

consideration for the shares in an insolvent company but instead offers to buy shares

for £1 with view to injecting funds to save it.

Tony Groom, CEO of turnaround and rescue company K2 Business Rescue, argues

that the owners trying to sell a business in difficulty should employ their own

turnaround advisers. This will help the sale by having a turnaround plan in place

rather than leaving buyers to work out how to save the business or more likely to walk

away because they can’t see how to structure a deal that protects their interests.

We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth. Our team has worked for over 20 years to help stabilise and return hundreds of businesses to profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors and use your company’s assets to pay themselves. We work for you, not creditors.

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

More Free Resources for Directors and Business Owners in Difficulty www.rescue.co.uk

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We negotiate with HMRC and creditors We are on your side

Need Immediate Help – Call Tony Groom on 0844 8040 540