Buying a business in administration What are the pros and cons?

High profile examples of businesses being bought from administration have been in the press recently and Tesco’s purchase of the stationary retailer Paperchase is just one. But what are the pros and cons of buying a business from administration?

A business in administration is, most often, under some form of financial difficulty so purchasing such a business is very much a case of buyer beware.  This means that a buyer will have responsibility for ensuring they know what they are getting into.  To further complicate matters, given the speed of these type of sales there won’t be much time for a potential buyer to carry out due diligence.

Once a business is in administration, the administrator’s duty is to either rescue the business or achieve the best possible outcome for the business’ creditors – which will usually mean selling it as quickly as possible for as much as possible. Because of their role as an agent, administrators will not have any personal liability for the sale, and they are likely to refuse to give any representations or warranties regarding the business or its assets.

The administrators will, however, ask the buyer to give them indemnities against any liabilities which may arise following the sale.  Their scope can range to include things such as the assets, employee liabilities, third party claims, and these indemnities could add up to a sizeable amount.  TUPE regulations will usually transfer employment contracts to the buyer, and they will be required to inform and consult with them regarding the transfer of employment contracts and any changes to them. If stock is included in the sale, there is a risk that a supplier could have the right to ask for any unpaid goods to be returned to them as part of the administration process.

Other creditors or lenders could have a charge over the business’ assets. This can include property, equipment and machinery, but it can also cover goodwill or intellectual property. If this is the case, administrators should be asked to secure the release of such charges before the sale completes.

If a leased property is included in the sale, the administrators can offer to give the buyer a License to Occupy the premises whilst negotiations with the landlord take place.  The process of administration prevents the landlord from forfeiting the lease without their permission, but if court action is threatened by the landlord, the administrators will be unlikely to defend it and a buyer could find themselves in a difficult position.

Not least important are any existing debts of the business, as they will be assigned to the buyer.  The value of assets such as goodwill and intellectual property can also be diminished by the administration process itself.  A buyer will want to be aware of such issues and take them into account in the purchase price.

But the role of a legal advisor would not stop at the due diligence matters outlined above. For example, they would take necessary steps to ensure that the administrator has proper authority to sell the business and its assets, and that the necessary process is followed to offer a buyer as much protection as possible. In recent times, there is an added requirement to consider any links the business may have to restricted countries or persons, so the importance of proper due diligence cannot be overstated.

Clearly there are a number of issues to consider when buying a business from administration, far beyond the opportunity to take over a business for a greatly reduced price. If you would like to discuss a business sale or purchase, get in touch with our team today.