By Guy Rigby, Head of Entrepreneurial Services at Smith & Williamson

Some purchasers like to buy businesses in distress. These are generally accessed through insolvency and restructuring practitioners (IPs) and can sometimes be great bargains. However, there may be challenges and pitfalls to face along the way.

In the first place, a lack of time and information means that due diligence is likely to be limited, so it may be difficult to assess what you’re buying. Secondly, continuity of trade can be challenging if contracts have been terminated or suppliers or customers have been alienated. And finally, any purchase from an IP is likely to come without warranties or indemnities, leaving your purchase unprotected.

If you’re buying a distressed business, it’s important to find out what happened. In some cases, there may be good reasons why a business failed and why it may recover in the future. Perhaps it was overleveraged by bank debt following an earlier transaction, or perhaps it was the subject of a fraud.

If you’re buying a salvageable business from an IP consider the different ways of acquiring it. “These may include different deal structures, e.g. purchasing assets versus shares and arranging short-term bridge funding to see the business through,” advises Henry Shinners, Restructuring & Recovery Partner at Smith & Williamson.

“Your offer will be benchmarked against ‘going concern’ and ‘liquidation’ values,” explains Henry. “IPs generally don’t like deferred payments so you’ll probably need funds available immediately.”

Be clear about what you are purchasing and take advice on the potential risks. Be aware of the IPs timetable and be prepared to move quickly.

If you’re thinking about buying a business in distress and would like some advice or guidance, speak to Brian Livingston on 020 7131 8213 or email guy.rigby@smith.williamson.co.uk.

By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.

Smith & Williamson LLP
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.