Selling an insolvent business: What are your options?

Is it possible to sell an insolvent or distressed business?

If your business is experiencing financial distress or is already insolvent, you may believe there is no hope of selling it. What you may be surprised to hear is that insolvent and distressed businesses are commonly purchased, however, by various parties including turnaround specialists and entrepreneurs. The sale of an insolvent company is also commonly negotiated during an administration process, whereby a connected or unconnected party will look to purchase the company's assets. 

So what are the main considerations if your business has reached the point of insolvency, or if it’s at a stage where you feel insolvency is inevitable? How could you sell your business under these conditions?

Your options for selling an insolvent business

When an insolvent company enters administration - whether pre-pack administration or company administration - one of the possible exit routes is a sale to either a connected or unconnected party. A sale of an insolvent company can allow for trade to continue and for jobs to be saved in the process; this therefore makes a sale out of administration a desirable option.

Pre pack sale

If a pre pack administration sale is chosen, the administrator must be able to demonstrate that the procedure provides the highest returns for creditors.

It is commonly the case that existing directors use their personal funds to purchase the underlying assets of a failing business, using these assets to create a ‘newco’ with minimal job loss and disruption to customer service.

Third party buyers may also be interested in the sale, however. Pre pack administrations are typically fast moving procedures that attract interest for various reasons, not least of which is reduced competition when compared with an open market sale.

Maximising business continuity, minimising adverse publicity associated with the failing company, and preventing the departure of key staff, are all characteristics of this process, and reasons why pre pack sales are finalised very quickly – in days rather than weeks.

Sale on the open market

If sufficient working capital is available, the administrator may decide to trade the company in the short-term before placing it for sale on the open market. This can achieve a higher price than a pre pack given there’s likely to be more competition, but having the cash available to trade when the business is in such a dire financial position is a key issue.

The main concern when selling a company in administration is preserving as much of the company's value as possible. As soon as news breaks that the company is insolvent and has entered into a formal administration proceedings, the company is at risk of losing value. This would be bad news for outstanding creditors, so ensuring the sale is timed optimally is a vital part of the administration process. 

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Shaun Barton
Business Debt Expert

What type of sale – shares or assets?

Depending on the circumstances, a buyer may be interested in purchasing the shares of a company, or only the assets. They may be experienced in turning businesses around and are looking for a business such as yours - if it’s been profitable in the past, for example, your business could prove to be an attractive proposition. By purchasing only the shares, and having a firm plan to improve the business, they may be able to offset losses against the profits they anticipate.  

What could adversely affect the sale of an insolvent business?

Lack of time for the due diligence process that’s normally a key part of a business sale means various events or issues could negatively affect proceedings. These include, but are not limited to: