A trade sale is a commonly used form of business sale whereby a company is sold to another business typically operating in the same industry or sector. It’s often the case that a business broker or independent intermediary acts on behalf of the owner/directors, making initial contact with parties interested in purchasing.
But even if a business has entered insolvency or is facing legal action by creditors, a trade sale organised from within a formal insolvency process may still be a viable option, and offer the best returns for the company’s creditors.
Trade sales can take a number of different forms including the sale of the company’s shares, or only underlying business assets such as stock, goodwill, or premises. Before we look at the trade sale of an insolvent business, how does the process work for companies trading profitably?
If a business is operating solvently and a trade sale is being considered, information about the company will need to be provided to interested parties in the form of a sales memorandum, including the reasons why it’s being sold.
Once one or two serious buyers are identified, in-depth negotiations take place and the due diligence process commences whereby the information provided is scrutinised in detail by potential purchasers.
A prospective buyer may insist that certain warranties and indemnities are provided to reduce their risk, so professional legal and financial assistance is required at intervals throughout the process.
Insolvent businesses can also be sold in a trade sale but the process is directed and carried out by a licensed insolvency practitioner (IP) rather than the company’s directors. Various insolvency processes allow for a trade sale to take place, including company administration and pre pack administration.
Depending on individual cases, a Company Voluntary Arrangement (CVA) may also be an option. It allows for the restructuring of company debt, and offers the potential to sell the business to trade buyers in the future.
When a business enters administration, the appointed office-holder must determine a viable plan for the future of the company. In some cases a trade sale may offer the best outcome in which case the business will be placed on the open market, typically following cost-cutting and streamlining measures.
A trade sale may also be possible using pre pack administration, which is a process led by a strict timeline. A business’ underlying assets are sold very quickly in these cases, and although the existing directors are typically the purchasers, selling to trade buyers is also a strong option.
In the case of a pre pack trade sale, the business isn’t marketed openly as with the company administration route mentioned earlier, and a licensed insolvency practitioner is only appointed once a buyer has been found.
The trade sale of an insolvent business exposes buyers to greater risk than if the business was solvent, however. There’s no due diligence process as such, and no warranties or indemnities, but there is a market for this type of sale when a company has entered insolvency.
If your company is experiencing financial distress and you’re wondering if a trade sale would be appropriate, or you’d like more general information about the trade sale of a business, call one of our licensed insolvency practitioners at Real Business Rescue. We can arrange a free same-day consultation with more than 70 offices nationwide.