What does it mean when a company is bought out of administration?

Understanding what a sale out of administration means for a company and its employees

In these challenging economic times, it seems scarcely a month passes without yet another high street name calling in the administrators. But what exactly is administration and what does this mean for the future of these retailers who are increasingly turning to this rescue procedure in an attempt to survive?

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What is the purpose of company administration?

Administration is a temporary state for a company to be in rather than a long-term solution; once a company enters administration it is safeguarded from legal action while an exit out of administration is sought. Depending on the financial position of the company and its likely potential for future success, this may well involve a sale out of administration which would allow trade to continue and jobs to be saved. This is widely seen as the preferred route for shareholders and stakeholders alike. Alternatively, there is the option to close the company if unlikely to recover from financial difficulty. 

HMV, L.K Bennett, and Pretty Green have all recently been bought following their entry into administration; some by those already connected to the company, others by unconnected parties keen to acquire a well-known brand along with its customer base.

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What happens when a company enters administration?

The administrator will assume control of the company upon being appointed and any decisions from this point onwards must be done with the interests of outstanding creditors in mind. In most cases the administrator will look for ways of streamlining the business and paring back operating costs to a minimum.

It is likely that the business will continue to trade during the administration, particularly if a future sale is likely. Trading businesses which are sold as a going concern tend to sell for much more than what can be achieved by selling the assets of a company which has already closed its doors.

If the company is deemed to be salvageable, then the appointed insolvency practitioner acting as administrator will actively try to sell the company as a going concern, and market the business for sale accordingly. Offers will be listened to and it is the administrator’s job to accept the offer which best satisfies the company’s creditors. This deal may well be the highest aggregate bid, or instead it could be the deal which offers the greatest amount of cash upfront rather than as part of an instalment plan. The eventual purchaser could be an unconnected third party, or a newco set up by the existing directors and shareholders.

This process differs to a pre-pack administration where a sale has already been negotiated and agreed to before administrators are formally appointed.

What is sold to the buyer when a company is bought out of administration?

The exact terms of any deal will be unique to each transaction; however, as part of the sale the purchaser typically acquires the business and its tangible assets, the brand, goodwill, its online presence, wholesale business, as well as its stores. Selling the company’s tangible and intangible assets in this way allows for a distribution to be made to outstanding creditors from the proceeds, while giving the new venture a significantly increased chance of survival as it is no longer burdened by the weight of this mounting debt.

What happens after the sale has completed?

Just because the company has successfully exited administration by way of the sale, this does not mean things will be plain sailing from this point onwards. Although debt levels may have reduced, the issues which led to the debt accumulating in the first place are likely to still be present, and unless these are addressed then there is a very real risk that the situation will reoccur.

These issues could be low profit margins, reduction of customer base, or high outgoings such as costly long-term leases on large premises which is often cited as a major problem for bricks and mortar retail businesses.

Other areas where failed companies have been criticised, include lack of product innovation, not keeping up with customers’ changing demands, and a failure to adapt its business model in a retail space which is moving increasingly online.

Changes afoot

When purchasing a company out of administration a significant cash injection is required, not only to purchase the business in the first place, but also to rejuvenate its cash flow and fund any changes to its current operating model that are likely to be required.

The brand image and its positioning, along with its product or service offerings may well need to be revamped to better appeal to its target market while its outgoings will need to be carefully scrutinised.

While a sale of out administration can be the best way for a company to continue, only time will tell whether its new owners can effect a turnaround great enough to steer the company back to safety and remain a continuing presence on our high streets.