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. Insolvent and distressed businesses are commonly purchased, however, by various parties including turnaround specialists and entrepreneurs searching particularly for struggling businesses.

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

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The price you could achieve

Pre pack sale

If a pre pack sale is chosen, the administrator must be able to demonstrate the procedure provides the highest returns for creditors. This is to prevent abuse of a process that happens very quickly.

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 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.

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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:

When the business isn’t insolvent

If your company is experiencing severe financial distress but it hasn’t yet reached the stage of insolvency, it’s important to act quickly to maximise your chances of completing a sale. This is because it does become more difficult to find a buyer once the business enters insolvency, as the company’s value naturally drops.

A professional valuation of both the business and its assets, on a liquidation basis and on a going concern basis, offers valuable insight into how much could be achieved, and assists in negotiating a deal.  Factors that can influence the final valuation include the type of business you run, and the current state of the market.

If you would like more information on selling an insolvent or distressed business, our licensed insolvency practitioners can help. Real Business Rescue are insolvency specialists and will provide the professional guidance you need in this complex situation. Please call one of the team for a free same-day consultation – we operate from a network of 100+ offices.