Companies are going bust left, right and centre as recession squeezes the UK economy. The administrators are busy, but on the upside there are bargain-priced assets to be claimed.
For many owner-managers, growth strategies have been replaced by survival plans. Now is not the time to be considering acquisitions, they say, but rather for battening down the hatches. For others, the dark clouds of recession have silver linings: lower costs, struggling competitors and a new order that might leave them at the top. The chance to buy a failing business at a good price is always worth a look, but it takes nerves of steel, and cash. Buy-ups are risky, even in boomtimes, and many have been burned in the process before.
That’s business
Cast aside any feelings of guilt. It’s a fact of life that downturns produce winners and losers. Feeding on those who have fallen is normal practice in a market economy, and essential for its eventual recovery. You’ve already seen the headlines and know that there’s carnage on the High Street, and this is reflected in the wider economy.
Insolvency figures in the third quarter of 2008 reveal 4,001 compulsory and voluntary liquidations in England and Wales. This was an increase of 10.5% on the previous quarter and 26.3% on the same period a year ago. Figures for the final quarter and first three months of 2009 are expected to show more decline and the end is not yet in sight – not unless you believe what the government says.
Colin Haig works as an administrator at PricewaterhouseCoopers and says his workload has massively increased recently. Previously, businesses would be referred to him before they hit truly dire straits, when creditors were beginning to have concerns. This gave him the time to market the struggling firms and find buyers to rescue them. However, the average time between referrals and outright insolvency has been reduced, mainly through a lack of credit.
“There are some really good companies, but they have just been over-leveraged. I have seen businesses that would have needed to have been working at their optimum potential if they were to have had any chance of servicing their debt,” he says.
For those with the cash, guts and strong advisers, there’s nothing wrong with buying from an administrator. You might understandably be suspicious of a failed company, but the credit crisis is so severe that there are some businesses that should, by all rights, be up and running, and entrepreneurs should be encouraged to resuscitate them.
Matthew Riley, founder of business telecoms company Daisy Communications, has made close to 20 acquisitions since founding his business in 2001. Previously, he would buy up the accounts and lists of competitors that were going concerns. However, he now has his eye on failing businesses. “There are a lot of assets around and there are some companies in distress, so there are going to be a lot of bargains about,” he says. “If you are a strong company with a good track record, then you can take advantage of that.”
But be warned, there are dangers to buying a company in distress, and it’s essential to understand what the real cost of buying is. There’s often a good reason why a company has gone bust and it isn’t always the fault of the banks or the availability of credit. It’s essential to ensure you have some good advisers with experience in the field beside you. “You can bet that whoever you are buying from won’t be selling for the first time. Don’t scrimp on your advisers, as that’s a false economy,” advises Haig.
No trade sale
Buying from an administrator does bear some similarities to buying from another business. For example, you need to understand why you are buying and how it fits into your overall plan. However, the speed of the deal is likely to be much faster and you aren’t going to be able to get the same level of information or assurances that you would from a trade sale.
“If the vendor is an owner-manager, there is a pressure on them to be very forthcoming with information about the business, as there will be warranties attached to the deal, which could reduce the overall price if they are breached,” explains Irit Edri, a solicitor at Keystone Law who specialises in company administrations. “However, when buying from an administrator, it’s unlikely they will provide such warranties and will provide far less information.”
You must remember that administrators are there to get value for the shareholders or the secured creditors of the business (depending on the deal) and aren’t motivated to be concerned about
what happens after the deal. The relationship between the two parties is, therefore, very different to a trade sale or even a private equity deal. Typically, the administrator wants to get as much cash as possible and then get out. This can result in some deals turning into something of a lottery for the buyers, so you should mitigate your risks (see Avoid the Pitfalls on page 39) and consider the worst-case scenario before taking the plunge.