How to Sell an Insolvent Business

If you’re looking to sell an insolvent business, you may question why anybody would be interested in a company that has debts it cannot pay. Indeed, to business owners that have been working around the clock to pay their company’s bills in vain, the prospect of somebody taking that responsibility on voluntarily may seem hopeful at best.

In truth, you may be surprised at how attractive as proposition your business actually is. The initial excitement you experienced when conceiving your business idea, may well be shared by another party that sees a different way of approaching it. We’ve all seen businesses that we think we would run differently if given a chance, and this is no different for those looking to buy businesses.

Insolvent businesses can offer buyers a near-turnkey opportunity for a cut-price fee. Your efforts may have already provided any buyers with branding, marketing presence, supplier relationships, or even a client list. If a few tweaks are all a potential buyer thinks is needed to turn a profit, then an insolvent business can make for a great low-cost starter kit.

 

 

Should I sell my business? Factors for owners to consider

The last thing you want as a seller is to have your old company’s problems lingering around long after you’ve sold. To avoid potential problems arising further along in the process, it’s important that all parties are clear about what is included (or excluded) in the sale. Exclusions that you might think are obviously not part of the deal, may well be the main reason your buyer is interested in purchasing.

Make sure that everything down to contracts, warranties, and indemnities are accounted for in any sale. It should be entirely transparent from the off what a buyer will receive when purchasing your company.

Any ongoing legal or staff issues should ideally be disclosed too. Employment claims for unfair dismissal could even be made against the new company owners despite them not being initially involved.

It’s a good idea to ensure that any financial paperwork and records are up to date and readily available to potential buyers. Not only does this show prospective purchasers that you’re not trying to hide any unfavourable information, but it also demonstrates that you’ve run the business in a responsible manner, minimising the risk of unwanted surprises later on.

 

 

What options do insolvent companies have when selling?

There are a couple of different routes an insolvent company can take to proceed with a sale. In some cases, you may even find that an insolvency practitioner (IP) will tackle most of the issues on your behalf.

 

• Sell on the open market

If you think that there might be a fair amount of interest in purchasing your business, selling on the open market can be a good idea. This opens up the sale of your business to many more potential buyers, and thus gives you a better chance of achieving a higher price.

The IP (acting as an administrator) will need to determine that there’s enough working capital to allow the business to carry on trading while it’s up for sale. This can be a problem for businesses that are already insolvent, however. In this instance, they may find a pre-pack administration a better option.

 

• Pre-pack administration

This option is often utilised by existing directors that have personal funds available to buy a struggling company’s assets, allowing it to keep running as a new business. It is a viable option for external parties, however.

The lack of competition compared to an open market sale can entice some buyers to look to pre-pack administration sales in the hope of securing a business for a low price.

Although they typically accrue smaller fees than open market sales, a pre-pack administration sale tends to allow for a far smoother process. Businesses can continue in much the same fashion as they were accustomed to by avoiding redundancies and the negative publicity that’s attached to failing businesses.

Pre-pack administration sales are quick too, often being completed in a matter of days.

 

Are there any parties that could object to the sale of an insolvent business?

If you have any creditors that are waiting on money owed to them, they could potentially challenge the sale of your business, causing any sale to drag on longer that it should If your business will struggle to muster the appropriate funds to trade while the sale goes through, it may be more cost-effective to wrap up any problematic debts beforehand.

 

Can you sell a liquidated company?

Technically, no. Once in liquidation measures, a company cannot be sold as one whole unit. Buyers can, however, look to purchase the business’s assets separately.

Specialist equipment, vehicles, and especially property can be attractive assets for a buyer to acquire. The sale of items such as these is handled by the insolvency practitioner, who will appoint an independent third party to value the assets before they’re sold.

 

It’s best to start looking for a buyer before insolvency hits

You’re far more likely to achieve a favourable sales figure if you can sell your business before it reaches insolvency. If you can see the signs of your business failing, and are unsure what you can do to turn things around, it’s best to look into selling before it becomes less valuable.

Lucrative contracts can be lost by businesses struggling to pay their debts. If you can offer such contracts before they’re at risk of being cancelled, you’re far more likely to attract a buyer.

 

Present your company in its best light

Just as you would tidy up your house before selling it, you might also need to make a few adjustments to your business to ensure that it looks its best for potential buyers. If there are any inexpensive repairs to your premises or cleaning of equipment that’s overdue, it’s worth getting this sorted before potential buyers visit.

Speak to your staff about the situation, and check that they’re all committed to the business. If you can demonstrate that you have a stable workforce in place, you’ve already taken care of one task for any buyer.

If you can present buyers with a business turnaround or restructuring plan, you may be taking care of yet another task for them.  With so many opportunities open for anybody looking to purchase a business, you need to ensure that you make your business’s most valuable elements are clear and visible to anybody looking. If your business has valuable assets, a settled workforce in place, and a viable turnaround plan, make sure that you use these as the main selling points.

 

Liquidation

If your business has run out of funds completely and can no longer continue to trade, you may need to liquidate your company instead. This process involves an insolvency practitioner (IP), coming into your business to act as director and liquidator. They’ll then start the process of selling off any assets in order to repay any outstanding debts and dividing any remaining funds among directors or shareholders.

 

Asset sales

Businesses that have little chance of being turned around may opt to just sell off its assets before declaring itself insolvent. This is a useful option for companies that own their own premises or use valuable specialist equipment.

Struggling businesses selling off their assets can attract plenty of buyers hoping to find themselves a bargain. An asset sale allows them to purchase the items that provide the most valuable to a company, without having to take on the business’s accompanying liabilities. Interested parties will know that you may have limited time to sell your assets, and possibly have creditors putting pressure on you to be paid too. Despite this, you’ll need to resist any temptation to sell at a price that’s too low.

Assets sold at a price significantly lower than their expected value can cause the selling company’s owner to face personal liability issues. This is also true of selling items to an individual connected to the business. If you can enrol the help of an IP to guide you through how best to sell off your assets instead, you’ll potentially save yourself a lot of trouble later in the process.

In general, any sales should be seen as being in the company’s best interests. Remember that limited companies are classed as a separate legal entity to the owners, and as such, shouldn’t be exploited by being sold at nominal fees to family or other related parties.

 

Is ‘phoenixing’ legal?

Phoenixing is the act of leaving debts behind with an insolvent company and launching the same business again, but free of debts. This practice has garnered a fair amount of controversy over the years due to unscrupulous directors driving their companies into insolvency on purpose to avoid paying creditors. Once debt free, directors could then buy back their assets at a reduced price which was often less than their original debts

Thankfully, the Insolvency Act 1986 has made this practice much more difficult to exploit, but the act of creating a phoenix company is still entirely legal. There are rules and regulations to adhere to in order to do this, but if your business has found itself in trouble without any wrongdoing involved, and it has a good chance of operating with a profit, then it might be a viable option.

 

Paying back creditors

If your company has outstanding bills that it cannot pay, any funds you raise from the sale of your business will go towards paying off your secured creditors before anything else. Secured creditors are those that have a formal agreement with your company, and usually have a fixed charge that’s been in place since your business’s opening. These are often related to business premises, trademarks, and specialist equipment.

Unsecured creditors such as HMRC, customers, or suppliers, are next in line to be paid off. They’ll take a share of whatever is left over after the secured creditors have been paid.

 

Let us guide you through your best options

Here at Forbes Burton, we specialise in giving business owners the best possible advice for their particular situation. We’ll take a look at your business and recommend a tailored solution that suits your distinct circumstances. If selling your business is your best option, we can help you along every step of the way, and even help you find a buyer. Alternatively, we may even be able to find ways in which to turn your business around and continue trading. Give us a call or book a free consultation to speak to one of our business specialists, and receive real, actionable help today.