Administration Sale: Tips for buying a business from an Administrator

With the current economic landscape witnessing the highest number of company insolvencies in 30 years, there are more opportunities than ever to acquire struggling businesses. Tom Grummitt, Insolvency Practitioner & Partner at Bridgewood, shares valuable advice from his experience.

In the year 2023 alone, over 25,000 companies faced insolvency, marking a significant uptick – the highest recorded since 1993. While many of these businesses inevitably wind up in liquidation due to their non-viability, those deemed salvageable become available for acquisition as part of an administration process.

Investing in a distressed business comes with inherent risks, but also provides an opportunity to acquire valuable assets at a discounted price. Whether attributable to mismanagement or unfortunate circumstances, even reputable companies and established brands can find themselves grappling with financial woes. Under new ownership, such businesses often have the potential to be revitalised and restored to profitability.

In many of the cases we see, underlying businesses are viable but have succumbed to over-leveraging and cannot sustain repayments amidst rising interest rates. Through the insolvency process, once the burden of debt is alleviated, these businesses can return to profitability.

Alternatively, some businesses face setbacks due to unforeseen events or short-term disruptions yet retain promising long-term prospects despite temporary challenges.

A buyer with solid business acumen can leverage their expertise to steer a company towards success. By integrating the acquired business into their portfolio, they can capitalise on economies of scale and cross-referral opportunities.

Key things to consider when buying a business from administration

Scrutinise the profit and loss account

A detailed breakdown of the accounts will reveal exactly what the company is spending money on and where there is scope to cut costs. If you are planning to merge it with your existing business, then you should be able to identify duplicate items that offer potential for immediate savings.

Calculate TUPE obligations

If you are buying the business as a going concern, then under the TUPE Regulations (Transfer of Undertakings Protection of Employment) you will be required to take on the existing staff and any associated liabilities, including any future redundancy or notice pay costs which will be calculated based on original start dates.

The involvement of an administrator can be very helpful here, as they will be experienced in dealing with TUPE transfers and can help communicate with employees. Administrators also understand what information a buyer requires to assess their liabilities under TUPE and can help ensure this information is readily available. For this reason, the TUPE process is potentially easier when buying a business in administration than in a normal acquisition.

Review the property lease

If the premises from which the business trades are leased, this brings another party into the negotiations – the landlord. Check how long is left on the lease and how the administration will affect it. If the business is to stay in the same premises, you may have to negotiate new terms and reach an agreement with the landlord and administrators about rent and a deposit. In practice landlords often take a constructive approach as it is usually in their interests to keep an existing tenant rather than find a new one, or risk becoming liable for business rates on an empty building.

Consider honouring customer deposits

The last thing new owners want to do is start on the wrong foot by upsetting customers and attracting bad publicity, so they may wish to honour any deposits taken. Ask for these to be taken into account when negotiating the purchase price with the administrators.

Beware of warranties

By contrast, few buyers will want to take responsibility for warranties on products previously sold and for which they have received no benefit. Make sure these are not included in the sales contract, or again, ensure they are taken into account in the price.

While acquiring a business from administration entails risks, in the right circumstances and with the right approach, it can make good business sense.