Yes, you can sell your insolvent company, in many circumstances, this must be done with an Insolvency Practitioner’s consent, either as a general element of an administration or as a pre-pack sale.
If your business is facing financial distress or is already insolvent, you may assume that selling it is no longer an option. You might be surprised to learn that insolvent and distressed businesses are often acquired by various parties, including turnaround specialists and entrepreneurs. The sale of an insolvent company frequently takes place during an administration process, where either a connected or unconnected party may seek to purchase the company’s assets.
Key considerations arise when your business reaches the point of insolvency or if you believe insolvency is unavoidable. Understanding how to navigate these challenges could help you secure a successful sale even under difficult circumstances.
Your options for selling an insolvent business
When an insolvent company enters administration — whether through a pre-pack administration or a standard company administration — one potential outcome is a sale to either a connected or unconnected party. Selling an insolvent company can enable the business to continue trading and help preserve jobs in the process, making a sale out of administration an attractive and often beneficial option.
Pre pack sale
If a pre-pack administration sale is pursued, the administrator must be able to demonstrate that the process delivers the best possible return for creditors.
It’s common for existing directors to use personal funds to acquire the underlying assets of a struggling business, allowing them to establish a ‘newco’ with minimal job losses and limited disruption to customer service.
Third-party buyers may also express interest in such sales. Pre-pack administrations tend to move quickly, partly due to the reduced competition compared to an open market sale.
The ability to maintain business continuity, limit negative publicity linked to the company’s financial troubles, and retain key staff are all key advantages of this process. These factors contribute to the swift completion of pre-pack sales, often within days rather than weeks.
Sale on the open market
If sufficient working capital is available, the administrator may choose to continue trading the company in the short term before putting it up for sale on the open market. This approach can generate a higher sale price than a pre-pack, as increased competition is likely to drive up the value. However, securing enough cash to keep the business running while it’s in a fragile financial state remains a significant challenge.
Preserving the company’s value is the primary concern when selling a business in administration. Once news spreads that the company is insolvent and has entered formal administration, there is a risk that its value could quickly decline. This would negatively impact creditors, making it crucial to time the sale carefully to maximise returns and protect stakeholder interests.
What type of sale – shares or assets?
Depending on the situation, a buyer may be interested in acquiring either the shares of a company or just its assets. Some buyers specialise in business turnarounds and may view your company as an appealing opportunity, especially if it has shown profitability in the past. A business with a solid track record, despite its current difficulties, can attract interest from investors seeking to unlock its potential.
By acquiring the shares and implementing a clear strategy to improve operations, a buyer could offset existing losses against the future profits they expect to generate, making the acquisition a strategically beneficial move.
What could adversely affect the sale of an insolvent business?
A shortened due diligence process, which is typically a crucial part of any business sale, can lead to unforeseen complications or disruptions. These may include, but are not limited to:
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Lack of warranties or indemnities – A prospective buyer won’t benefit from the added security that warranties and indemnities usually provide in a business purchase, increasing the level of risk involved.
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Transfer of contracts – A buyer may mistakenly assume that certain contracts are included in the sale, only to realise later that this isn’t the case, leading to potential operational and financial setbacks.
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Claims under TUPE – The Transfer of Undertakings (Protection of Employment) regulations (TUPE) protect employee contracts under certain conditions. This could result in claims against the new company, such as for constructive dismissal, creating additional liabilities for the buyer.
Selling when the business isn’t insolvent
If your company is facing severe financial distress but hasn’t yet become insolvent, taking swift action is crucial to maximise your chances of securing a sale. Finding a buyer becomes significantly more challenging once a business enters insolvency, as the company’s value tends to decline at that stage.
Obtaining a professional valuation of both the business and its assets — on both a liquidation and a going concern basis — can provide valuable insight into the potential sale value and support negotiations. Factors such as the nature of your business and current market conditions will influence the final valuation.
If you need further advice on selling a distressed or insolvent business, our licensed insolvency practitioners are here to help. Business Insolvency Helpline specialises in insolvency and can provide the expert guidance you need to navigate this complex process.
If you company is insolvency and you are wanting to sell it, simply complete the online enquiry form and one of our team will talk you though the process.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.