What does it mean when a company is bought out of administration?

Understanding what a sale out of administration means for a company and its employeesWhen a company is bought out of administration, it signifies a pivotal moment in its tumultuous journey. At this critical juncture, another party, often with ties to the original business, emerges as a beacon of opportunity by agreeing to purchase select assets from the company and sustain its operations.

As the transaction takes shape, the once-prominent company, now stripped of its valuable resources, faces an inevitable destiny: the liquidation process that will render it defunct as a legal entity moving forward.

This profound transformation embodies both the bitter farewell of the old company and the hopeful emergence of its remaining components under new ownership, symbolising the duality of endings and beginnings in the world of business

Understanding what a sale out of administration means for a company and its employees

Understanding what a sale out of administration entails holds immense significance for both a company and its employees. For the company, such a sale represents a lifeline, offering a chance to salvage valuable assets and continue operating under new ownership. It presents an opportunity to restructure, reinvigorate, and potentially regain stability in the face of financial distress. However, this process also brings uncertainty and change for the employees.

While some may find reassurance in the continuation of operations, others may experience anxiety about their job security, potential restructuring, or altered working conditions. It is crucial for both the company and its employees to navigate this transitional period with transparency, communication, and support to ensure a smooth transition and mitigate the impact on individuals and their livelihoods.

What is the purpose of company administration?

Entering administration is intended as a temporary measure rather than a long-term solution for a struggling company. Once a company enters administration, it is granted protection from legal actions while efforts are made to secure its exit from this state. The approach taken to exit administration depends on the company’s financial position and its potential for future success. One possible route is a sale out of administration, which allows the business to continue trading and preserves jobs.

This option is often preferred by shareholders and stakeholders as it offers the prospect of maintaining the company’s value and reputation. Alternatively, if the company’s chances of recovery are deemed slim, the option to close the business may be considered.

In recent times, well-known companies such as HMV, L.K Bennett, and Pretty Green have undergone the process of administration and subsequently been acquired by various parties. Some of these acquisitions were made by individuals or entities already connected to the respective companies, while others were carried out by unrelated parties eager to acquire a renowned brand and tap into its existing customer base.

These instances illustrate the diverse approaches and motivations behind the purchase of companies emerging from administration, highlighting the complex dynamics at play in the business landscape.

What happens when a company enters administration?

Upon being appointed, the administrator assumes control of the company, and their decisions must prioritize the interests of outstanding creditors. In most cases, the administrator seeks ways to streamline the business and reduce operating costs to a minimum. Throughout the administration process, it is common for the business to continue operating, especially if there is a likelihood of a future sale. Selling a trading business as a going concern often yields higher prices compared to selling the assets of a closed company.

If the administrator deems the company to be salvageable, they actively market and seek potential buyers for the business as a going concern. Offers from interested parties are considered, and the administrator’s role is to accept the offer that best satisfies the company’s creditors. This could be the offer with the highest total bid or the deal that provides the largest upfront cash payment rather than an installment plan. The eventual purchaser may be an unrelated third party or a newly established entity formed by the existing directors and shareholders.

It is important to note that this process differs from a pre-pack administration, where a sale is negotiated and agreed upon before the formal appointment of administrators

What is sold to the buyer when a company is bought out of administration?

In each transaction, the specific terms of the deal may vary; however, when a company is sold out of administration, the purchaser typically acquires various components of the business. These include tangible assets such as equipment, inventory, and property, as well as intangible assets like the brand, goodwill, online presence, and wholesale operations. By selling both the tangible and intangible assets of the company, proceeds can be generated to make distributions to outstanding creditors, alleviating the burden of the company’s debt.

This approach not only benefits the creditors by allowing them to recover some of their funds but also significantly increases the chances of the new venture’s survival. The new entity, unencumbered by the weight of the mounting debt, can start afresh and focus on building a sustainable future. By acquiring the essential elements of the business, the purchaser gains a solid foundation to continue operations, capitalize on the brand’s recognition, and leverage the existing customer base. This approach serves as a mutually beneficial solution, providing a financial resolution for creditors and offering the new venture an improved opportunity to thrive

What happens after the sale has completed?

While successfully exiting administration through a sale may bring some relief, it does not guarantee smooth sailing for the company going forward. Despite a reduction in debt levels, the underlying issues that led to the debt accumulation are likely to persist. Without addressing these underlying challenges, there remains a real risk of history repeating itself.

These challenges can take various forms, such as low profit margins, a shrinking customer base, or high financial obligations like expensive long-term leases for large premises—particularly problematic for brick-and-mortar retail businesses. Failed companies have often faced criticism for their lack of product innovation, failure to keep pace with evolving customer demands, and an inability to adapt their business model to an increasingly online retail landscape.

To ensure long-term success, the newly acquired company must confront and tackle these challenges head-on. It requires strategic planning, innovation, and adaptability to overcome the hurdles that led to its previous financial difficulties. By addressing these issues, implementing necessary changes, and staying attuned to market trends and customer preferences, the company can aim to secure a more stable and prosperous future. It is essential to learn from past mistakes and proactively evolve to meet the demands of a dynamic business environment.

Change will be needed

Purchasing a company out of administration entails a substantial infusion of cash. This financial investment is not only required to acquire the business itself but also to revitalize its cash flow and support any necessary changes to its current operating model.

Revamping the brand image, refining its positioning, and revitalizing product or service offerings may be essential to better appeal to the target market. Simultaneously, a careful examination of the company’s expenditures becomes imperative.

While a sale out of administration can be a lifeline for a company’s continuity, only time will reveal whether the new owners can execute a turnaround significant enough to steer the company towards stability and maintain a presence in the competitive landscape of high streets. It demands astute leadership, effective implementation of strategic changes, and a keen understanding of evolving market dynamics.

The path to success lies in the ability to adapt, innovate, and align the company with the evolving needs and preferences of consumers. By rejuvenating the brand, optimizing operations, and carefully managing resources, there is a chance for the company to regain its footing and forge a new path towards long-term viability and success.

Steve Jones Profile
Insolvency & Restructuring Expert at Business Insolvency Helpline

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.