Buying an Insolvent Business... Advice Please

[poohbear99]

I have been looking for premises for a business for sometime and have finally found something which fits my criteria perfectly.

They are demanding a fairly hefty premium for the lease which could be attributed to the size and location of the business.

So far they have provided 08/09 trading figures but they seem to be taking time with the remainder. Although turnover is healthy, the profits are low but the expenses have been hugely inflated to minimise profits and thus tax. I'm not hugely concerned by this as there is huge scope to develop the business.

After doing some research online today I have found a notice relating to the business, registering it as Insolvent as of December last year.

My question is, should I have been made aware of this by the vendor and agent? What do I need to be aware of when dealing with an insolvent business?

When I met with the vendor they explained that they own a number of commercial properties and after many years of running the business they are slowly leasing off premises. I don't understand how a business owner with multiple businesses and revenues would need to go into liquidation?

Apologies if this sounds naive but any thoughts would be greatly appreciated.

 

[Homshaw]

This sounds a little confused

An insolvent company shouldn't be leasing property or doing anything else. You need to know who you are dealing with

Also I don't know what you mean by "inflating the expenses". They are what they are and I wouldn't pay a premium on some dubious claim they are not as high as shown especially if the lastest accounts aren't forthcoming

If I couldn't get a clear idea of what is going on I wouldn't touch it

At least you have the common sense to be suspicious

 

[Paul Norman]

I am slightly confused too.

Are you buying the premises only, or the business as a going concern?

Each is a very different prospect. If the accounts of the business are not verifiable as accurate (you need to get a profesesional to do this for you), then I would not go near it. Be very careful to understand, in the event of buying a business, exactly what you are getting.

If it is just the premises, then the existing business is not relevant. If, however, you are going to be conducting an exactly similar business, and the outgoing people are closing down, there are some obscure employment rules you must be aware of. Your solicitor will know of them, and be able to advice.

 

[elaine@cheapaccounting]

All part of the due diligence process of buying a business.

My view based purely on what you have said here – walk away!

You have a choice here – spend precious time / money investigating further or work on your gut feel that something is not right about this whole deal.

The very fact that you have posted here would suggest that you have concerns – not a great basis upon which to broker a deal, buy a business and then develop it.

Is your time / money best spent on something that has far less issues and more transparency on the deal?

 

[poohbear99]

Thanks for your responses so far.

The business is running currently running as I intend to operate it, so I am buying it as a going concern.

Upon looking at the accounts for 09 some of the expenses / outgoings seem ridiculously high but of course, if I intend to progress with it, I will get these looked at professionally.

I totally agree that it would be better to walk away and find something with less issues. However, the premises I am looking for are very specific (location, size, layout etc) and it's taken me so long to find these that I don't want to walk away unless certain it's not worth the trouble...

 

[elaine@cheapaccounting]

Why not buy the premises then rather than the business?

If the business is in insolvency then it is not a going concern! If proceedings are on going are you dealing with the liquidator?

 

[poohbear99]

The value of the freehold would be too high

The business is being sold by a commercial agent, there has been no mention of the liquidation, it's only something I came across after doing a search online

Is it normal for a commercial agent to be working on behalf of the client and or liquidator?

 

[Jenni384]

I wouold go straight to the vendor and ask them about the liquidation and ask them to explain it. Depending on how they handle the answer (i.e. open and honest or evasive) would determine to me whether or not to continue. Even if you really want it, if they are evasive about the liquidation, what else are they not telling you? Tread very carefully.

 

[elaine@cheapaccounting]

[FONT=&quot]Do you know who the liquidator is?

An agent may be appointed by them to sell the business / lease.

Check what the status of the business sis with the agent.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]The last accounts you have are too out of date and you need 2010 plus year to date for current.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]If you are told the business is on liquidation and still want to proceed I would strongly recommend that you seek professional advice - I mean from a solicitor and accountant. You must ensure that the agreement does not pass any dents / liabilities etc to you![/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]Good luck.[/FONT]

 

[poohbear99]

Yes I know who the liquidator is, as it's stated on the notice of liquidation

thanks for you help

 

[Alan R Price]

Yes I know who the liquidator is, as it's stated on the notice of liquidation

thanks for you help

You need to establish exactly who the owner(s)/seller(s) of the business/property is/are. They are not necessarily the same - it would not be unusual for a business occupied by one company to occupy premises owned by a different but associated company. This is absolutely vital because a company in liquidation may not dispose of its assets without the consent of the liquidator. I recommend you contact the liquidator immediately to find out the position: only he can validly dispose of the company's assets if it is in liquidation.

 

[poohbear99]

Thanks for your response.

So I have had some clarification that the sale is for the trading business in leasehold format and not the limited company itself.

It also appears that the directors set up another limited company at the same time that the other company went into liquidation and are running the business from the same premises under a new name.

Now I need to understand whether the premium attributed for the lease and goodwill is accurate. I have been told that the valuation is based on the value of the business, goodwill and fixtures and fittings - as I intend to run the business as it was previously but under a new limited company. But given there is no business to buy, does that sounds correct? What do I need to take in to account to understand the value?

All of your help is really appreciated.

 

[elaine@cheapaccounting]

You need an accountant to check the valuation and carry out full due diligence on this transaction.

 

[Alan R Price]

I agree with Elaine. Given the owners' previous history fairly vigorous due-diligence is required. You need to understand exactly what you are buying and to be happy there are no hidden "nasties". In particular, if the liquidator sold the business and/or assets to the current company, I would want to see proper evidence of this.

My advice: don't do it on the cheap. Get your accountant or a corporate finance specialist to advise on the transaction. From what I can see, the figures are sufficiently large to make it worthwhile: what's that old saying about losing the ship for a ha'porth of tar?

 

[jim_price]

So the current owners original trading business went into liquidation, they've set up a NewCo to pick up the trade and they're now selling the lease and trade. As Alan says you would need to be sure that they have good title to these assets first and foremost.

After that I guess you could try to piece together some kind of profit history for OldCo and NewCo. If it has been run as a "lifestyle" business then you could indeed strip out certain items that will not be relevant under your ownership, you could also factor in some of the opportuninities for growth that you can see, but don't get carried away! It is the business's ability to generate profit and ultimately cash that should determine its value to you, and therefore what you should be willing to pay.

You haven't said whether you will need access to finance for this acquisition. The recent history of the business might make that difficult no matter how well a case is presented. Make sure you've got this side of things addressed before incurring professional fees on due diligence and the like.

 

[poohbear99]

Thanks Jim. Yes I will need finance which is why I am reluctant to get an accountant involved at this stage as I want to do as much research first to see if this is going to be feasible. At the moment with all of the information I have been provided so far, its not looking too good.

They have said their valuation is based on ANP and EBITDA as opposed to the net profits because there are items included to save the vendor a higher tax liability and those that would not apply to an incoming buyer. But I need to check whether this is something that will be considered by a lender.

 

[elaine@cheapaccounting]

They have said their valuation is based on ANP and EBITDA as opposed to the net profits because there are items included to save the vendor a higher tax liability and those that would not apply to an incoming buyer. But I need to check whether this is something that will be considered by a lender.

ANP??

Valuation on EBITDA to “save the vendor a higher tax liability" doesn’t make sense at all.

EBITDA should not exclude any allowable expenses to save tax. So are there cost in there that are false? Why would they not be part of EBITDA?
(EBITDA is earnings before interest, taxes, depreciation, and amortisation)

My view - this is a pup and steer clear.

With what you have said it all sounds bloody fishy but devil in detail.

 

[jim_price]

I share Elaine's scepticism I'm afraid. In this context using EBITDA is just a convenience for the vendor.

ANP (Adjusted Net Profit) is more palatable but lenders will be looking for unequivocal add backs, so pension contributions, wages for family members etc, not more murky areas such as travel costs and motor expenses.

 

[poohbear99]

I went back to the agent and explained that I wasn't happy with the assessment of the business based on EBITDA. Given that turnover has dropped considerably over the last 5 years the goodwill also appears to have diminished so i'm not entirely clear how the premium can be justified. They agreed and said an offer should be made to reflect this.

I still haven't seen the recent figures so I'll wait for these and then decide where to go from there.

Thanks again for all of your help.

 

[elaine@cheapaccounting]

If you really want these premises - Don't buy the business - buy the lease and start again

 

[Alan R Price]

My view? Don't get sucked into tying up the value of the business with the value of the lease. The two are separate, so how much would they be worth separately? Why is the lease worth so much? As you say, turnover has dropped considerably over the last five years, so I can't see that the location has any special value when related to the business. The location has value to you but does the business?

This sounds to me like a sale in extremis. Forget their valuations or expectations. Look at the accounts, and assess what you think you could make out of the business. How valuable is the location to you really? And how valuable is the lease to them in terms of future income? Make a low, low offer. Be prepared to negotiate up a little but be prepared to walk away.

 

[thebiznizdotcom]

Mmmm right....here's my tips for this...
a) Never get personal with business. You might love the property and get a real gut feeling its right but keep thinking with your head. The art of the deal is "always be prepared to walk away"
b) Get a local commercial agent on your side to check if the rent their asking is right and get them involved in helping you with negotiations. They might be able to help you knock the rent down or show you cheaper alternatives.
c) If your going to buy a busines, please, please, please get someone involved in doing due dilligence like an accountant etc. You might think it an undue expense but I can guarantee you it will really be worth it.
d) Dont forget tip a)
Hope this helps and good look.
If you need any other help try www.thebizniz.com

 

[Alan R Price]

I think a common theme of advice is forming . . .

 

[poohbear99]

Thank you so much for the advice.

The location is such a strong selling point and adds huge value to the business. It's a surprise that the business has failed where it is, but I think it has been neglected by the owners who have no interest in the potential or growing the business.

Great tip to get a commercial agent involved and of course if it gets to that stage I will seek qualified help.

Thanks again.

 

[Homshaw]

but I think it has been neglected by the owners who have no interest in the potential or growing the business.

It's surprising how many times I hear this. But the truth turns out to be very different

People get an idea in their head and get carried away with how they can do better than the current owner. The number of times people tell me something is a goldmine and in turns out to be a bottomless pit for dumping money

They've gone to the trouble of setting up a business with all that entails. To question there ability or commitment is not something I would do lightly. Few people who have gone to the trouble they have would have given up without trying every option available

I would be careful especially in view of the rubbish the agent is talking about the accounts

 

[HerdAboutHorses]

Hi

It would appear that the business was insolvent and as such it is now under the control for either an Administrator or Liquidator. Either way their duty will be to raise as much cash as possible to pay down the creditors at the date of insolvency.

If this business is currently trading whilst under the control of the administrator or insolvency expert then the view must be that there is an opportunity to raise more funds for the creditors selling it as a going concern as oppposed to what it would be worth on a breakup basis.

The insolvency expert will be monitoring the ongoing trade which should have a view of a profitable underlying trade.

Caution is the key word as is due dilligence. Be very cautions. Make sure you negotiate directly with the administrator / liquidator. I am very surprised that the agent you refer to did not make you aware of the insolvency.

Take professional advice, assets on a breakup or insolvency basis are often worth very much less than on a going concern basis. Make sure that you do not inadvertently take over any debt the company had when if fell into insolvency.

This is a massive topic area and one that is very difficult to full answer in a forum.

Good luck

Rob