PKF VIEWPOINT - Think before you buy
There has been a spate of insolvencies among both hardware and software computer companies and their distributors. In such a rapidly developing and competitive sector, this may be inevitable.
In some cases, there may be a viable underlying business that could be turned around by a skilled manager and that, with careful nurturing, could be a profitable source of growth. But there are many pitfalls for the unwary.
A purchaser of a business out of an insolvent company should be aware of these pitfalls and of the powers of the seller, who will be a licensed insolvency practitioner.
The specific powers of the insolvency practitioner vary according to the type of insolvency procedure - liquidation, administration or administrative receivership - but when buying an insolvent business, there are five golden rules.
1. The insolvency practitioner can only sell whatever right, title or interest the company has.
The offer for sale will be for the assets and undertaking of the company, not the liabilities. It may be that not everything on site is for sale; for example, assets may be subject to leasing agreements, retention of title claims or liens.
In some circumstances, the insolvency practitioner can sell assets subject to third-party claims, provided he or she accounts to them for the proceeds.
Or it may be possible to make a cash offer to the owner or finance company.
The order book and existing contracts should be closely examined. Some contracts are not assignable, while others need the other party's consent.
Intellectual property, franchising and licensing agreements may not be transferable. It may not be possible to take over the premises, or there may be sitting tenants.
If the company's name is purchased, it could be a criminal offence to trade under the insolvent company's name if the former directors are retained.
2. The insolvency practitioner will give no guarantees or warranties.
The insolvency practitioner will want to distribute the proceeds of sale as quickly as possible and will not want to retain funds to cover guarantees.
The assets being purchased should be clearly defined and inspected as far as possible and any exclusions specified.
Any purchaser of an insolvent business should obtain advice from a specialist valuer.
3. The insolvency practitioner will exclude personal liability.
For example, if the company's workforce is being taken over, there could be substantial liabilities and, in certain circumstances, the employees' contracts will continue as if they were originally made with the purchaser.
4. The insolvency practitioner will probably want a quick sale.
The more time that elapses between the insolvency practitioner's appointment and the sale, the less of a business there may be available to a purchaser, and the price may fall.
But even if others interested in purchasing add to the time pressures, it is important to carry out a thorough financial investigation into the business, in particular to ascertain the reasons for its failure. Don't be pushed into putting your other businesses at risk.
When making an offer, remember that the alternative for the insolvency practitioner is an auction sale of the individual assets.
5. The insolvency practitioner will prefer immediate payment.
The insolvency practitioner may require a non-refundable deposit and will rarely agree to any form of credit terms. He or she may want a percentage of future turnover and will usually require payment in cash or a banker's draft.
John Alexander and Nitin Joshi of Pannell Kerr Forster are accountants and insolvency practitioners specialising in the computer sector.