Buying a business from administration – tips from a professional

With company insolvencies at a 30-year high, there have rarely been more opportunities to buy an ailing business. Tom Grummitt from insolvency firm Bridgewood (part of the DSW Network), who acts as an administrator in many cases, offers some advice

Over 25,000 companies became insolvent in 2023 – equivalent to one in every 186 active companies and the highest number since 1993. Many such firms are simply not viable, so enter liquidation and close with immediate effect. However those considered to have a chance of survival are often placed into administration and may be put on the market.

Acquiring a struggling business is risky but it can also be an opportunity to pick up quality assets at a bargain price. Whether through bad management or bad luck, even successful firms including many established brands find themselves in financial difficulties. Under new ownership, businesses can often be restored to health.

As administrators, we often see cases where the underlying business is profitable but it has been over-leveraged and with rising interest rates, has been unable to keep up with repayments. Once the debt burden is removed as a result of the insolvency process, a business can return to profitability.

In other cases, the problem has resulted from an unforeseen event or short-term disruption and the business had insufficient reserves to weather the storm, though the long-term prospects remain good.

Even if a company has been poorly run, a buyer with sound business acumen can apply their expertise to make a success of it. By adding the business to their portfolio, they can benefit from economies of scale and cross-referrals.

Here are some key things to consider when buying a business from administration:

1. Scrutinise the profit and loss account

A detailed breakdown of the accounts will reveal exactly what the company was 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.

2. 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.

3. Review the property lease

If the property from which the business trades is 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 payment. 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.

4. Consider honouring customer deposits

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

5. 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.

Buying a business from administration is not without risk, but in the right circumstances and the right approach, it can make good business sense.

Tom Grummitt

Tom Grummitt
Partner at Bridgewood

Thank you Tom for sharing this insight with us, if you’d like to see more resources from Bridgewood visit their website