I have previously talked about the risks and potential benefits of buying a distressed company from an administrator. Such opportunities can generate substantial value for a buyer. Over the next year or so, you may be presented with opportunities to buy a business from administration. This could be a competitor, customer, supplier or a business with no connection to you.

When an administrator is appointed to a company, he is obligated to maximise the cash realised for the assets available and must act in the interests of the creditors at all times. Due to the very fact that the company is in administration, those assets are usually sold at a substantial discount to normal value, offering a good opportunity for buyers, albeit usually with no warranties or guarantees. However the acquirer will need to move very quickly, and whilst there is not time to undertake all the rigorous checks applied to a normal transaction, there is a minimum which should be undertaken:

• meetings with management/key staff to assess their strengths, weaknesses and intentions
• discussions with key customers, and other stakeholders such as landlords/suppliers
• some brief due diligence – focused on key areas
• consideration of retention of title issues, ransom payments, ongoing contractual obligations
• establishing profit viability and evaluation of working capital requirements
• consideration of Transfer of Undertakings (Protection of Employment) Regulations (TUPE)
• devising an offer and negotiating with the administrator/management team.

It is also important that the buyer can also devote time immediately after the acquisition, otherwise the business can easily hit the same problems that put it in a distressed position.

The earlier that dialogue is begun with a distressed business – even before administration – the better.

I would also recommend that you only consider investing time and money in a distressed business where you have knowledge of the sector. There is no time to gain an understanding of the area of business, given the time pressures involved in a distressed transaction.

Julian Dobbin is a partner at Mercer & Hole. The views given in this blog are personal to the author.

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There have been several predictions that the number of business failures will increase in early 2010. History indicates that insolvencies rise as the economy comes out of a recession, and that Q1 is frequently the time when owners run out of cash.

There are therefore likely to be more financially distressed businesses being sold by administrators – offering a great opportunity for those with cash. Not all distressed businesses are basket cases – some can be well managed and profitable. One bad debt, legal dispute, missed payment or change in terms can push a company into cash flow difficulties which could lead to formal insolvency procedures.

Buying from an administrator must be undertaken very quickly. The assets are usually sold at substantial discounts to normal valuations, which reflects the risks and lack of warranties/indemnities.

Mercer & Hole have several experienced insolvency practitioners. This provides us with a big advantage when it comes to negotiating with an administrator.

We receive a number of distressed acquisition opportunities every week, if anyone would like to hear of such businesses, please email me to register an interest.

I will cover the key issues to be aware of in buying from an administrator in another post.

Julian Dobbin is a partner at Mercer & Hole. The views given in this blog are personal to the author.

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In my recent posts, I have been talking about how an acquirer can maximise their return on investment by avoiding the standard pitfalls in a deal. I have mentioned the experiences of Mercer & Hole in making acquisitions, and how we have ultimately succeeded by aiming at niche businesses, realistic negotiating and by integrating into the existing M&H ethos. 

We had reached the point in our hypothetical deal where the seller had provided enough information to make an offer.

It is important to invest significant time in the offer itself. The key issue is obviously the valuation - there are a number of ways to approach this - profit multiples, discounted cash flows etc (far too much for this blog). 

It is almost as important to ensure the other terms are in your favour - earn out agreements, working capital levels, vendor service agreements and warranties. A crucial issue I come across time and time again are the conditions attached to the offer - if sufficient conditions are not included with the offer, it may hinder price negotiations after due diligence. It is not easy to predict what the diligence will identify, but with a bit of thought the key risks can be covered. 

Most sellers will attempt to renegotiate the terms of the offer - most good business people should be well used to bartering / haggling at this point. In the words of the father of modern economics: 

"The propensity to truck, barter and exchange one thing for another is common to all men, and to be found in no other race of animals."

Adam Smith (Scottish philosopher and economist) 

I will cover the final stages shortly. 

Please see our website (http://www.mercerhole.co.uk/services/overview/C24) for more details on the acquisition process.

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