Management buy outs in insolvency situations

When dealing with an insolvent company, an Insolvency Practitioner’s principal duty is to maximise the returns for creditors, and a key step is to maximise recoveries in respect of the assets of the company.

It is often the case that the director of the company shows an interest in acquiring the underlying business and some or all of the assets. Achieving a sale on that basis can be an effective way of realising the greatest value – a director will likely have the deepest knowledge of a business and its potential and therefore may see it as having a greater value than another party with more limited knowledge who might see the opportunity as more speculative.

Alongside the directors, there may be staff who have the desire and means to acquire all or part of the business and we have acted in a number of instances recently where this has been the case. However, dealing with employees in this scenario can give rise to different challenges.

Funding

A sale of an insolvent business is, by its nature, a time pressured exercise. An employee without access to personal funds is likely to require external finance which can add to the complexity and cost of a deal.

Moreover, an employee without a business background may struggle with the concept of having to pay some value to acquire an insolvent business, especially where it is likely that they’ll need to make payments to key suppliers to preserve the business.

We are able to make introductions to various finance providers to suit the needs of the individuals. We are also committed to being transparent and clear in our dealings so that a management team can have confidence that they are getting value from the transaction.

Negotiations

We are always keen to ensure that any purchaser is receiving sensible advice regarding financing a deal and the legal aspects of the sale agreement.

In our experience, employees may not have an appreciation of the value in paying for good advice. Also, they often expect the Insolvency Practitioner to provide a certain level of advice on various matters, for example in relation to the level of consideration that they will have to pay.

To maintain independence and a competitive market, when acting for an insolvent company, we cannot provide the purchaser with advice and cannot, for example, share a copy of a valuation which will have been obtained. However, we can recommend a solicitor or other advisor who will be able to assist the management team in identifying issues and understanding how they can be resolved.

Due Diligence

We have found that employees making up a management team can tend to be very risk-averse in their negotiations and can be wary when there is any uncertainty with the sale, for example on the question of whether any employees will transfer to the purchaser.

An Insolvency Practitioner will almost always be selling a business in the unusual circumstances where they have very limited knowledge, and the records of the company may not be up to date. A purchaser of an insolvent business will need to take on a level of risk in relation to any unknowns and this may not sit well with a management team where the individuals are used to being employees.

As above, we find that being clear on the parameters and also recommending suitable advisors can avoid barriers arising.

Organisation

The purchaser of an insolvent business is likely to have to undertake a review of the operational aspects of the business and quickly establish whether any changes are required. Ideally the management team will have a good spread of experience and knowledge of the business, but they may not be used to having the kind of overview required to run the business and make decisions.

We are able to discuss these issues with the purchaser and, if there are gaps in the management team, share ideas as to how that might be addressed.

Reputational Risk

The management team looking to acquire the business will need to consider whether they will be viewed as credible by suppliers and customers, when the company’s reputation may already have been tarnished in the lead up to a formal insolvency.

The purchaser will need to quickly identify stakeholders who they wish to do business with and issue messaging which sets out their intention to move forward with the business. In some circumstances, there might be a tendency to lay blame on the previous owners, or to avoid mentioning the insolvency of the company in question.

Using our experience of these matters, we can provide some guidance to the purchasing team to ensure that all communications are measured in tone and factually accurate in order to avoid creating more difficulties.

Conclusion

A management buy out may be a useful option to extract value for creditors when a company becomes insolvent. As with any sale process, issues will arise but an experienced Insolvency Practitioner should be able to help a management team to identify likely problems at an early stage, and to help them obtain appropriate advice to ensure that the issues don’t scupper a good deal.

For more information about the topics explored in this article, please get in touch.