The pros and cons of buying out of administration

The financial gains to be made from buying a business out of administration can be significant. However, the potential risks involved can be just as great.

For this reason, it’s vital that potential buyers consider the benefits and pitfalls of undergoing such a process.

‘Fire sales’ often take place either before an administrator is appointed, known as pre-pack administrations, or purchasing a company from the administrator once appointed. 

Assets may be bought by a third party or a trade buyer, but the directors of the failed business often buy the assets and trade under a new company name. 

The main benefit is the speed of sale, usually resulting in higher returns for creditors in comparison to alternative routes into insolvency.

Another advantage is business continuity. Buying the business as a ‘going concern’ means that operations are uninterrupted and the value of work in progress and customer goodwill are protected, contributing to the success of the new company.

Buying the business as a ‘going concern’ means that operations are uninterrupted

The pitfalls must also be seriously considered. A fundamental pitfall is that time is of the essence. If an opportunity arises, as the buyer, you will need to be very focused on making the deal work, rather than completing a typical deal process involving the due diligence procedure and extensive negotiation, particularly in relation to warranties.

Typically for these ‘fire sale’ transactions, very few or no warranties would be provided to the buyer.

All sale transactions are subject to benefits and pitfalls. As a buyer, it is crucial that you are made fully aware of these factors before entering the sale process – and take legal advice from a specialist solicitor. 

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