Every year, hundreds of Irish companies go into liquidation/receivership. Such situations can represent a unique opportunity for a purchaser to expand his business, or acquire a complementary business, at a knock down price.

Sometimes, depending on the particular market which the company is operating in, the situation may give a competitor the opportunity to increase his market share by paying a premium for the assets and thus preventing the previous management from buying the assets and setting up in competition. It has been known for competitors to mothball such assets in order to protect their market share.

Leaving aside the strategic issues facing potential purchasers, the purpose of this article is to lay out a suggested action plan for acquiring businesses from Receivers. Similar considerations would apply to buying a business from a Liquidator.

Initial Review of the Business

The purchasers should determine why the company went into receivership. If the company failed because of poor product quality leading to poor sales then it is likely that there is no inherent viable business. However if the company failed because of, say, inadequate financing but is has a strong brand name in the market place then it may be viable.

Assemble the Acquisition Team

If the purchaser is interested in buying the business he should assemble an acquisition team, who should be advised by competent solicitors and valuers, it is also a very good idea to have an insolvency specialist on the team as he can advise on the negotiating strategy to be adopted with the receiver.

The Detailed Investigation

Generally speaking, the receiver will sell the assets “as are” and will give no warranties or guarantees. Thus, receivership sales are a case of caveat emptor. The investigation into the business should concentrate on its future prospects. In contracting type businesses the Receiver may wish to sell the benefit of uncompleted contacts. These require particular due diligence to ensure that they can be completed profitably.

Negotiating the Offer

The most important stage! The purchaser has completed his investigations and has concluded that he wishes to sit at the negotiating table. The tactics for the final negotiations will depend on many factors, including the degree of face to face negotiations and the skills of the respective negotiating teams.

The experienced Receiver will rarely tell you how much he is looking for, he is well aware of the adage that “every offer is subject to a counter offer”, and thus he will ask all interested parties to submit written offers and attempt to improve on these, He may also attempt to generate a bidding war among the potential purchasers, leading to a so called “Dutch Auction”.

While the Receiver will try and sell the business for the maximum amount possible, he will generally end up selling the business for an amount between its forced sale value and its going concern value. The receiver will have received valuations from his valuers for the assets on these two bases. To illustrate the difference in values, we once sold the business of a small engineering company whose book value of plant and machinery was € 410,000, going concern value € 228,000 and forced sale value of €104,000. We finally managed to sell the business, after three months trading, for an effective price of €182,000.

There are many factors which the Receivers will take into account in selling assets. For example, there may be a rent quarter day coming up and the Receiver may wish to have the premises vacated by then. We once sold, in the space of an afternoon the contents of a 20,000 square foot carpet warehouse and the office furniture and equipment in an adjoining building for only €32,000, as a rather aggressive landlord was organising bailiffs to come round the following day.
Most receivership sales are not done under such duress, and in these circumstances it is worth while maintaining close relationships with the company’s management and the Receiver’s staff to determine the level of interest of other purchasers. This information can be used for setting the parameters of your opening bid.

The golden rule to remember is that everything is negotiable: the price, payment terms, rents, access to premises post completion, retention of title claims, commission for the collection of book debts etc.

The longer the receiver continues to trade the more likely he is to sell the business closer to its forced sale value. This is because the business starts to lose customers due to uncertainty over future supplies and key staff take up positions elsewhere.
If there is only one purchaser interested in the business then the opportunity for knocking the price down is greater. However, an experienced Receiver should still manage to achieve a good result.

Conclusion

Receivership/liquidations offer a unique opportunity to buy a business for less than its going concern value.

For further information please contact Jim Stafford or Tom Murray on 01 661 4066 or jim.stafford@frielstafford.ie or tom.murray@frielstafford.ie