The offer
Insolvency Practitioners (IP) are often asked to name a price for a business and although they will often be able to give some guidance there will be circumstances that do not permit this.
There are three aspects of an offer:
The amount;
Timing for payment; and
Other benefits to the IP.
The amount to offer
There are a few considerations:
Value of the tangible assets
An IP will have a valuation of the plant, machinery, vehicles and office equipment prepared by a professional firm of agents. They will usually have at least two types of value; a value of the assets in its current situation (going concern) and a value should the assets have to be removed from site/sold at auction.
The IP will normally expect to sell at a price between these values. In order to formulate an offer it is therefore usually of great assistance to understand the value of the assets. This can normally be undertaken on a desk top basis by a firm of valuers for a relatively low cost.
In terms of stock, this is often difficult to value. An IP would typically use an estimated percentage ranging between 10 and 50% depending on the nature of the goods and the value they would realise in the open market. Market and industry knowledge will assist a purchaser in putting a value upon this.
If the purchaser is acquiring the debtors (customers who owe money) then an exercise of establishing recoverability needs to be undertaken. As a general rule an IP would expect between 75% and 100% of the gross value of the debts.
Valuing intangibles
This is much more difficult as the goodwill, etc. is only worth as much as someone is willing to pay for them.
To establish a value for these a purchaser could consider the expected value to them of the acquisition. This will involve an appraisal of synergy savings, profitability following restructuring and costs of the process.
A potential purchaser would then reduce this value to account for some of the liabilities and risks of the transaction. (See managing risks section.)
It is recommended that professional advice should be obtained to ensure that these are not over or undervalued (the latter may result in losing the potential acquisition).
Liabilities
The assets of the business will be sold and the liabilities will remain with the Company subject to the insolvency process. The primary exception to this is employee claims that may transfer to the purchaser of the business. Legal advice should always be sought on this.
Under the Transfer of Undertakings (Protection of Employment Rights Act) 2006 (TUPE 2006) some of these liabilities do not transfer. This includes primarily arrears of wages limited to £400 per week gross.
Other rights will often transfer to the purchaser. This includes the employee’s length of service for notice and redundancy purposes and claims for unfair dismissal. If a purchaser is considering making redundancies then the cost of this will have to be built into the price they are willing to pay.
Proper title
The IP can only sell whatever rights or title that the Company may have to the items. The IP will rarely be able to provide any warranties confirming that the Company own the item.
Provision needs to be factored into an offer to take account of this. In particular stock may be subject to reservation of title claims which may result in a price being paid for items that do not belong to the Company. In this event the purchaser will have to pay the supplier for the goods or return them.
The situation is the same for other assets other than stock but the risk tends to be lower with larger items where documents of ownership may be available for consideration.
Reduction in creditors
An offer for the business as a going concern will normally result in lower creditor claims than if the business is closed since contracts can be completed and the employees retain their jobs. The IP may give some weight to such a reduction if the IP thinks that there will be a distribution to the unsecured creditors.
Timing for payment
Much weight is placed upon up-front payments and Insolvency Practitioners will heavily discount any ‘earn out’ or deferred consideration. Such arrangements are only usually considered if an element is up front and at least covers the value of the tangible assets and if there is a highly limited market.
If an element is deferred it would be usual practice for the IP to obtain security over the items through some form of charge, cross guarantee or personal guarantee from the directors of the purchaser. Care should be taken and advice sought in relation to guarantees since this could jeopardise an existing business or the personal finances of the officers of the purchaser.
Other benefits
A purchaser may be able to offer other benefits to an IP. This could for include for example:
Assistance in collecting the book debts of the Company (if not purchased). (As a general rule an IP may be willing to pay 10% of the amount collected in fees.)
Taking over responsibility for any orders placed by the IP that have not been fulfilled
