Should You Buy an Insolvent Business?

I am an Insolvency Practitioner and this is a question I get asked a lot.  It comes from all sorts of people; including those associated with an insolvent company, from competitors, general entrepreneurs wanting to grab opportunities that come their way, from people wanting to enter into a market place and from people looking to diversify, to name a few.

It is not a question I can answer, it’s more of a question that leads to further questions.  Such as “What do you want to achieve and how is this going to help you achieve it?”  There is no answer and all insolvent scenarios are different.  I have, however, put some of my observations (more questions and comments) which may give some guidance.

The first question I would ask is “Are you familiar with the industry in which the company you are considering buying operates?”  If you know the market well and have knowledge and contacts in this industry, great.  If it is a new market – you will be placing reliance on the staff/management of the insolvent company. 

You must then ask yourself the following – Why did the business fail?

  1. Was it due to market/industry changes – Would you really want to invest your money into a market that is shrinking?  A lot of markets and products have a lifecycle.  If the market/product is at the end of the lifecycle, you really need to be able to create a niche situation (with niche pricing) to make the business work.  If you cannot create this niche, don’t go there.
  2. Was it from poor management – The insolvent company may have been poorly managed – which can be changed.  But if you are taking the employees on, consider that they are used to working in a particular way and they will need to go through an element of change which will involve a cultural change as well as management changes, systems being put in place and a general change in procedures.  You will also have TUPE liabilities if taking employees on.
  3. Was it from bad debts  – If the Company has suffered from insolvency due to customers failing to pay it, this is probably the best scenario provided that there would be no over-reliance on a particular customer going forward.  It could work, provided that good systems were in place to prevent this from happening again, such as good credit control, insuring debt and verifying new customers when offering credit accounts.
  4. Was fraud involved or other adverse events such as licensing issues?- If so, stay away – you are probably opening a can of worms.  Mud sticks and you will find yourself being associated with this.
  5. Was it from competitor’s forcing the company out of the market? – This could be key employees setting up a similar company or a competitor opening up in the area.  Generally it is being unable to offer the prices/services that competitors offer.  Ask yourself, what can I do differently to the company that failed?  If you can benefit from economies of scale or you are that competitor that they couldn’t compete with, you are probably onto a winner.  But do you really need to buy the insolvent company or can you do it organically yourself?
  6. Was it from being unable to secure necessary supplies or skilled staff.  If you have these resources, great.  If you don’t – can you get them?  Be honest.
  7. Was it through being unable to fund expansion or general working capital in times of growth?  Over-trading can put cashflow burdens on a company which are particularly more apparent if turnover falls in quiet periods.  Generally a strong business can achieve funding for this if it is profitable – the question is, is it a profitable model or did the management assume it was profitable because it was growing?

Here are just the first 7 things I thought of while writing this blog. There are a lot more things to think about.  I do conclude from this though that it is a very tough decision – and in my opinion is much tougher than deciding whether to start a company from scratch. 

I sell insolvent companies and see the pros and cons of this.  As a result of this, I can also help people that are considering buying these insolvent companies, but not the ones from me as you need independent advice.  If you are considering purchasing an insolvent company (from anybody but me), I would be happy to talk to you about the pros and cons and help you to avoid any pitfalls. 

Claire Foster, Revive Business Recovery Ltd – 01302965485