Certainly, acquiring a company in insolvency is not an investment for everyone. However, the boldest can find unique opportunities in this market. Companies that, although now in distress, have a strong legacy on which they can build to overcome these difficulties. This is a great opportunity for potential buyers to gain access to their assets at a reduced price, restructure the company, adapt it to current needs and return it to profitability.
Within the uncertainty inherent to this type of operation, in this article we review how to buy a company in insolvency proceedings with maximum guarantees of success.
Comprehensive preliminary assessment
Before embarking on the purchase of a company in insolvency proceedings, the first step is to carry out a thorough preliminary assessment to determine the potential of the investment and identify the risks involved. To this end, it is important to review any documentation that may be relevant: the latest financial reports, minutes of the administrative and management bodies, etc.
Identifying the causes of insolvency
When assessing the purchase of a company in insolvency proceedings, perhaps the most important point is to evaluate the causes that have led it into insolvency. To analyse whether it is a viable company, it is not the same whether its difficulties are due to structural problems, whether they are the result of poor management by the management team, the appearance of new competitors…
Analyse the debt structure
The Insolvency Act establishes a certain order in the payment of creditors. In order to negotiate with them, it is therefore essential to analyse the structure of the company’s debt: its total debt, the hierarchy of creditors and the conditions of the credits.
Analysis of the assets of the company in insolvency proceedings
The chances of recovering the investment will depend to a large extent on whether the assets of the business are liquid or whether they will be difficult to sell. Another point to clarify is whether the core business assets are encumbered by liens or encumbrances.
Review of existing contracts
- In the case of existing contracts with customers and suppliers, it is essential to know whether they are transferable after the acquisition.
- With regard to existing contracts with employees, it should be noted that the acquisition usually entails the subrogation of employment responsibilities. The purchaser must be prepared to assume the obligations in terms of wages, severance and other labour rights.
Full due diligence
In order to minimise risks, it is essential to carry out a complete due diligence including all commercial, legal and financial aspects. This process identifies each and every burden and liability of the company and assesses its viability. The legal review should cover, among others, ongoing litigation and possible tax contingencies.
Drawing up a realistic viability plan for the company in insolvency proceedings
A realistic viability plan based on sound financial projections must be drawn up before the purchase is initiated. Because this will be the key document in the negotiation with the insolvency administration and creditors.
In short, the purchase of a company in insolvency proceedings is an investment for investors with a high risk profile. The uncertainties are many, but with a thorough preliminary assessment and advice from a team of insolvency and M&A specialists, it is possible to find excellent opportunities.