Many companies are being listed for sale through brokers with high price tags based on very tenuous valuations, where the owners have been deceived into thinking they will be paid a huge amount for their equity.
However, on closer inspection it turns out that many of them have a Time to Pay arrangement with HM Revenue and Customs or are in arrears with the Revenue and are stretching their trade creditors. All too often they are insolvent but don’t realise it.
This over indebtedness is becoming a serious concern among potential investors because often the company they want to buy is operationally a great business and for trade buyers a perfect fit with their existing businesses. The problem for investors is how to protect their own interests and avoid contamination.
Very often, even experienced executives lack the knowledge and methodologies for assessing a company they want to buy, let alone knowing how to sort out the indebtedness once due diligence has revealed its extent.
In my view, potential investors can work with incumbent directors to reach agreement with creditors that protects all parties by enhancing the prospect of a return to sellers and avoiding cross contamination.
One method I use is an investment, conditional on approval of a CVA by creditors thus leaving finance agreements and any liabilities in the target company. It also allows creditors’ issues to be addressed where they are not normally consulted in a pre-pack. For the investor, this can be structured to give them security and control if they so wish.
As a rescue specialist I would advise owners trying to sell a business in difficulty to employ their own turnaround advisers before putting the business on the market.