Posted by Bharti Moore, Senior Associate
Weathering the Coronavirus storm and finding the rainbow
Over the last few months, the world has changed dramatically. The International Monetary Fund, published its World Economic Outlook on 14 April 2020, which projects global growth in 2020 to fall to -3% as a result of Covid-19.
One thing that the last financial crisis and history has shown us is that the markets will at some point return to the new normal and investment in businesses will be essential to keep the economy afloat.
The effect of Covid-19 is no different; some sectors have been harder hit than others. In the UK, we have seen a huge impact on the retail and hospitality sector, with big brand names recently entering into insolvency proceedings such as Debenhams, Laura Ashley, Olra Keily and Carluccio’s. But we have also seen a boost in the healthcare and technology sector.
Many funds, private equity houses and private investors have funds readily available to invest and they may look at this small window of opportunity to explore investment in distressed business or assets.
With valuations dropping significantly, now would be a time to look at investment possibilities. The current period may allow buyers to acquire business or assets which were out of their reach just a month ago.
It is not about weathering the Covid storm but finding the rainbow when we get to the other side.
Distressed businesses or assets are often sold in a competitive auction process with other potential buyers looking for a bargain; therefore time will be of the essence. Transactions within the distressed and insolvency arena must be completed on specific terms.
Administrators will want reassurances that the bid has integrity. A key indicator for Administrators is the buyer’s purchasing team; they will be looking to see if the buyer has the right specialist legal and financial teams supporting that bid.
The Administrators will be looking to see that the buyer and its team are organised from the outset and that they are on top of the due diligence process. Having the right expert team on board will determine whether the bid is successful.
Key considerations for buyers:
1. get the right advice and put an expert team together before you make a bid.
2. understand who you are purchasing the business from. You should exercise caution if the seller’s insolvency is looming. You can purchase the business out of insolvency which will increase certainty but this does come at a price.
3. understand the assets and liabilities that you will be taking on. Some assets may include contracts which may come to an end in the event of insolvency or may be non-assignable.
4. have a clear plan for the management, will the management team stay in place? You will need to carry out a review of the employment contracts/ service agreements and the understand the liabilities.
5. consider your funding options and get your funding in place. As the timescales to complete the transactions will be tight you should consider your funding before you make the bid.
Acquiring distressed assets can be a lucrative way to expand and diversify an investor’s portfolio, but before taking this step getting the right professional advisors on board from the outset is vital. It will ensure that you understand the risks and are in a position to move to completion in the necessary timescales.
If you would like advice on purchasing a distress business, our Corporate team has the legal expertise and professional contacts to help you.
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