Can I sell an insolvent business?

If your business is struggling financially, it may be possible to sell it. Selling a business in debt requires careful planning and compliance with legal requirements. However, it can be a viable exit strategy while ensuring those owed money by the business (its creditors) receive the best possible return.

Needless to say, when a business is insolvent, there will be an impact on its saleability and valuation. However, there can still be areas of value in the business and a pool of prospective buyers who are looking for the specific type of opportunity and investment it offers. 

What is an insolvent business?

A business is technically insolvent when it can no longer pay its debts when they are due, or its total liabilities exceed its assets. 

A business that’s in debt is not always insolvent. Many businesses experience temporary cash flow shortfalls that can make it difficult to pay their liabilities. The key difference is that an insolvent business has an ongoing inability to meet its financial obligations when they fall due. 

Selling a business with debt is generally much easier than selling one that’s insolvent. A business with debt can still show potential for recovery, growth and profitability, and the sale process involves fewer legal complications. However, debt still presents risks for buyers, and those risks typically reduce both the level of interest and the price you’re likely to achieve.

What are your options if your business is insolvent?

If your business is insolvent, you generally have three options:

• Rescue it - If the company has a viable business model and you believe it can return to profitability, there are informal and formal rescue methods you can use to increase cash flow, repay creditors and get it back on track.
• Close it - If the business is no longer viable or you simply don’t want to continue running it, you can choose to close it through liquidation. If it’s a limited company or a limited liability partnership, any debts the business cannot afford to pay are typically written off as part of the liquidation process.
• Sell it - Selling an insolvent business, usually through an Insolvency Practitioner, can help preserve jobs and enable it to keep operating under new ownership. The money raised from selling the business and its assets is used to repay its creditors.

The best option for you will depend on your desire to keep running the business, its financial position and its future viability. 

How do you sell an insolvent UK business?

In many cases, when a buyer acquires an established business, they do so by purchasing its shares. That allows the business to continue trading without interruption while retaining its company name, contracts, employees and customers, but under new ownership.

However, when a company is insolvent, buyers typically purchase the assets of the business rather than its shares. That’s because the remaining value usually lies in physical assets, such as property, machinery and equipment, as well as intangible assets like intellectual property. Buying only the assets allows the buyer to take over the useful parts of the business without inheriting its debts.

There are several ways you can sell an insolvent business in the UK, all of which must be overseen by an Insolvency Practitioner (IP). The IP will ensure the sale is fair, complies with insolvency law and that the proceeds are paid to the creditors in the correct way.  

What are your insolvent business sale options? 

The most appropriate strategy for selling a distressed business will depend on its financial condition and how attractive it is in its current state. 

Selling the business as a going concern

If the business still has operational value, for example, through goodwill, customer and supplier relationships, or ongoing contracts, it may be possible for an Insolvency Practitioner to sell it on the open market as a going concern. 

In this type of sale, the company’s assets and operations are transferred to the buyer. The proceeds from the sale are then distributed to the creditors. An Insolvency Practitioner will only approve a going-concern sale if the creditors are likely to receive a greater return than they would through liquidation. 

Selling the business’s assets

The more common approach is to sell the insolvent business’s assets. This route breaks up the business but maximises value recovery when no buyer wants the whole company. The buyer acquires the assets without taking on the company’s debts and liabilities, and the creditors are paid from the proceeds of the sale.  

Pre-pack administration

Rather than selling the business or its assets on the open market, it may be preferable to arrange a pre-pack sale. This is a prearranged sale that takes place immediately before formal insolvency proceedings begin. 

A pre-pack sale can protect jobs and preserve the value of the business, as there is typically no disruption in its operations. The benefit for the buyer is that the business and its assets are not openly marketed, so they face less competition. However, the IP must be able to show that a pre-pack offers a better return for the creditors than the other alternatives. 

Who buys insolvent businesses?

You might wonder who would be interested in buying a failing business, but there’s a well-established market for this type of opportunity. For example, there are turnaround specialists who buy businesses in debt and inject capital and management expertise. They then sell it for a profit once it has recovered.  

Competitors are also common buyers of distressed businesses and their assets. They may see an opportunity to acquire customers, contracts or market share at a reduced cost, while eliminating a rival from the industry. In some cases, competitors purchase specific assets that complement their existing operations or strengthen their position. 

Preparing to sell an insolvent business

Selling a distressed business carries more risk than a regular sale, so you should be aware of the potential legal and financial obligations and prepare thoroughly. To increase the chances of a fair and successful sale, you must:

• Engage professional advisers - The first step is to contact a licensed Insolvency Practitioner (IP) as soon as you suspect your business is insolvent. They will assess its financial position and explain your options. 
• Get a professional valuation - If the IP believes a sale is possible, you will need to obtain an independent, professional valuation from a business transfer agent or broker. That will provide a realistic basis for negotiations, ensure transparency with creditors and help to maximise the value of the sale. 
• Negotiate with creditors - When a business is insolvent, directors have a legal duty to act in the best interests of their creditors, not shareholders. Therefore, your IP will negotiate with your creditors to structure a deal that maximises their return.
• Prepare detailed financial records - You must ensure all accounts, contracts and liabilities are up to date and clearly documented. Transparent records will help potential buyers assess the business and build trust in the process.
• Find an experienced business transfer agent - A transfer agent with experience in selling insolvent businesses will understand the process and its legal framework. They will also be able to reach buyers who are actively seeking distressed business opportunities

Expert sales support for distressed and insolvent businesses

At Eddisons Business Sales, we work closely with Insolvency Practitioners and owners of distressed companies to achieve fair and transparent sales. With a broad network of buyers who are actively seeking businesses with debt problems, we can quickly match opportunities to ensure a clean break while helping you meet your obligations.

Find out more about our professional valuations and business sales process, and get in touch for a free, confidential consultation.