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Five Key Legal Concerns When Buying a Business in Administration
Purchasing a business in administration can be a great strategic move. However, this process comes with its own set of risks. Below we explore the five key legal concerns that buyers should consider when purchasing a business in administration.
1. Establishing What Is For Sale
The information in sales particulars will not be guaranteed, so a physical inspection of the assets is recommended. Some assets might be subject to retention of title or lease agreements and so will not be the seller’s to sell.
Debts owed to the seller generally remain with the seller and are collected by the administrators. The buyer may want to consider making an offer on the debts or negotiating an arrangement whereby the buyer collects the debts on behalf of the administrators for a fee.
2. Legal Due Diligence
Undertaking comprehensive legal due diligence is crucial when considering the acquisition of a business in administration. This involves a review of (amongst other things) the target company’s commercial agreements, any ongoing legal disputes, intellectual property rights and regulatory compliance. However, there may be little time available for the buyer to carry out thorough due diligence due to completion deadlines and in any event, generally, there will be no right of recourse if information provided by the administrators is incorrect. It is therefore important to strike the right balance of legal due diligence when buying a business in administration.
3. Warranties, Representations And Indemnities
Administrators act as agents of the seller. They will accept no personal liability under the sale agreement and will give no warranties about the assets sold. As a result, the normal warranties that a seller might give will be very limited or excluded entirely. Buyers should approach the purchase with the understanding that they are likely to receive the business on an “as-is” basis, with no assurances about the condition or performance of the business or its assets.
Conversely, the administrator will likely require the buyer to provide indemnities to the administrator and seller in respect of any liabilities that arise post-completion such as any employment related claims under The UK Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) or any ongoing contractual obligations that the buyer agreed to take over.
4. Employment Law
Navigating employment related legal issues is crucial when acquiring a business in administration. Where possible, buyers should examine existing employment contracts and any pending employee disputes. TUPE generally applies where the seller company is in administration. As a result, employees assigned to the business that is being sold will be transferred automatically on their existing employment terms to the buyer. It is therefore not possible to elect to choose certain employees and employment related liabilities in the same way as other assets and liabilities.
TUPE is particularly important in an administration sale context as TUPE related claims are likely to be focussed on the buyer given the seller’s insolvency and, as mentioned above, administrators will usually require broad indemnities from buyers for any liability as a result of failing to comply with TUPE.
5. Customer and Supplier Relationships
Maintaining strong relationships with customers and suppliers is essential for the continued success of any business. Buyers should assess the impact of the acquisition on existing customer and supplier relationships. Reviewing and understanding the contractual obligations of the target business is crucial. Existing contracts with customers, suppliers, and other stakeholders should be reviewed to assess transferability of contracts, identifying any change of control provisions, and understanding the consequences of the acquisition on ongoing agreements. Your legal advisor can provide guidance on contract novation, renegotiation, or termination to ensure a seamless transition and avoid legal disputes.
Conclusion
While buying a business in administration presents unique opportunities, there are inherent risks that require careful consideration. At Quastels, we have experienced legal advisors in our Corporate Department to draft and review business sale agreements and all related documents to ensure that the buyer’s interests are protected to the fullest extent within the constraints of the administration sale.
To discuss any of the points raised in this article, please contact Nilam Davé or fill in the form below.
Structuring Investments: Possible Approaches for Entrepreneurs and Investors
In our previous article, we explored just some of the different types of investments available to entrepreneurs and investors, ranging from bootstrapping and seed rounds to venture capital and private equity.
This time, we aim to delve into the potential structuring of these investments (excluding debt), focusing on the variety of mechanisms typically adopted such as preference shares, convertible shares and redeemable shares. We also touch briefly on tax-efficient schemes like the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).
We talk through some of the advantages and disadvantages of these structures from the perspectives of both companies and investors interchangeably. Needless to say, what might be a disadvantage to an investor will no doubt be an advantage to the company and vice versa.
As with the points addressed in the last article, many of the following models overlap and are often used together. For example, companies and investors often adopt a combination of preference, convertible and redeemable shares and sometimes use all three at once!
Preference Shares: Prioritising Investor Returns
Preference shares are a popular investment vehicle, offering investors certain privileges over ordinary shareholders. These shares typically guarantee a fixed dividend, which must be paid out before any dividends can be issued to ordinary shareholders. In the event of a liquidation, preference shareholders also have a higher claim on assets than ordinary shareholders.
Key Features:
- Fixed Dividends: A set return that provides a steady income stream.
- Liquidation Preference: Priority over ordinary shareholders during asset distribution.
- Non-Voting Rights: Typically, preference shares do not grant voting rights, allowing founders to retain control.
Advantages:
- Guaranteed returns for investors via fixed dividends and a higher claim on assets during liquidation.
- From the company’s perspective, founder control is maintained due to typical non-voting status of the preference shares.
Disadvantages:
- The investors’ returns are typically limited to fixed dividends with no additional upside.
- Fixed dividends can cause a cash flow issue for the company.
Redeemable Shares: Defined Exit Strategy
Redeemable shares give the company the option to buy back the shares at a future date. This can be attractive to investors looking for a clear exit strategy.
Key Features:
- Exit Strategy: Provides a clear mechanism for returning capital to investors.
- Fixed Terms: Typically, terms are agreed upon issuance regarding timing and price.
Advantages:
- They provide a clear exit strategy for investors where the redemption is mandatory.
- The company can retain some level of flexibility with an optional redemption.
Disadvantages:
- Mandatory redemptions can cause problems for the company where there are not sufficient funds
- Investors may feel constrained by the redemption terms as they cannot choose when to sell their shares independently; they must wait for the company to initiate the buy-back.
Convertible Shares: Flexibility and Potential Upside
Convertible shares can typically be converted into ordinary shares from either preference or redeemable shares at a predetermined ratio, offering investors the upside potential if the company performs well.
Key Features:
- Conversion Option: Converts into equity, often at a discount, allowing investors to benefit from future growth.
- Conversion Trigger: Can be time-based or event-based (e.g., hitting certain milestones).
Advantages:
- Potential for significant and uncapped returns for the investor if the company grows.
- Company can benefit from a cash flow perspective if shares are converted from preference to ordinary.
Disadvantages:
- Existing shareholders may face dilution.
- Conversion values typically depend on future company valuations leading to uncertainty for the investor.
- Non-voting shares can become voting ordinary shares impacting on founder control.
EIS and SEIS: Tax-Efficient Investments
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are UK government initiatives designed to encourage investment in early-stage companies by offering tax relief to investors. Specialist tax advice should be taken. These schemes can be particularly beneficial for startups looking to attract investors by reducing their risk.
Advantages:
- The potentially significant tax reliefs can enhance investment attractiveness.
- Deferral or exemption of capital gains tax improves investor returns.
- Loss relief reduces risk for investors.
Disadvantages:
- Must Be Ordinary Shares: Limits the flexibility in structuring the investment from both parties’ perspective.
- In particular, the fact that ordinary shares must be used means that there is a pro-rata equality of voting/dividend rights. This can lead to a reduction in founder control and, from the investors perspective, no guaranteed return on investment.
- Eligibility requirements can limit applicable companies.
Conclusion
Structuring investments effectively is crucial for fostering strong relationships between entrepreneurs and investors, ensuring both parties can achieve their financial objectives. By understanding the nuances of various investment structures, from preference shares to tax-efficient schemes like EIS and SEIS, businesses can attract the right kind of capital to fuel their growth.
Whether you’re a startup seeking seed funding or an investor looking for lucrative opportunities, we can offer comprehensive legal guidance to help structure investments that align with your business goals.
To discuss any of the points raised in this article, please contact Adam Convisser or fill in the form below.
Breaking Down the Corporate Investment Landscape: A Guide for Entrepreneurs and Investors
In the dynamic realm of corporate finance, various types of investments cater to the diverse needs of entrepreneurs, investors, and businesses. From early-stage startups to established enterprises, understanding the terminology and nuances of different investment options is crucial for understanding the funding landscape effectively.
By way of a high-level summary, I will explore some key types of investments and their characteristics, bearing in mind that many of these sources and terms overlap and are sometimes used interchangeably. Likewise, while the following may seem chronological, every business has a unique lifecycle and may rely on one or more of these models at any stage.
Bootstrapping: Harnessing Resourcefulness and Independence
Bootstrapping epitomises the spirit of self-reliance and resourcefulness, as entrepreneurs fund their ventures without external financing. By leveraging personal savings, revenue streams, and sweat equity, bootstrapped startups tackle the challenging terrain of business without diluting ownership or control. While bootstrapping demands resilience and discipline, it empowers entrepreneurs to retain autonomy and drive their ventures toward sustainable success.
Notable examples include companies like MailChimp and GoPro, which initially thrived without initial external funding.
Seed Rounds: Early-Stage Capital For Growth
Seed rounds provide the initial capital that startups need to develop their product, conduct market research, and launch initial operations. This funding typically comes from a mix of personal connections (friends and family) and external investors such as angel investors and seed venture capital firms explored in more detail below. These rounds are crucial for laying the groundwork for future growth and attracting further investment. Seed funding amounts can range from tens of thousands to a few million pounds, depending on the startup’s needs and the investor’s confidence in its potential.
Notwithstanding the close relationships when friends and family are involved, clear agreements are crucial to maintaining relationships and setting expectations.
Series A, B, C and Beyond: Scaling With Institutional Investors
As startups progress beyond the early stages, they may seek additional funding rounds to fuel growth and expansion. Commonly referred to as Series A, B, C, and subsequent rounds, these involve raising capital from institutional investors like venture capital firms and private equity investors. Each series represents a milestone in the startup’s journey, with larger funding rounds enabling scalability, market penetration, and product development.
Series A typically focuses on refining the business model, Series B on scaling operations, and Series C on expanding market reach.
Venture Capital: Fuelling Innovation and Growth
Venture capital (VC) provides funding to startups and early-stage companies with high growth potential. Venture capitalists invest in exchange for equity ownership and often take an active role in guiding the strategic direction of the companies they support. VC funding enables startups to scale rapidly, penetrate markets, and realise their full growth potential.
Typical investments range from hundreds of thousands to several million pounds, depending on the startup’s stage and growth trajectory.
Angel Investment: Early Support From Visionary Individuals
Angel investors are individuals who provide capital to startups in exchange for equity ownership. These visionary investors play a crucial role in the early stages of a startup’s journey, providing financial support, mentorship, and industry connections. Angel investment rounds typically occur in the seed or early stages of a startup’s development, helping founders turn ideas into viable businesses.
Typical investments range from tens of thousands to a few hundred thousand pounds, depending on the startup’s potential and the investor’s appetite for risk.
Private Equity: Driving Expansion and Value Creation
Private equity (PE) firms specialise in investing in established companies with the aim of driving growth, operational efficiency, and value creation. Unlike venture capital, which focuses on early-stage startups, private equity typically targets mature businesses poised for expansion or restructuring. PE investors provide capital in exchange for equity ownership, often leveraging buyouts or recapitalisations to fuel growth initiatives.
Investments can range from millions to billions of pounds, depending on the size and scope of the target company.
Debt Financing: Leveraging Borrowed Capital
Debt financing involves borrowing funds that must be repaid over time, typically with interest. This type of financing can come from various sources, including banks, financial institutions, and private lenders. Debt financing typically would not dilute ownership, making it an attractive option for businesses looking to retain control. However, regular repayments can strain cash flow, especially for businesses with inconsistent revenue streams.
Debt financing can often be used in conjunction with equity financing to optimise a company’s capital structure and minimise the cost of capital.
Overlap and Synergy: Finding The Right Mix Of Investments
While each type of investment has its unique characteristics, it’s essential to recognise the overlap and synergy between different funding sources. For example, angel investors may participate in multiple rounds, providing ongoing support to startups as they evolve.
Similarly, venture capital and private equity investments may complement each other, with VC funding fuelling early-stage growth and PE investment driving expansion and scalability. Debt financing can also be strategically integrated to leverage growth without diluting ownership.
In Conclusion
Understanding the diverse landscape of corporate investments is essential for entrepreneurs, investors, and businesses alike. Whether you’re launching a startup, seeking funding for expansion, or exploring investment opportunities, it’s crucial to consider the various types of investments available and their implications for your business’s growth trajectory.
As a London-based law firm specialising in corporate and commercial matters, we offer comprehensive legal guidance and support to entrepreneurs, investors, and businesses navigating the funding landscape. From structuring investment agreements to facilitating due diligence processes, our expertise helps our clients achieve their financial objectives and drive success in their ventures.
To discuss any of the points raised in this article, please contact Adam Convisser or fill in the form below.