A rescue management buyout is where the management (often the directors) of the distressed company, usually with financial assistance from commercial lenders or private investors, purchase assets from a distressed company with a view of turning these assets into a profitable business before the company falls into insolvent liquidation.
A company may be in need of rescue if it is in, or near, insolvency. A company may consider itself insolvent or nearly insolvent if, among other reasons; it is unable to fund its short term debts or the value of the company’s assets is less than its liabilities.
The structure of a rescue management buyout is quite similar to a buyout in non-distressed circumstances but the commercial considerations that will need to be taken into account are quite distinct. You can find more information on non-distressed management buyouts and how we can help you by clicking here.
Factors to bear in mind when rescuing a company
If an administrator is appointed then he will owe a duty to all of the company’s creditors. Therefore, the administrator must secure the best deal possible in the sale of the company so that he may settle the company’s debts. In short, an administrator will look to sell the assets to the highest bidder in the shortest amount of time.
One advantage of buying a business from an administrator is being able to wipe the slate clean with regard to the historic liabilities of the company. If insolvency of the company was brought about by a particular large debt, then leaving that debt behind may be all that is required to get the business back on an even keel.
There may be some exceptions to this, for example, landlords or key clients who may insist their rent arrears or debts are settled as a condition to continuing to allow occupation of the premises or to trade with the buyer.
One group of liabilities which cannot be left behind are the employees. Employment law provides that a buyer of a business must take on responsibility for all employees engaged in that business. A buyer will need to think carefully and take legal advice if it plans any redundancies following the buyout, because there is a risk that termination of employment around the time of a business transfer may be automatically unfair if not done properly.
The management’s advantage when rescuing the company
A buyer in a rescue buyout is in a weaker bargaining position when compared with a buyer in a non-distressed buyout. Negotiations are often non-exclusive, with a less comprehensive sales pack and under time pressure. The buyer will not have the same amount of time to carry out full due diligence into the company’s properties, assets, contracts, employees or other matters which a prudent buyer would normally do.
Furthermore, the usual amount of protection given to a buyer in a non-distressed buyout such as warranties, indemnities and restrictive covenants given by the selling owners of the company will not be given in a distressed buyout.
If the management of the distressed company wish to rescue the company then, given their greater knowledge of the company, they will often be in a better position to complete the deal than a third party buyer, as they will not need to carry out as much (if any) due diligence.
This will help get the deal done within the tight time frame and thus reduce the possibility of having to compete with other bidders due to the lack of exclusivity.
One further consideration to be borne in mind for a rescue management buyout is that, if a director of the insolvent company is also a director of the buyer, there will be restrictions on the use of the company’s trading name. Please see our article on this restriction here for further details on this point.
If you are looking to participate in a rescue management buyout, or need any advice on restructuring your business, then please get in touch to see how we can help.