Buying a business out of administration: how the sale works and how to fund it

An administrator is a licensed insolvency practitioner appointed to achieve the best available outcome for the company's creditors as a whole. Selling the business as a going concern usually achieves more than closing it and auctioning the assets, so administrators often market a business quickly to preserve value. A typical sale involves:

• A short marketing period, sometimes only days, with a brief information pack and a deadline for offers
• Limited information. The administrator did not run the business and will not give the warranties a solvent seller would
• A sale of assets, not shares. You buy named assets: equipment, stock, intellectual property, the name, goodwill, customer lists and sometimes book debts. The company, and its liabilities, stay with the administrator
• Price and certainty of funds matter most. A slightly lower offer with funding in place often beats a higher one that depends on finance not yet arranged

In a pre-pack administration, the sale is negotiated before the administrator is appointed and completed on or shortly after appointment. The business keeps trading, staff are kept and customers often notice little change. Pre-packs are lawful and common, but because the buyer is frequently connected to the old company, such as its directors or shareholders, they are closely regulated.

• SIP 16. Statement of Insolvency Practice 16 requires the administrator to explain the sale to creditors: how the business was marketed, valuations obtained, who bought it, the price and why the deal was the best available outcome.
• Connected-party sales. Under the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, a sale of all or a substantial part of the business to a connected person within the first eight weeks of administration needs either creditors' approval or a qualifying report from an independent evaluator. The connected buyer typically obtains the report, and it is shared with creditors and filed at Companies House.

If you are a director buying back your own business, budget time and cost for the evaluator, expect scrutiny of the price, and take independent legal advice. Rules on reusing the name of a company that later goes into insolvent liquidation can also apply to its former directors.

Days or a few weeks, not months. Administrators carry the cost of trading and the risk of value draining away every day, so they want certainty quickly. A conventional acquisition with full due diligence can take three to six months; an administration sale may give you a week or less to confirm funding. That speed shapes everything about the finance, and it is why buyers who already have lenders lined up tend to win.

There is rarely time for a full cash flow based acquisition loan. Instead, funding usually leans on assets that can be valued fast, combined with the buyer's own money.

• Asset based lending against the plant, stock and, where included, debtors acquired, with availability set by quick valuations.
• Invoice finance on the new sales ledger. The new company starts invoicing customers from day one, and an invoice finance facility can fund those invoices to cover wages, suppliers and working capital.
• Asset refinancing shortly after completion, releasing cash from equipment bought outright from the administrator.
• Buyer cash. Lenders expect the buyer to contribute; our guide to the deposit to buy a business sets out the usual expectations.
• Property-backed loans where the buyer has equity elsewhere, if timescales allow.

Working capital is often the larger need: you are restarting supplier relationships, possibly paying upfront, and funding wages before the first customer receipts. Our page on working capital after an acquisition covers this in more detail.

Lenders back buyers they believe can run the business better than before. They look for a credible management team, often the existing operational managers or an incoming team through a management buy in; a clear explanation of why the old company failed and why the new one will not; a realistic forecast; and a cash contribution from the buyer. Personal guarantees from directors are common.

Lenders typically take a debenture over the new company, specific charges over the assets bought and an assignment of the new sales ledger for invoice finance. Property may be charged where it is used. Where the buyer is connected to the old company, lenders will also look closely at the evaluator's report and the price paid.

• Thin due diligence. You may have days to review what would normally take weeks. Focus on the issues covered in our due diligence guide that matter most: customers, staff, premises and permits.
• No warranties. Administrators sell assets as they are, so problems found later are yours.
• Customer and supplier confidence. Some customers leave after an insolvency; suppliers may tighten terms.
• Third-party claims. Finance companies and retention of title suppliers can reclaim assets you assumed were included.
• Repeating the old mistakes. If the cause of failure is not fixed, the new business carries the same risk.

If the timetable is too tight, you can wait and buy selected assets later from the administrator or a liquidator, approach the business before it fails with a conventional purchase, or acquire a competitor's customers by recruiting staff and winning contracts over time. Each is slower, but carries less execution risk.