Running a business is challenging. Sometimes, despite their best efforts, business owners and company directors may find themselves grappling with a failing business. Business failure can be the result of both internal factors as well as external factors which are harder to control, but if you are experiencing any of these then you may be left wondering, ‘Can you sell a failing business?’
The answer to this question is yes, you can sell a failing business. However, the options available to you to achieve this will vary significantly depending on what has caused the business failure as well as what may be attractive about your operation to a prospective buyer. In some cases, it may be more suitable to consider an alternative process or liquidate the company and close it altogether. To help you understand all of your options and their implications, we have put together this short guide to selling a failing business.
Selling A Failing Business: Key Considerations
If you are considering selling a failing business, there are a number of key considerations you will need to make before attempting to seek out a buyer. Think first about whether there are simple changes you could make to return your business to profitability. For example, if market conditions outside of your control have shortened your profit margins, reconsider your pricing strategy or seek out new suppliers.
If you have exhausted all of your immediate recovery options or still wish to sell your failing business, you will need to confirm its financial position before you proceed. Failing businesses will either be solvent or insolvent and if they are in the latter position where they cannot pay their debts then the process of selling will be more complex (albeit still possible).
To determine which set of circumstances applies to your business, analyse the balance sheet and cash flow statement. If the total assets exceed total liabilities and the business maintains positive cash flow, it is solvent. Conversely, if the business is experiencing a number of these warning signs, cannot pay its debts when they are due, or its liabilities exceed assets, it is insolvent and lacks sufficient financial resources to meet its obligations.
How To Sell A Solvent Failing Business
Failing but solvent businesses have the most flexibility when it comes to a business sale. While you may feel that the business has run its course, a prospective buyer may be interested in your brand and assets or believe they can return it to profitability. To sell your business in this way you must:
- Accurately value the business – Your understanding of the day-to-day running of the business will only paint some of the picture and assets, liabilities, brand credibility and possible revenue streams can make it valuable to buyers. Before approaching these possible buyers, make sure that your business is fairly and accurately valued. This will not only ensure that you can appropriately position the sale and make it an attractive prospect but also ensure you do not sell the business for less than it is worth.
- Keep financial records up to date – Prospective buyers will need to see your financial records to weigh up the merits and risks of the sale. Get these records together and keep them up to date ahead of time to ensure that you can be as accurate and transparent when it comes to what you can share.
- Be patient – Buyers will conduct a thorough due diligence process before agreeing to any business sale. This process typically takes longer when the business being sold is failing as there will be a higher level of potential risk for the buyer. You must therefore be patient and open to negotiation to ensure that any possible deal can be completed fairly and legally.
How To Sell A Failing Insolvent Business
If your failing business is insolvent, the process of selling it will be more complicated and will require the guidance of a licensed insolvency practitioner to ensure any subsequent process is completed correctly. Company directors must always act in the best interests of creditors when a business is insolvent and therefore a business sale will have to prioritise raising money for creditors as the priority.
A licensed insolvency practitioner will help the insolvent business to explore a range of suitable options, including:
- Administration – Company administration can be used to facilitate the sale of a failing business. This process will involve appointing an administrator who trades the business free of creditor pressure whilst finding a viable buyer on the open market. However, this method of selling a failing business may not be possible if the financial position is so bad that there is no cash available to continue trading while a buyer is found.
- Pre-pack administration – In some cases, a suitable buyer can be lined up before the business formally enters administration. This is called a pre-pack administration and may typically be used in scenarios where the buyer is a competitor and able to facilitate a quick and smooth sale. However, the administrator must still prove that this method of selling the failing business is the best option for creditors.
Alternatives To Selling A Failing Business
When selling the entire business isn’t feasible, there are still several options for failing businesses. After valuing the business, you may decide that recovery is a realistic possibility and wish to explore your business rescue options rather than relinquishing control of the business through a sale. In these cases, an insolvency practitioner can help you explore a Company Voluntary Arrangement (CVA): a formal agreement with creditors through which you will agree to repay a portion of debts over time and continue trading. This can provide breathing room to restructure and return to profitability.
However, if the business is failing, insolvent, and a sale is not possible, the most suitable alternative will most likely be entering into liquidation. While this usually means the end of the business, it provides a clear resolution to financial difficulties. In liquidating the business, the insolvency practitioner will sell business assets and distribute proceeds to creditors before officially winding up the company.
Determine The Next Steps For Your Business
With a range of options available to failing businesses considering a sale, you must get expert advice before proceeding. The most suitable process and options will depend significantly on whether the business is solvent or insolvent, and due diligence must be conducted in all cases to ensure that the sale is in the best interests of all parties involved, including creditors.
If you would like more information about the most suitable next steps for your failing business, don’t hesitate to get in touch with the business rescue experts at Ballard Business Recovery. Our experienced team will take the time to understand your situation, recommend a suitable course of action, and help you proceed appropriately.
