As you can probably imagine, selling a limited company with debt is a lot more challenging than selling a company that is profitable. Debts and liabilities decrease the value of your business whilst increasing the risk for potential buyers of taking the business on. When a buyer purchases a business, they also inherit all the liabilities that have been causing the distress, and this is a significant and risky action to take. A buyer will only want to take on a company with debts if they can see that there is a realistic chance of turning the business around, and that ultimately, they will eventually see a sound financial return evolving from their decision to buy.
Whilst selling a limited company with debt is undeniably difficult, that doesn’t mean it’s impossible. In order to attract ‘turnaround investors’ it’s essential to be upfront & honest about the problems within your business, whilst highlighting its value. With this in mind, when thinking about selling a limited company with debt it’s crucial to put yourself in the best position by taking the following steps:
Identify the cause of distress:
In order for an investor to see the potential turnaround options for your business, it’s essential that they can understand the cause of failure, and how this can be prevented in the future. Businesses fail for a number of different reasons, some of which are often out of the owner’s hands. Showing that you’ve taken steps to identify and rectify the situation will have a big impact on creating a good impression for potential buyers.
Emphasise the value of your business:
Selling a limited company with debt requires a lot more sales work than selling a company that is thriving. Just because your company is currently struggling with debts, that doesn’t mean it won’t hold real value in the future. Emphasise the growth that can be expected to appear in the business with the right solutions and investment.
Maintain accurate financial information:
No one is going to invest in a struggling business if they don’t have a realistic picture of where the issues lie and how significant they are. Maintaining accurate bookkeeping is an absolutely crucial aspect of running a business whatever the circumstances, however particularly when you are trying to encourage a seller to invest.
Try & reduce the debt before selling:
It goes without saying that if you can reduce your liabilities before trying to sell, this will have a big impact on decreasing the risk associated with the purchase. The better the financial position of the company, the more appealing it will be to potential buyers.
What If My Company Is Insolvent?
If mounting debts have caused your company to become insolvent i.e your liabilities are greater than your assets, it is still possible to sell the company. Wherever possible, when you see that your business is starting to struggle financially, you should consult professional guidance to try and recover the financial situation. This will give owners and shareholders a lot more options with taking the business forward, whether that’s continuing as owners or selling the company on. However, if the company is already insolvent, there are a couple of ways that it could be sold. These include:
Pre-Pack Administration
In a pre-pack administration the sale of the business is negotiated before an administrator is appointed. Once the administrator is appointed, the agreed sale will be officially implemented in a very quick period of time. This means that the sale of the business is effectively agreed before news of the administration is publicly announced. Pre-pack sales can be attractive to investors because they offer reduced competition in comparison to a sale on the open market, and because the process is very quick. As the sale is made on a going concern basis, it maximises the potential value of the business.
Selling Part Of The Company
As we mentioned a little earlier on, a huge barrier that comes with selling a limited company with debt is risk. Selling part of the company rather than all of it may be a lot more appealing to investors by reducing the financial risks that they are taking. They may be interested in purchasing just the shares or assets, and using these to create strategies to recover the business.
Should I Sell Or Liquidate?
Selling a limited company with debt is a big challenge, particularly if that company is insolvent. Before attempting to sell, it’s worth considering the other options that might be available. One of these options is liquidation. In many cases, the decision to close a company via liquidation is a lot more beneficial to parties involved in the business than attempting a sale. When insolvency strikes, there is an obligation to prioritise the interests of creditors and so this is a crucial consideration to make when determining the best path forward. Creditors Voluntary Liquidation (CVL) removes creditor pressure quickly, whilst winding up the affairs of the business correctly so that directors can continue to trade under a new and different entity in the future.
If your company is struggling with debts, and you are unsure of the best path forward, please don’t hesitate to get in touch with our experienced team at Ballard Business Recovery. Looking at your business’ financial circumstances, and your own priorities as an owner/director, we will talk you through the most suitable options available.
