Retailers who once thrived in a world of lower prices, stable demand, reliable supply chains and abundant skills resource are likely finding the current environment challenging. Some companies may be able to pivot and avoid failure, but others may not be able to pivot fast enough or have no alternative options other than filing for insolvency.
The challenging landscape will also bring opportunity for businesses looking to make acquisitions of the key assets of failing UK retail businesses. How potential buyers deal with positioning their bid for such assets could make all the difference as to whether they are successful.
In this article, our Restructuring and Insolvency team shares some of the key practical steps that buyers should have in the forefront of their minds when they are considering an opportunity to acquire the business and/or assets of failing and insolvent retailers in the UK. If you would like to discuss any of these steps with us further, then please do get in touch.
1. Know your contacts
Specialist restructuring deal teams or specialist agents in retail will market distressed retail businesses. They will target the sector widely and/or target specific buyers who may have registered their interest for any potential acquisition opportunities. Being in touch with the right contact points at firms who will be marketing these assets is very useful in identifying an early opportunity and the timeframe to transaction. Retail distress will often require transactions to be managed at pace due to the cash requirements of the business and the credibility of a purchaser to transact in such circumstances will therefore be very important. Being on a shortlist of 'interested parties/target buyers' will help with you being made aware of potential opportunity, gaining early access to a data room which may prove crucial in how you present your offer and plan to transact competitively.
2. Cash is King
In retail insolvencies, cash offers are important. Administrators will need to demonstrate to the stakeholders of the distressed retailer that the best value for the business has been obtained and that the acquiring party is a credible option to transact with. On larger retail insolvencies, we have seen buyers who end up as the front-runners having already deposited their cash offer into the client account of their lawyers to demonstrate their readiness. More competitive buyers with early access to financial information in the data room and experienced in understanding how value to an insolvency estate is delivered, may even position offers to buy out key stakeholder debt. Early diligence on the target is key – it helps to shape a competitive and potentially credible bid that an insolvency practitioner can easily take back to the stakeholder decision-makers. Sometimes the highest cash offer will not necessarily be the best offer – the circumstances of the distress, how liabilities, such as landlords, employees and secured creditors, are considered as part of the offer and how the cash elements of the offer deliver an outcome for key creditors, are all key drivers for potential administrators when they are considering which offers to take forward into a 'best and final' round.
3. Your offer letter
Insolvency practitioners, their sales agents and seller boards will need to see offer letters. Often there may well be several rounds of offers, where credible offers are taken forward to the' best and final round'. It is important therefore that your first offer letter demonstrates an understanding of the insolvency nature of the transaction, is clear on the purchase price and identifies the purchaser entity. Buyers also want to make sure they are not committing to taking a position which, due to the distressed nature of the transaction, they don't need to. The limited diligence done through early access to a data room will shape the offer letter. Your legal team can refine the offer where needed and advise you on what an insolvency transaction, such as a pre-pack, entails, explain the risks and liabilities which may come with that, emphasise and present the strengths in your offer and ensure unnecessary obligations are excluded. In addition, Administrators will want to know they will be selling to a robust, identifiable entity that is legally able to contract easily and at speed. This means demonstrating your KYC, proof of viability post-transaction, confirming your specialist lawyers are instructed and on standby to review legal contract documentation and any consents required to transact (such as your lender consents) are in hand.
4. Your legal team
Acquisitions in relation to distressed business move at pace, maybe set to aggressive deadlines, and they are set in the context of UK insolvency legislation. Working alongside an experienced legal team of restructuring and insolvency specialists will prove valuable and will provide a high degree of comfort to proposed administrators and their teams that you are organised and have resilient and relevant support to advise you on insolvency laws and how those will impact the transaction in every respect. The right legal support will also provide early awareness of the risks which are inevitable in a distressed transaction, allowing buying teams to plan on dealing with these operationally.
5. Understand your risks upfront
Acquiring businesses and assets from administrators carries legal risk. Some of the areas on which buyers should seek early advice on include:
- TUPE (UK Employment) matters;
- purchasing real estate assets;
- how intellectual property and technology assets are organised;
- who owns the stock and where it is located;
- how sales are transacted, whether specific FCA licences are required for consumer buying options;
- where cash is held legally and how this will be apportioned at completion; and
- whether transitional services from the seller and Administrators are required for a period post completion.
Early understanding around the legal insolvency aspects to such areas might help to understand the pitfalls, how to avoid them or plan effectively to deal with them.
If you would like to discuss any of the above or anything else in relation to distress in retail, please contact Jasvir Jootla.