These days, it appears to me, a bit of money, for a lot of people can result in irrational behaviour. I am not talking about consumers trawling the internet to save 50p but business people (entrepreneurs, no less) who would do anything to save on professional fees (and really should know better).

“We bought the company two years ago for £100,000. The assets were worth about £25,000, there was VAT, PAYE, and other creditors of £50,000 (including a director’s loan account of £20,000) and a bounce back loan of £25,000. That’s the way the purchaser and his solicitor wanted to construct the deal.”

“Really. Did you take any legal advice?”

“No. We thought the deal was ok and our solicitor charges were a fortune!”

So, the directors went ahead and bought the company overpaying by around 75k.

The reason why the directors were talking to me is that they now realised they had significantly overpaid for their company, and it needed to be restructured. Of course, if the buyer had said to the seller that they were only prepared to buy the assets for £25,000 (an asset purchase agreement) leaving the liabilities remaining with the company, the seller may have declined to proceed. But there is not that many people looking to acquire businesses these days, so what is the point of overpaying.

The correct commercial decision would have been to structure the agreement as an asset purchase based on the value of the assets. The business would effectively be transferred with the assets to the purchaser. An Insolvency Practitioner (IP) should have overseen this transaction. The price paid for the assets would be paid to the selling company that would then be wound up by the IP by reason of its insolvency and the creditors receive a dividend from the assets realised.

What that avoids is a business going forward with too much debt and probably destined to ultimate failure. What it achieves is that the business is bought for a fair market price and the future business prospers as a result – even if there are some legal fees to pay!

The moral of the story. ALWAYS take advice off professionals!!

We are here to help Tim.corfield@griffinandking.co.uk & M: 07786 965 009