As we now all know, the credit crunch has developed over recent months from a phenomenon mainly affecting the banking and capital markets, to a full recession, impacting on every aspect of the economy. As a lawyer specialising in food transactions, it is clear that 2009 will be a very difficult year for mainstream corporate finance activity.
This is due to several factors. From a vendor’s point of view, now is a difficult time to realise full value for your business - historically, depending on the business, a vendor could expect to receive a sale price in the region of five times annual profit, but now that figure is three to four. Equally, a lot of deals have historically been financed in some way - the purchase price payable is often financed through the use of bank borrowings, and the business’s debtor book can be leveraged to provide ongoing working capital.
Clearly, the current environment makes that more difficult, because banks are less willing to lend against anything other than tangible assets, and less inclined to make ’cash flow loans’ available, which are based upon the security of future profits.
The picture is not completely gloomy, however; bank funding is still available for the "right sorts of businesses", albeit in return for increased fees and interest rates. And despite the tough times, we are still seeing transaction opportunities for food businesses.
This, in part, is due to larger corporates needing cash to pay down their existing banking facilities, and in the process divesting some non-core businesses. In particular, a large number of businesses involved in the fish and agricultural sector were previously financed by some of the Icelandic banks, and are now under increasing pressure to reduce the number of their facilities.
We are also seeing opportunities for companies to acquire food businesses from administration. The last few months have seen a number of bakery firms entering administration - Ferrari’s Bakery in South Wales and County Durham-based Tindale & Stanton went into administration last year, and just before Christmas, Pimblett’s entered administration, before being bought by Waterfields. Transactions involving insolvent businesses are never easy - there are few legal protections available when buying from administrators or receivers, but often, a good underlying business can be acquired cheaply, saving the jobs of many employees. For example, we have recently seen The Bagel Group acquired out of administration.
The use of ’pre-packs’ is also increasing. Pre-packs involve the sale of a business (often to continuing management) from administrators, where the sale has been negotiated prior to the administrator being appointed. Administrators often face criticism for pre-packs, because the business in question is seldom marketed, but they do provide a means for the business to continue trading.
If you are a supplier trading to a business that has cash flow difficulties, then you can try to improve your position by reducing credit terms, as well as keeping a careful eye on your customer’s debtor days. But should your customer go into administration, be prepared for the worst. For the most part, any sums you are owed will rank as unsecured claims and will come lower on the priority list than any funding bank with security over the business’s assets.
In a number of businesses, suppliers often insist on "retention of title" provisions in their terms of trading, which means that title to the goods does not pass, and goods can be seized back, until such time as payment has been made. These title claims are as valid against an administrator as they are against a solvent business - but the difficulty is having a valid claim in the first place.
In order to have a valid retention of title claim, the relevant paperwork itself has to be 100% correct. Often this is not the case, given that the law changes and, in any event, is never clear on whether the buyer’s or the supplier’s terms and conditions apply. In addition, the goods have to be clearly identifiable - not so much of an issue with branded tinned goods, but more so with homogenous raw materials such as wheat. It is also important that the goods do not become mixed up - if the supplier cannot directly point to the goods and prove they relate to the debt, then the claim will not succeed.
In certain instances, a company that acquires an insolvent business will agree to meet some of the unsecured claims, which would otherwise be left unpaid by the old insolvent company. It will rarely be a term of the deal that the new company has to meet these claims, but a supplier may be seen as being vitally important to the ongoing business and so will be needed onside - unlikely to happen if it has a large unpaid debt, which the new owner refuses to meet.
But these sorts of arrangements are very much the exception rather than the norm; if you are a supplier to an insolvent business, unfortunately, it is often unrealistic to expect any return on your unpaid debts, other than a few pence in the pound.B
? Mark Hughes is an associate with legal firm Browne Jacobson, specialising in corporate finance
=== Employee agenda ===
The employee position for insolvent businesses is also often unclear. If a business is transferred as a going concern (TOGC) then all individuals employed in that business will transfer to the buyer under the TUPE Regulations. However, there is no hard and fast method of establishing when a TOGC will apply - it depends on the facts of each case. If a buyer acquires the business’s name, ongoing contracts, premises, stock and fixed assets, then TUPE is almost certain to apply. But if a buyer just buys stock and fixed assets, and has no right to the business name or the goodwill, then TUPE probably will not apply - the buyer has simply bought some assets which the previous business used.
The position is also confused when a buyer wants to buy part of a business. For example, what is the position if a buyer wants to take on 20 bakery outlets out of the 60 previously operated? Has it bought the business in just those 20 bakeries or has it bought all 60? The difference is massive. Either the employees are all transferred to the buyer and then made redundant - and so have claims for redundancy and other employee claims against the buyer - or they remain with the insolvent company. Our view is that any buyer in such a situation should obtain specialist advice, given that the law is complicated and there is potentially a lot at stake.