Due diligence checklist for buying a company out of insolvency

Three differences shape every insolvency review: first, time pressure — the administrator must realise the estate quickly and rarely grants weeks of exclusivity. Second, limited warranties — administrators typically sell without or with heavily reduced warranties for defects, because they often don't have complete knowledge of the company's past themselves. Third, the state of information — not every document is digitised or current, and the former managing director may no longer be available to answer questions.

That doesn't make due diligence less important in insolvency deals — quite the opposite. Because the buyer has little recourse afterwards, they need to verify as much as possible themselves before signing, rather than relying on representations.

Start with the basic structure: articles of association, a current commercial-register extract, signing authority, and whether the deal is an asset deal or a share deal — that determines which liabilities transfer at all.

Second: third-party security interests. Which assets carry retention-of-title or security rights (supplier retention of title, bank security assignments, mortgages)? The administrator can generally only sell what actually belongs to the estate — encumbered assets often need a separate release or payoff.

Third: ongoing contracts with special termination rights. Lease, leasing and supply contracts frequently contain insolvency-triggered termination clauses — check which contracts end automatically and which need to be actively assumed. For business transfers, also check § 613a BGB: employment relationships generally transfer automatically in an asset deal, regardless of whether the buyer wants that.

The last three years' annual financial statements (where available — for insolvent companies the last published statement is often outdated) plus the freshest possible management accounts give a first read on revenue, cost and liquidity trends.

Important: separate outstanding liabilities into pre-existing liabilities (generally remain with the estate in a clean asset deal) versus ongoing costs of the acquired operation from handover onward. Tax arrears, social-security contributions and pension obligations toward employees deserve particular attention — depending on the structure, buyer liability can arise (e.g. § 75 AO for certain tax types on business transfer), which a tax advisor should assess beforehand.

Don't forget working-capital needs: an acquired business needs liquidity from day one for inventory purchases, wages and running costs — that's part of the purchase decision, not just the purchase price.

Customer contracts: which survive the transfer, and which are tied to the insolvent legal entity and need to be renegotiated? Looking at customer concentration (revenue share of the top 3-5 customers) shows how stable cash flow will really be post-acquisition.

Supplier relationships: after an insolvency, suppliers often turn cautious (prepayment instead of payment terms). That belongs in the first months' liquidity plan.

Employees: which key people (sales, production, technical) are still with the company, and will they stay after the acquisition? In an asset deal with a § 613a transfer, employees have the right to object to the transfer of their employment — that should be priced into workforce planning.

IT and intellectual property: are software licences held by the insolvent entity, and are they transferable? Who actually owns trademarks, domains and customer data — and can that data be transferred in a GDPR-compliant way?

Unclear ownership of core assets (machinery under retention of title presented as "company-owned"), a customer portfolio depending on a single client for over 50% of revenue, key employees who have already resigned or clearly plan to leave, and contracts with automatic termination clauses that — on closer reading — cause the most valuable asset (e.g. the main lease) to lapse.

Another common pattern: management accounts that look considerably better than reality because one-off proceeds (asset sales, receivables sales) aren't flagged as such. Always ask about the composition of revenue, not just the total.

Because time is short, prioritisation pays off: first check the points that could kill the deal entirely (encumbered core assets, key contracts ending automatically, unresolved liability questions), then the ones that affect price, and last the operational details that can still be clarified after signing.

Request data-room access from the administrator early — the more structured the first inquiry (see contacting the insolvency administrator), the sooner you get access to documents. For more complex cases, bringing in an M&A lawyer and tax advisor with insolvency-specific experience from the start pays off — the pitfalls differ noticeably from a regular acquisition.