Acquiring, Financing, and Selling Distressed Businesses and Assets
Smart investors with an appetite for risk can find bargains in acquiring or financing financially distressed businesses whose troubles scare away competing investors. A business owner who desires to exist an unsuccessful investment may limit his or her losses through a well-executed plan to sell the business or its assets, whether as a going concern or through piecemeal liquidation of individual assets, inside or outside of bankruptcy.
Where insolvency or bankruptcy is involved, special considerations apply. The Bankruptcy Code powerfully incentivizes buyers to purchases business assets, sometimes whole companies, out of bankruptcy. In many circumstances, a bankruptcy judge’s order approving a sale results in the buyer receiving the assets “free and clear” of associated liabilities. The liabilities transfer from the purchased assets to the cash purchase price under the bankruptcy court’s jurisdiction. Lenders may be willing to finance purchases of troubled businesses out of bankruptcy when they would not touch the transaction without the cleansing effect of a bankruptcy sale order.
However, not all sales and financial infusions into distressed businesses require a bankruptcy filing. Much can be accomplished outside of bankruptcy with the consent of the major creditors and shareholders. See Bankruptcy-avoidance strategies and counseling. Major creditors may be induced to give that consent by the prospect of a sale providing a better return for them than other options. Foreclosure under state law remains an available vehicle in many instances for a secured creditor to get clean title to the assets of the troubled debtor. See Deeds in lieu, short sales, and foreclosures.
It is important in all these situations to focus on contracts and leases that may be an important part of the value of the troubled company or its assets. The rights of the third parties which entered into those contracts or leases with the troubled company must be considered, as it is not always possible to transfer those contracts or leases to a buyer over their objections.