As most companies transition from survival to rebuild mode in the second half of this year, some will become financially distressed and the owners will want to move on. Fortunately, for the shareholders and creditors of these companies, there is an active market for distressed business assets. Distressed businesses can be attractive acquisition targets for strategic buyers, and sellers can optimize financial outcomes through a proactive M&A sale process.
Financial distress is a term in corporate finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty. If financial distress cannot be relieved, it can lead to bankruptcy. (Source: Wikipedia)
Distressed business sales range from simple out-of-court transfers of a company’s tangible and intangible assets, to highly structured and expensive bankruptcy proceedings.
Four Routes to Selling the Assets of a Financially Distressed Business
- Sale of assets (Asset Purchase Agreement), where lenders and certain creditors may be asked to forgive or discount outstanding debts
- Secured party short sale under Article 9 of the Uniform Commercial Code
- Asset sale in an Assignment for the Benefit of Creditors
- Section 363 asset sale in a Chapter 11 or Chapter 7 bankruptcy
Selecting the appropriate method is case-specific and involves a number of considerations, including: (i) the particular assets involved; (ii) the seller’s runway and the speed of consummating a transaction; (iii) the cost of the process; (iv) privacy concerns; (v) the cooperation of secured creditors and ability or need to sell assets free and clear of liens; (vi) buyer protections afforded; (vii) exposure to subsequent challenges and liability (i.e., fraudulent conveyance or successor liability claims); and (viii) which process will most likely maximize value to shareholders. Choosing the most effective method requires careful analysis of facts and circumstances and understanding of alternatives.
If your company is facing financial distress, the sooner you get help and take action the better. When financial distress is severe and on a path to insolvency, an attorney with specialized expertise in complex workouts, restructurings and bankruptcy must be consulted early on.
Al Statz is President and founder of Exit Strategies Group, a leading California-based M&A advisory firm with decades of experience selling companies in all market conditions. For further information, or if you are interested in exploring the potential sale or acquisition of a distressed business, contact Al Statz at 707-781-8580 to discuss your needs, circumstances and options, confidentially.