90 Second Lesson: First Step Before Buying a Distressed Business

How Types of Sales Affect the Purchase of a Distressed Business

Question

What is the first integral decision a buyer must make before buying a distressed business?

Answer

Assuming that the seller has not already decided on the mechanism for the sale, the first choice confronting the potential purchaser of a distressed business is how the sale should be effected. Buying a distressed business can be time consuming and come with hidden liabilities, and the type of sale from which you purchase a distressed business will come with its own set of advantages and disadvantages. 

4 Options for Buying a Distressed Business

The four basic choices are an ordinary stock/asset purchase, an assignment for the benefit of creditors (ABC), an Article 9 purchase, or a bankruptcy acquisition. 

Pros and cons for the buyer will largely depend on whether the sale is handled out-of-court or in bankruptcy sale (i.e., a 363 sale). A regular stock or asset purchase outside of bankruptcy, including an Article 9 sale, for example, tends to be faster and less complicated. A court does not have to approve the sale, and the buyer may have more control over certain provisions. 

On the other hand, buying a distressed business through a bankruptcy acquisition affords other protections. For example, an approved sale will be “free and clear” of liens and liabilities. However, a sale in bankruptcy will generally be in the form of an auction, which means that buyers will have to take part in a bidding process.

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[Editors’ Note: This is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to [email protected] and we will try to answer it. This 90 Second Lesson is based, in substantial part, in material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives for and Against Distressed Businesses, with permission of Thomson Reuters. For more information about these publications, please visit www.legalsolutions.com.

To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Opportunity Amidst Crisis – Buying Distressed Assets, Claims, and Securities for Fun & Profit
2. Structuring and Planning the M&A Transaction

This is an updated version of an article originally published on April 11, 2017 and previously updated August 7, 2020.]

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