What is the first integral decision a buyer must make before buying a distressed business?
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.
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.
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This is an updated version of an article originally published on April 11, 2017 and previously updated August 7, 2020.]
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The editors and editorial board of DailyDAC include preeminent restructuring and insolvency professionals, journalists, and editors. They are devoted to providing reliable and plain English education and deal intelligence about assignments, corporate bankruptcy, receiverships, out-of-court workouts and similar topics.
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