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Acquiring a distressed business

While a failing business may be burdensome to its current owners, acquiring the entity or its assets can be very attractive to onlookers. Such a purchase takes a competitor out of the market, enables substantial instant growth and ensures a negotiated cost that may be much lower than “organic” growth. Offsetting these attractions are the risks of distressed-business acquisition, including lack of recourse, which should be addressed through due diligence, valuation and negotiation.

Buying as a whole or in parts

An essential question is whether to buy the distressed business or purchase its assets. Before buying the company, a purchaser needs to consider:

  • Why the business is in trouble and whether the purchaser has the expertise and financial resources to make necessary changes
  • Whether the target’s distressed condition has left it with unpaid debts or wages, tax arrears, lawsuits or other impairments that will be passed onto the purchaser

The question of timing

Buying the assets of a distressed business comes with its own options and associated risks. One decision involves whether to buy assets before or after the distressed company fails.

Before a receivership or bankruptcy filing, a direct purchase of assets may prevent a competitive bidding situation. The distressed business’s principals may be selling assets to reduce debt and avoid failure of the distressed company, which is legal, or to siphon money from the failing business, which is illegal. The Bankruptcy and Insolvency Act (BIA) generally protects “good-faith” purchasers of assets. But if the business subsequently fails, a trustee in bankruptcy will closely examine all recent asset sales for signs that creditors may have been defrauded.

After a BIA filing, a trustee will generally seek competitive bids for assets, in order to maximize distributions to creditors. This process will place upward pressure on asset prices and take time, during which asset values may decline.

The purchaser of a distressed business or its assets should ensure that the deal is structured to close on the date of signing. This can help guard the impaired state of the business from causing ongoing deterioration. An experienced bankruptcy and insolvency lawyer can provide legal advice to prospective purchasers of distressed businesses.

Buying as a whole or in parts

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