The Only Guide You Need to Read Before Buying a Business in Distress

The task of putting up a business can be quite challenging, to say the least. As with almost all ventures, starting from scratch is often the best way to go, but also the most time-consuming and it also requires the most effort.

 

Couple that with the fact that there’s no guarantee that your business is going to thrive, especially if the market you intend to compete in is over-saturated, and you’ve got a sea of uncertainty that’s bound to discourage many would-be entrepreneurs.

 

And so, it’s no surprise that many might want to instead invest in a dying (but already established) business. After all, all that needs to be done is to breathe new life into the business. And while it’s true that the easiest route to take here would be to simply engage the services of the seasoned lawyers at the McQuarrie law firm, it’s always best to at least have an idea of what exactly you’re getting yourself into.

 

But being the savvy readers you are, you’re already aware that taking over a failing business is not as easy as it may seem on paper. There are many considerations that you have to take into account, and here are some of the most important ones.

 

Buy Assets, Not Stock

 

As you may have already guessed, acquiring assets serves you, the new owner, in two primary ways. First is that you’re going to be able to offset any liabilities that you’re likely to incur. Apart from this, you’re also going to obtain an improved tax basis with regard to these assets.

 

However, it’s very important to understand that while this is indeed a general principle, caution be must taken, especially since each and every deal is different and they should all come with their own structures and negotiations.

 

Fraudulent Transfer Protection

 

If assets from a distressed business are purchased before a Chapter 11 Bankruptcy is filed, you risk facing a fraudulent transfer challenge later down the road. If creditors show that there was indeed a fraud that was committed, the sale can be nullified.

 

To avoid such a scenario, you need to build proof on record that there was fair judgment taken by getting a fairness opinion from a recognized bank, and that there are already procedures in place to pay off the creditors.

 

The Purchase Price Escrow

 

Unless a buyer has a guarantee from a credit-worthy partner or stockholder of the distressed business, you as the buyer can hold a significant amount of the purchase price in escrow to avoid the risk of having your purchase price treated as an unsecured claim. This can happen if the business you meant to purchase decides to file for bankruptcy AFTER the acquisition of assets.

 

The Section 363 Sale

 

This method of purchase is deemed as one of the most efficient because not only is it a faster process, but it is also a significantly cheaper process. This is the method of choice for many businessmen for a multitude of reasons that deserve an entire article of its own.