The Bankruptcy Sale Process
A bankruptcy sale can include everything that the company’s management and the court believes has tangible value. When a business files for bankruptcy, the expectations of every party involved in the process is immediately diminished. Owners recognize that their valuations of the business must be lowered, while creditors realize that any chance to be fully compensated has vanished. As a result, all parties involved typically become more willing to accept far less than what they might have originally hoped or expected.
While a Chapter 7 bankruptcy results in complete liquidation, Chapter 11 reorganization is far more common. Most distressed businesses use the Chapter 11 filing option because it allows them to continue to conduct business during reorganization. Under this provision, debtors have the exclusive right to submit their own reorganization plan within 120 days of the original filing. After that period, creditors and other interested parties can submit their own plans.
Those looking to buy a business in bankruptcy can choose to align themselves with either the debtor or creditors in the plan development process. This provides a substantial degree of strategic flexibility in the negotiations. Asset purchase plans are then submitted to the court where interested parties have 20 days to file objections and offer counter proposals.
In many cases the buyer and debtor have already worked with the various creditors to reach a settlement agreement prior to the submission of the proposal to the court. Secured creditors who have encumbrances against the business and its property will be more rigid in their recovery expectations. However, they often grow weary of the process and lose confidence in management which often results in an opportunity to negotiate with them.
Unsecured creditors are in a subordinate position and have very little negotiating strength. Significant legal precedent exists that usually results in their recovery of only a portion of the proceeds from the liquidation of unencumbered assets.