One companyÂs bankruptcy is anotherÂs growth opportunityBiz Spotlight – Banking and Finance
Smart shoppers know that a going-out-of-business sale is an opportunity to purchase things theyÂve wanted at a discount. The same holds true for business owners.
ÂBankruptcy can be an unwelcome event if youÂre a creditor, or if your company is the one thatÂs going under,Â says Robert K. Malone, co-chair of the financial restructuring practice of Drinker BiddleÂs Florham Park office. However, Âfor a growing business, companies that declare bankruptcy can represent a bonanza.Â
Malone describes a New Jersey-based health and beauty products manufacturer that wanted to expand its offerings. Instead of investing millions of dollars to develop new items, his client purchased a bankrupt firmÂs catalog for pennies on the dollar and slapped its own name on the products.
There are a host of issues that can drive a business to liquidate its assets through Chapter 7 bankruptcy. Bigger competitors can squash a firm; consumer tastes may change, leaving a company over-invested in last yearÂs bestselling tchotchke. Poor management can drag down an otherwise-healthy enterprise.
When a company does go under, the court-appointed trustee who administers the liquidation may try to pay down debt by putting the entire company on the market or holding auctions to sell off merchandise, equipment or other assets. Notices are often posted in newspapers and trade journals; bankers and other insiders may hear about the sales from industry contacts.
And just like shopping at a failed department store, the buyer must beware.
ÂBuying a bankrupt business can save money for an acquirer and let it quickly gain traction in the market through the target companyÂs existing contacts,Â says Louis Altieri, the director of business advisory services at Sobel & Co. in Livingston. ÂThere may be some risk, though. Look closely and try to see why the company went under and whether or not acquiring it may pull your business down, too.Â
Altieri, who is advising a manufacturer thatÂs hunting for equipment to expand its product line, says that buying assetsÂrather than an entire companyÂis one way to reduce risks.
ÂIf you limit the purchase to selected hard or tangible assets like machinery and equipment, the odds are that the payback will be quicker,Â he says. ÂIn contrast, it may be difficult to know if youÂre overpaying for intangible property like a customer list.Â
While a company is likely to see some savings by making a bankruptcy purchase, the exact amount can vary widely, notes Louis Miele, a partner with the Fairfield CPA firm of Leaf, Saltzman, Manganelli, Pfeil & Tendler. He says that equipment and other assets are often auctioned off to the highest bidder; if the action gets serious, prices can quickly rise.
ÂThe odds are that the assets will sell for less than market value; but, youÂre not getting any kind of warranty,Â he warns. The goods are usually sold as is, so potential buyers should inspect them carefully before making a bid.
Another consideration: A buyer has to have the purchase price on hand. Payment, generally in the form of a certified check, is usually due before the buyer can take the assets.
With these considerations in mind, picking through the shelves of a bankrupt company can offer good value.
ÂAbout five years ago we advised a client, a New Jersey-based construction company, about buying a national firm that specialized in a related line of construction,Â says Miele. ÂOur client bought the firm and its assets, along with its contracts and certain obligations for about 75% of the market value. More importantly though, our client got the companyÂs expertise and industry contacts. Today, the expanded firm is doing well.Â
Buying someone elseÂs failure may not be for the faint of heart, but it can represent a good opportunity, and there appears to be plenty of choices for companies that want to give it a try.
Nationally, 26,275 business bankruptcies were filed through the first nine months of 2005, the most recent data available from the American Bankruptcy Institute. While thatÂs essentially flat from the 26,389 filings recorded during the same period in 2004, it still gives potential buyers a lot to look for. In New Jersey, the ABI recorded 684 business filings in 2004, the most recent period it covered, down from 734 in 2003.
But more may be on the way says Malone of Drinker Biddle.
ÂI believe the national economy will be slowing during 2006 and 2007,Â he predicts. ÂAnd as that happens weÂll probably see more businesses go under.Â Attention shoppers!
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