Buying a bankrupt business from a trustee has its drawbacks. But perhaps it actually offers opportunities for your position in the market. Because by buying such a business, your company may finally be able to serve those niche customers or you may be able to buy up a technology and workforce for a relatively "soft price.
When a company is eventually declared bankrupt, there is an opportunity for entrepreneurs and investors to buy such a business. Buying a business out of bankruptcy requires a specific approach. For example, you can buy the estate from a bankruptcy, buy part of the estate at auction or buy the entire business from the trustee.
Trustee
A receiver (usually a lawyer) is appointed by the court at the time a business is declared bankrupt. The trustee must ensure that the bankruptcy proceeds properly and that creditors get as much as possible of what they are entitled to.
In general, a receiver will first try to transfer all or part of the bankrupt company as a going concern, because then the highest price can be realized. We call this a relaunch. Only if a complete relaunch is not possible, a receiver will want to sell parts of the company or individual assets.
Relaunch
In a takeover from bankruptcy, you only buy assets from the bankrupt company, such as business inventory, operating assets, inventory, receivables and/or goodwill (trade name, domain name, customer base). The debts are not taken over in this. A trustee will want to settle a relaunch as quickly as possible. This is because the longer it takes, the more the value of the business drops.
Bid
In the case of a bankrupt business, the trustee will prepare a bid book. This information document will include the most relevant and up-to-date information about the business, including an overview of inventory, assets, inventory, revenue and expense data, and employee information.
Interested buyers will have to hurry, because of the speed the trustee wants to keep in the process, to make an offer. If there are many interested parties, a trustee often holds multiple rounds of bidding. With the interested parties who have made the best (preliminary) bid, the trustee enters into further negotiations.
Why should you buy a bankrupt business?
After all, a business is bankrupt for a reason. But opinions are divided on that. A business can have very good future prospects, but due to mismanagement or strangling contracts it is inevitably headed for bankruptcy.
Sometimes it actually pays to buy a bankrupt company and restart it under a fresh new name. Or maybe the company's inventory is just perfect for expanding your own business. Do thorough research before you decide to buy a bankrupt business, and due diligence and legal advice is no unnecessary luxury.
10 tips to buy a bankrupt business
Taking over a bankrupt business from a receiver does bring its own challenges. Here are 10 tips to consider when taking over a bankrupt business from a receiver:
- Goal of the takeover
- Does the business have future prospects?
- Research, research, research!
- Arrange your financing
- Be there on time
- Start with minimal cost structure
- Keep your staff
- Is there still trust?
- Evaluate
- Take the time
1. Goal of the takeover
As mentioned, taking over a bankrupt company is complicated. This is mainly due to the fact that a trustee wants to look after the interests of the creditors as well as possible. And that usually involves money. As a buyer, you are on the sidelines. Now it is true that a trustee will pursue a relaunch, because this usually realizes the highest returns.
It is important to determine if this business really fits within your business strategy. Because the bankruptcy of a company is often due to mismanagement. Policies that are woven into all layers of the organization, and which you have not reorganized one, two, three with an acquisition. Such an acquisition is therefore only advisable if it really fits within your business strategy.
2. Does the business have future prospects?
In line with tip 1, it is important to properly examine the future prospects of a business. Don't focus on your competitor's one product, but look at the numbers. What does this company offer your business? And is that worth "saving" the bankrupt company? Look three years ahead and then weigh whether you will take on the challenge of acquisition.
3. Research, research, research!
Well, by now you have considered whether the business fits within your business strategy and whether you would dare to do this in the long term. Then it is now high time to do some in-depth research. Delve into the industry, into the business and dig up all the information you can find. Get good advice from experts about the content of the acquisition and the legal settlement.
4. Arrange your financing
Pulling a bankrupt company out of the doldrums and making it profitable again does not happen overnight, it takes time. Time to get revenue, and therefore cash flow, back on track. When drawing up the investment budget, you should therefore seek advice from a financial specialist.
5. Be there on time
After thorough research, you determine "yes, I'm going to take over a bankrupt business from the receiver. If so, now is the time to make some haste. Haste is rarely good, but with thorough preparation, you can afford to hurry now. This is because a trustee prepares a bid book, which includes all of the business's latest information. Based on this bidbook, interested parties can make an offer.
And as mentioned earlier, a trustee represents the interests of creditors. They want to see their money, and preferably today. Several rounds of bidding may take place, depending on the number of bids. In the end, the best bid is the winning bid.
6. Start with minimal cost structure
Depending on the business, market position and future prospects, it is wise to take over only what is really necessary. Delete as much "unnecessary" ballast as possible. Why? Because as a relauncher, you usually have higher costs than a regular acquisition. This has to do with a bank guarantee that a receiver often demands and the fact that suppliers want to be paid in advance during a relaunch.
7. Keeping staff
Minimum cost structure affects your payroll. Because ideally, you would only take over the employees you need at that time. When a company is taken over, employees are legally employed by the new employer, unless it is a takeover of a bankrupt company. As the buyer of the business, you have a free choice. Be careful if you restart a business that you have previously declared bankrupt. Staff can then object to the dismissal.
8. Is there still trust?
Whether you can save a business depends not only on the new wind that blows. Bankruptcy can hit customers, staff and suppliers pretty raw. Sometimes they are faced overnight with the news that they are not getting what they paid for or that their jobs are at risk. This puts quite a dent in confidence. It is up to you as the new owner to restore this trust and get people back on hold. Time heals all wounds, but be clear about the new situation and expectations.
9. Evaluate
Although in tip 2 you looked three years ahead for the future prospects of your business, you can often tell after six months or three-quarters of a year whether the relaunch is bearing fruit. If things are still not going as they should be, evaluate the process and take stock of the bottlenecks. Perhaps it is time for additional actions.
10. Take your time.
Taking over a bankrupt business can feel like a rollercoaster. There are opportunities to expand your business relatively inexpensively, and you have to make quick choices to seize those opportunities. Although you have little time to grasp all of this rationally, feelings often say a lot. So listen to your head as well as your heart. And after your decision, take the time to get everything right!
