To take over a bankrupt business from a trustee, you can buy the estate—either part of it at an auction or the entire business through a going-concern sale. In doing so, you purchase only the assets—such as inventory, stock, and goodwill—and not the debts. The trustee aims to maximize the proceeds for the creditors and generally wants to close the deal as quickly as possible.
Buying a bankrupt business from a trustee involves quite a few complications. But perhaps it actually offers opportunities for your position in the market. After all, by buying such a business, your company might finally be able to serve those niche customers, or you could acquire technology and a workforce at a relatively “bargain price.”
If a business is ultimately declared bankrupt, entrepreneurs and investors have the opportunity to buy that business. Buying a business out of bankruptcy requires a specific approach. For example, you can purchase the bankruptcy estate, buy a portion of the estate at an auction, or purchase the entire business from the trustee.
What is an insolvency trustee?
A trustee (usually an attorney) is appointed by the court when a business is declared bankrupt. The trustee must ensure that the bankruptcy proceedings run smoothly and that creditors receive 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.
What is a turnaround for a bankrupt business?
In a bankruptcy acquisition, you only purchase the assets of the bankrupt company, such as the business inventory, equipment, inventory, receivables, and/or goodwill (trade name, domain name, customer base). The debts are not included in the acquisition. A trustee will want to finalize a going-concern acquisition as quickly as possible. The longer it takes, the more the value of the business declines.
How does the bidding process work for a bankrupt business?
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 business and give it a fresh start under a new name. Or perhaps the business’s inventory is just what you need to expand your own business. Conduct thorough research before deciding to buy a bankrupt business. Conducting due diligence and seeking legal advice are essential steps in this process.
What are the 10 tips to help you take over 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 because a trustee wants to protect the interests of the creditors as best as possible. And that usually comes down to money. As a buyer, you’re on the sidelines. That said, a trustee will generally aim for a turnaround, as this usually yields the highest returns.
It’s important to determine whether this company truly fits within your business strategy. After all, a company’s bankruptcy is often due to mismanagement—a problem that’s woven into every level of the organization and can’t be easily fixed with a takeover. Such an acquisition is therefore only advisable if it truly aligns with your business strategy.
2. Does the business have future prospects?
In line with tip 1, it’s important to thoroughly investigate a business’s future prospects. Don’t fixate on that one product your competitor offers; instead, 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’re up for the challenge of the 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
Getting a bankrupt company back on its feet and making it profitable again isn’t easy—it takes time. Time to get revenue—and thus cash flow—back on track. That’s why you should seek sound advice from a financial specialist when drawing up your investment budget.
5. Act quickly
After thorough research, you decide, “Yes, I’m going to take over a bankrupt business from the trustee.” Now it’s time to move quickly. Haste rarely makes for good decisions, but with thorough preparation, you can afford to act quickly now. This is because the trustee prepares a bid book containing all the most recent information about the businesses. Based on this bid book, interested parties can submit a bid.
And as mentioned earlier, a trustee represents the interests of the creditors. They want to see their money—preferably today. Depending on the number of bids, there may be multiple rounds of bidding. Ultimately, the best bid is the winning bid.
6. Start with minimal cost structure
Depending on the business, its market position, and its future prospects, it’s wise to acquire only what’s truly necessary. Eliminate as much “unnecessary” baggage as possible. Why? Because as a business taking over a bankrupt company, you generally face higher costs than in a regular acquisition. This is due to the bank guarantee that a receiver often requires and the fact that suppliers want to be paid in advance in the case of a business takeover.
7. Keeping staff
The minimal cost structure affects your payroll. After all, you’d prefer to take on only the employees you need at that moment. When a company is acquired, employees are legally employed by the new employer, unless the acquisition involves a bankrupt company. As the buyer of the business, you therefore have free choice in this matter. Please note, however, that if you are restarting the business after having previously had it declared bankrupt, employees may file an objection to their termination.
8. Is there still trust?
Whether you can save a business doesn’t depend solely on the fresh start it’s about to get. A bankruptcy can come as a real shock to customers, employees, and suppliers. Sometimes, from one day to the next, they’re confronted with the news that they won’t get what they paid for or that their jobs are on the line. This takes a serious toll on trust. As the new owner, it’s up to you to restore that trust and get people back on track. 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!
Frequently Asked Questions About Taking Over a Bankrupt Business
What is an insolvency trustee?
A trustee (usually an attorney) is appointed by the court as soon as a business is declared bankrupt. The trustee ensures that the bankruptcy proceedings run smoothly and that creditors receive as much as possible of what they are entitled to.
What is a turnaround for a bankrupt business?
A turnaround involves the transfer of all or part of a bankrupt company as a “going concern,” usually because this yields the highest price. Only when a full turnaround is not possible does the trustee sell off parts of the business or individual assets.
What exactly are you buying when you take over a bankrupt company?
When acquiring a business out of bankruptcy, you only purchase assets, such as business inventory, equipment, inventory, accounts receivable, and/or goodwill (trade name, domain name, customer base). You do not assume the debts of the bankrupt company.
How does the bidding process work for a bankrupt business?
The trustee prepares a bid book containing the most relevant information about the business, including inventory, assets, supplies, and revenue and expense data. Interested buyers must submit a bid quickly; if there is significant interest, the trustee often holds multiple rounds of bidding.
Do you have to take on the staff during a restart?
In a standard business acquisition, employees are legally transferred to the new employer, but when acquiring a bankrupt company, you, as the buyer, are free to choose whom you hire. Please note: if you previously had the business declared bankrupt and are now restarting it, employees can file an objection to their dismissal.
Why would you take over a bankrupt business?
A bankruptcy offers opportunities to acquire technology, personnel, or a customer base at a relatively low cost, or to give a business a fresh start under a new name. However, always conduct due diligence and seek legal advice, as bankruptcy is often the result of deeper-rooted mismanagement.
