Buying a Business in Bankruptcy

The American Bankruptcy Institute (ABI) reports that approximately 30,000 American businesses file for bankruptcy protection every year. Of course, many of these businesses still have a lot of value. You or your company may be considering purchasing a business through the bankruptcy process. 

Buying a distressed company (or its assets) through bankruptcy offers tremendous upside potential. At the same time, doing so is complicated. It is crucial that you get it right. Here, our New York business bankruptcy lawyers highlight some of the key things to know about buying a company that is in the bankruptcy process. 

Proper Due Diligence is a Must

First and foremost, the importance of proper due diligence must be emphasized. While you should always conduct comprehensive due diligence when buying a business, it is even more critical when purchasing a company in bankruptcy. Make sure you understand the true value of what you are acquiring—including all possible liabilities. Only after a full analysis can you be confident that the business you are acquiring is worth it. 

Buy Assets, Not Stock (Usually) 

When purchasing a business through the bankruptcy process, it is generally better to buy the underlying assets and not equity (stock) in the company. Although there are always exceptions, buying assets directly generally puts your company in a better financial position. For example, asset purchases often carry tax advantages. In addition, buying the assets of a bankrupt company as opposed to the equity in it minimizes the risk of liability. 

Comply With Bankruptcy Law—A Section 363 Sale May Be the Best Option

When a business files for bankruptcy protection, all of the transactions it makes are subject to evaluation by its creditors and the court. You must comply with bankruptcy regulations when buying a financially distressed company. Failure to do so carries several risks. Your company may end up exposed to unwanted legal liability or the sale could even be disallowed as a fraudulent conveyance. 

In the context of bankruptcy law, a so-called ‘Section 363 sale’ is generally your best option. An acquisition under 11 U.S. Code § 363 is an effective and efficient way to buy a company (or its assets) outside of its reorganization plan. When done correctly, this method allows the buyer to purchase a business or business assets "free and clear" of all liabilities. If you are considering buying a business in bankruptcy through a Section 363 acquisition, an experienced New York business bankruptcy lawyer can help. 

The Bottom Line: There are two unique risks to buying a business in bankruptcy. First, the transaction could be challenged by creditors or blocked by a court. Second, the buyer could accidentally be stuck with the liabilities of the bankrupt company. An attorney can help your business navigate and mitigate these risks. 

Speak to Our Business Bankruptcy Attorneys Today

At Pierce / McCoy, our New York business bankruptcy lawyers provide top quality, cost-effective guidance and representation to clients. We deliver value to businesses and entrepreneurs. If you have questions about buying a company in bankruptcy, our legal team can help. Contact us now to arrange a confidential initial meeting. Beyond New York, we also represent businesses in Virginia and Texas.