The current economic turmoil is giving businesses more opportunities to benefit from competitors’ and vendors’ financial troubles, but there are also increased risks.
When you venture into this Wild West of distressed asset acquisitions, you need guides who know how to navigate this complex territory. In the world of distressed asset acquisitions, deals close in days and transactions that would typically include 60 pages of documentation are sealed with something much less.
“It’s important to know your exposures and liabilities,” says Steve Roemer, president and CEO of Solid Asset Solutions, LLC.
Steven M. Weiss, a partner in the Corporate Practice Group and the Restructuring & Insolvency Service Group at Levenfeld Pearlstein, LLC, adds, “If you do everything the conventional way, deals just can’t be done with speed, and you won’t be seen as an experienced buyer.”
Smart Business spoke with Roemer and Weiss about how to prepare for the unique challenges of distressed asset acquisitions so you don’t end up with no deal, or, worse, a bad deal.
What are the biggest mistakes businesses make in distressed asset acquisitions?
Worst case scenario: Choosing the wrong structure. Take, for example, the story of an inexperienced buyer who went into a deal with inexperienced counsel. They started with a seller-financed deal that had great potential. But because of their mutual inexperience, they chose the wrong structure (an equity purchase agreement instead of an asset purchase agreement) and unknowingly exposed the buyer to assuming liabilities that were not contemplated by the deal. As a result, each month the buyer had a costly reminder of the mistake when he had to fulfill the lease obligation for a building the company didn’t occupy. If the deal had simply had a different structure, the buyer never would have assumed that liability.
Are there times when companies should consider a joint bid with another firm?
There are times when finding a partner for the deal may help get the transaction done and also reduce risk. For example, if both inventory assets and intellectual property assets are for sale, the seller may view a bid for both more favorably than a higher bid for a single asset class. So to be the winning bidder, you may need to partner with a firm interested in buying another portion of the assets.
When joint bidding occurs in a conventional transaction, the two companies negotiate a joint venture agreement and generally form a new legal entity for the purpose of the transaction. But when two parties approach a joint bid in a distressed situation, standard operating procedures often change. Often the joint venture consists of nothing more than a general partnership (with no state law charter and liability protection) and a short-form partnership agreement.