As a potential purchaser of assets in a small business restructuring, it’s important to fully understand the opportunity presented to you, and the context which brings you and Second Wind together.
When a business becomes insolvent under the weight of unsupportable debt, creditors seeking to recover value have limited recourse. Most commonly, mitigating loss involves the liquidation of the business’ assets, normally at auction, for pennies on the dollar of the assets’ practical worth. By result, creditors recover only a tiny fraction of the outstanding debt; but in the absence of any other mechanism, this has traditionally been the “best worst option.”
After the liquidation of assets, what comes next is a reckoning of the deficiency balance and the personal asset exposure of the guarantor. More often than not, the result is bankruptcy. So what has been gained? In most cases, virtually nothing. The whole scenario can best be described in terms of broad, sweeping loss for all parties. Not least of which is the destruction and dissolution of the business and its services, creating a loss of jobs and a gaping hole in the community it had previously served.
Preserving Value Benefits All
Second Wind exists to preserve and salvage core operational value in the context of insolvency. The principle is relatively simple: when assets can be liquidated into a purchasing entity, rather than liquidated at auction, the core value of the business can pass through as well. When that value is preserved, a better result is created for all parties involved; including owners, creditors and purchasers.
Beyond the immediacy of your role or the circumstances of the parties involved, you are part of a broader mission—to change the way debt and default are handled in our economy as a whole. We believe that business value need not be destroyed through forced liquidation, as it is both irrational and unethical.
While bankruptcy will remain as a viable option for the very few where it is needed, the fact is that it is an overused “solution” that typically fails everyone involved—borrowers, guarantors, creditors, vendors and employees. Everyone.
Your Role in the Solution
The solution, and your role in it, begin at the point where creditors would typically seize and liquidate business assets. In the absence of any alternative, creditors are both entitled to and obligated to take possession of the business assets and liquidate them at auction for pennies on the dollar, thereby destroying the company.
What we propose (and successfully execute) is to intercept these assets before forced liquidation. Through a sale of business assets into a purchasing entity, two results are achieved simultaneously:
- Creditors recover their asset valuation more efficiently, without the difficulties and time involved with auctions.
- Core operational value is preserved and passed through to the purchasing entity, as both the practical and ethical end-result of the broader mission of which you are a part.
The buyer enters without debt and risk of depreciation.
We present the bank with a qualified buyer who can submit adequate consideration for the assets in question. In most cases, the consideration for this asset purchase is funded by the operations of the newly organized company itself. In a few instances, funding is required, but not the majority.
- By issuing funds appropriate and adequate for the transfer of assets, we can preserve business operations without having the buyer take on the obligation of the unsupportable debt.
- The buyer benefits through the opportunity to invest in a viable business at liquidation value, with effectively no risk of depreciation.
The seller is preserved.
What follows is the resolution of the personal guaranty that remains on the deficiency balance. By preserving business operations and allowing employment for the former owner in the new purchasing entity, we can (with your help) furnish the opportunity for guarantors to work and earn funds to provide for themselves and their families. Furthermore, they can finance their eventual settlements with subordinate creditors, so as to avoid bankruptcy.
A Rational and Ethical Result for All
As a result of this transaction, creditors will be able to collect funds commensurate with and often exceeding any value they would have extracted through bankruptcy proceedings. The guarantor does not lose her assets, home, or personal credit. She is given the chance to resolve and honor her obligations without having to say no to employees, vendors, communities/clients, and without saying no to creditors.
Beyond the benefits to guarantors, creditors and buyers, the preservation of business value and jobs is an ethical imperative and pragmatic necessity for our nation as a whole. Billions of dollars of economic activity and countless thousands of jobs are needlessly lost each year. Beyond the human toll, our competitive edge in a global economy requires putting an end to the epic waste resulting from the irrational liquidation of business assets.
For decades, the preservation of business value has been well understood and has existed within the domain of the largest corporations. In the popular imagination—and in practice—these enterprises are considered “too big to fail” and by implication, more important than the aggregate of the many thousands of smaller businesses destroyed each year. As an artifact of this perception, bankruptcy has been the only path available to most companies. By result, a profitable legal industry has built up around it, reinforcing the flawed conventional wisdom surrounding the process, its effects and its apparent lack of options.
An Opportunity You Can Feel Good About
Often a potential buyer will find themselves with a series of questions. What’s in this for me? What are my obligations? What liabilities should I know about?
So, let’s define the opportunity.
As a potential buyer, you are allowed to enter into a marketplace at rock-bottom liquidation prices and, going forward, to earn through the operation of, and possible future sale of a now viable business with no unsupportable debt burden.
You are also offered the chance to help a business and group of individuals within a community—to salvage and preserve not simply employment, but the intellectual and emotional value and effort that would otherwise be lost.
What are my obligations?
Ultimately, your obligations will be defined by the goals and aspirations of all parties involved, as they align with your vision and objectives. In some cases, a new business owner need not carry any operational duties or obligations. Working with the previous owner through a consultancy and employment agreement, the day to day operations of the business need not be a worry or concern of the new owner. That said, in many cases a new owner may want to be a collaborator and contributor, to participate in the growth of the new business and to ensure its future success. In short, the scope and nature of your obligations will be yours to define.
What liabilities should I know about?
Does a new buyer inherit any obligation to the debt of the old entity? Absolutely not. They are coming into possession of these assets not just with the cooperation of the creditors, but literally for the benefit of the creditors. None of the debt follows, as all liens and encumbrances on the assets will be stripped and resolved through this process.
Does a new buyer take on any tax liabilities? That depends on the structure of the organization. The new entity will not take on any tax liabilities of the insolvent entity. Any tax liabilities would correlate directly to the earnings of the new business operations, and whether you file as an S-Corp or a C-Corp will be up to you and your CPA. Worth mentioning, and one of the only other tax liabilities to be aware of, is the topic of payroll and sales taxes. While these are the obligation of the entity itself, some of that obligation is also shared by the business owner. So simply pay your payroll and sales taxes, and there is no issue about which to be concerned.
Will there be any debt liabilities in the future? That would be wholly up to the owners and managers of the company. In most cases, new businesses need not take on additional debt, as the relief experienced through this process results in increased cash flow that is often sufficient to operate, thrive and grow.
Where Opportunity and Responsibility Meet
As a potential purchaser of assets in an Article 9 restructuring, your investment opportunity is aligned with the opportunity to contribute to others. Beyond the numbers, the rewards of preserving jobs, livelihoods and economic activity return a sense of satisfaction and pride that many purchasers don’t initially expect.
No investment decision should be taken lightly or without having performed all due diligence. At Second Wind, we’ve concluded thousands of restructurings in the distressed space over the past ten years. For the many distressed owners and asset purchasers involved, restructuring and value preservation have created opportunities unavailable anywhere else.