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How to Acquire Add-Ons at Liquidated Asset Valuation

Article | April 12, 2019

Learn how Second Wind reorganizations can provide a source of add-on opportunities at the attractive cost of liquidated asset valuation.

A man building a tower out of wooden blocks

As a private equity group or strategic buy-side intermediary, you are looking for attractive add-on opportunities.

In this article, you will learn about a stream of target options you may not be aware of. Furthermore, you will learn why this source is uniquebecause target acquisitions are available at the far more attractive cost of liquidated asset valuation, rather than the cost of the note.

“I think it’s a huge opportunity. I really do.”

Mike Kendall, Kendall Capital Group

How Reorganizations are a Source of Opportunity

The distressed space is often thought of as a minefield of sunken costs, risk and futilityand rightly so. A myriad of complexities and inefficiencies involving the subordinate debt schedule are often prohibitive to pursuing acquisitions. More often than not, the value will not be extracted from a distressed enterprise and will ultimately be liquidated rather than capitalized upon.

However, a growing number of insolvent businesses are pursuing the more rational path of reorganization over a bankruptcy filing. This alternate path preserves core business value while divorcing all subordinate debt. The result is a pristine, new entity and a unique opportunity for purchasers.

Through reorganization, business assets are liquidated privately into a purchasing entity to satisfy the appraised valuation of the first position creditor’s collateral. By result of reorganization, core value passes into the purchasing entity while satisfying the first position secured creditor. This is your target and your opportunity.

“I was really surprised to learn that this process has something in it for everybody—including the second level of lien holders that actually don’t get paid on their liens—but because they’re going to preserve the ongoing business and it will be a new entity probably with better management, they can keep the customer.”    

Greg Carpenter, M&A Business Advisor

Pristine Entities at Liquidated Asset Valuation

Article 9 of the Uniform Commercial Code is a provision by which the first position creditor can liquidate collateral to their benefit in a private sale while eliminating all subordinate liens and obligations. Subordinate creditors’ liens are removed through Article 9 when total asset valuation is outweighed by the obligation to the first position. This benefits the first position creditor and facilitates their ability to transact on the collateral with assurance to purchasers that assets transfer free of all encumbrances.

Through the strategic Article 9 short sale, a purchaser for the assets is identified, and a new purchasing entity is selected or created for the transaction. This simplified short sale of business assets requires only the consent of the first position secured creditor, whose appraisal-based recovery value is satisfied. Upon completion of the ten-day notice period to subordinate creditors, the assets transfer free and clear. Through this reorganization, ongoing concern value and full continuity of operations may be preserved within the purchasing entity that acquires the assets at appraised liquidation value.

“We recently closed a deal where the owner had to take out a personal loan to clear the assets, so we could transfer them to the buyer. With [an Article 9 reorganization] we would have been able to close it quicker, and a lot more easily.”

Scott Mashuda, River’s Edge Alliance Group

“I recognized the value immediately. It not only brings a business owner out of a bad situation, but everybody wins—that’s the best model.”

Troy Tucker, Blue Sky Business Resources / Committee Chair, M&A Source

A Flow of Add-On Opportunities at Attractive Entry Costs

There are three scenarios in which your PEG or even M&A model can benefit from strategic, Article 9 reorganizations being transacted in the distressed space.

Scenario 1

You have a distressed target acquisition where the outstanding debt outweighs the value of the operation. You bring that target opportunity to Second Wind Consultants who willat no cost to youreorganize the target prior to or through your acquisition to deliver you back a pristine, debt-free enterprise in a matter of weeks. There is no need for ABCs, global settlements or 363 sales. Reorganizations are streamlined, requiring negotiation with only the first position creditor, and generally are completed in 45-60 days.

Scenario 2

When core business value is preserved through distressed reorganizations, purchasing entities become available as target opportunities to PEGs at the attractive entry cost of liquidated asset valuation. By forming a strategic alliance with Second Wind Consultants, PEGs will be alerted of add-on opportunities that fit their criteria in real time.

Scenario 3

Intermediaries can form a strategic alliance with Second Wind Consultants to line up strategic purchasers of potential add-ons in order to transact on newly reorganized enterprises, creating a competitive advantage for themselves and value for their clients.

Find out more about how a strategic alliance with Second Wind Consultants can offer you a stream of reorganized opportunities at attractive entry points.

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