With business bankruptcies on the rise, cherry-picking good businesses through a bankruptcy buyout may be a pragmatic alternative to a traditional acquisition.
Most modern bankruptcy buyouts are 363 deals (363 refers to the section of bankruptcy code that details these). They are designed to maximize the value of each asset without letting it languish over the long bankruptcy process, garnering the most cash possible for creditors. These deals are not subject to a reorganization plan or creditor approval, but can be executed with the approval of a bankruptcy judge, speeding up the acquisition process considerably. As the buyer, you are protected from all liens and liabilities on the assets you purchase, which makes a 363 especially attractive. It also cuts down on your due diligence.
If you know of a business that is in Chapter 11, or may soon be, you can approach the business owner directly about a deal. If not, work with business brokers that specialize in the Chapter 11 market and have them scope out opportunities for you.
Once you have a potential target, you'll want to claim the so-called stalking horse position. That means you'll negotiate the transaction with the seller before it officially declares bankruptcy, if at all possible. Ideally, you'll build in protections for yourself such as a breakup fee and expense reimbursement in case the deal falls through.
The seller, once it files for bankruptcy, then asks the judge to approve the deal and authorize an auction of the asset. The auction, which is mandatory, is designed to prove that the bankrupt company is seeking the highest and best bidder. If the deal goes to a higher bidder, you will be compensated for expenses and any breakup fees you've negotiated—which can be a pretty nice consolation prize.