When a company goes bankrupt, the most important question is "Who owns what?" This is a particularly important question if you are seeking a white knight buyer for your failing company or planning to buy a failing company as a turnaround project.
Determine who has the first claim on assets and who are the subordinate claimants, then negotiate for terms. If secured creditors make up a small portion of the total liabilities, you should negotiate first with the largest creditor who may have an unsecured claim. There is great potential for a successful merger between a product company with no money and a vendor that is able to provide funding for a turnaround. In this case, secured creditors can either be paid off or convinced to be patient pending the company's return to good financial health.
List all liabilities. A company entering bankruptcy may be doing so in order to obtain temporary protection from creditors during a reorganization (Chapter 11 bankruptcy), or it may be forced into receivership by secured creditors anxious to attach certain assets (Chapter 7 bankruptcy). In liquidation, assets are distributed first to the secured creditors such as banks and finance companies, and what is left goes first to unsecured creditors such as landlords, vendors and even customers who are waiting for delivery of pre-paid product. If anything remains after all creditors have been paid, it gets distributed among the stockholders. What this means is that if there are no assets left, there is no company to own and, therefore, no merger possibilities.
Create a due diligence book that contains audited financials, copies of tax returns, bank statements, employment contracts, leases, bills of sale for equipment, vendor contracts, customer contracts, inventory, and a capitalization table that shows how much money has been invested by whom and the number of shares owned by all major stockholders.
List all assets. A successful merger involves selling the assets of a company to a buyer who can improve the performance of that company. The surviving company is not necessarily the company with the most money. It sometimes happens that a company with a strong product line but not enough money to fund expansion will buy a company that has a failed product line but has managed to retain cash. In this case, the product company will buy the other company's cash asset with shares of common stock in the product company. A company entering bankruptcy must have assets such as IP (intellectual property, including trademarks, patents, copyrights), valuable plant or equipment, a valuable customer base, or some other asset that will produce a successful company if only there could be an injection of enough money to fund marketing, inventory creation and other elements of growth.
Create a simple straightforward proposal to present to potential merger candidates. If you are seeking an acquirer, make a list of all your vendors and creditors who might be appropriate merger candidates. Attorneys and accountants are also good sources of potential acquirers and business broker referrals. If you are anticipating a possible bankruptcy but have some time, you should approach local angel investors and venture capital funds. If you are seeking a distressed company, your attorney, accountant or business broker will also be helpful. You should also attend trade shows in the industry and seek referrals there.
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