Buying assets from SBA lender in prepackaged liquidation?

February 08, 2024

by a searcher from Harvard University - Harvard Business School in 1970 Walton Dr, Burlington, WA 98233, USA

I’m currently operating an outdoor product manufacturer/brand that I acquired via a self funded search in###-###-#### Our industry is in a major downturn with a post-COVID inventory glut and softened consumer demand. This has created some interesting buy opportunities that we are exploring.

In one case, an owner-operator has a company in deep distress, with a non-bank SBA lender who I believe is likewise in trouble. I’m interested in chatting with folks who have direct experience with buying/selling impaired assets in situations like this. I’d like to make a cash offer that is at a discount to stated asset values but better than what I know the lender would net in auction. Best to send the offer to the owner-operator or the lender? Other tactical suggestions? Thanks in Advance!

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Reply by a searcher
from Cornell University in New York, NY, USA

Scott, we specialize in investing in deals like this. There are many nuanced financial/legal considerations to evaluate before coming up with a strategy and approach. To me, before approaching anyone, I'd want to think through the structuring as most of the execution of the deal will depend on this. This is a small smattering of the first questions that come to mind. Do you want to purchase the asset free and clear if there are other looming liabilities--if so, would want to do the acquisition in a bankruptcy Section 363 asset sale. Is there less than $7.5m of funded debt--if so, definitely want to do a Subchapter V filing. Is the lender over or under collateralized based on the market value of the asssets--one or the other can drive substantially differing outcomes depending on path. Do you want to enter through an acquisition of the paper or through a purchase of the owner entity--there a different cost/benefits to both approaches. etc, etc. Once there is a clearer picture of the structure, can approach the seller and the lender with more confidence.

Distressed deals are more complex than a typical LBO/searcher acquisition primarily due to the legal weapons and defenses that are required to win when push comes to shove. Some call it "3D Chess", per the industry bible "Distressed Debt Analysis" by Moyer. However, if you have the right team asking the right questions, it's possible to score massive wins. Shoot me a message if you want to chat about it.

Reply by a professional
from University of Miami in New York, NY, USA

Scott - I’ve done a number of these types of transactions as counsel. When buying a distressed asset like this, it’s typically best to go to the seller 1st. The exception to that would be if the asset is already in a distress position, and is under receivership with the lender.

There’s a few acquisitions strategies that we can explore: making a straight offer, and then negotiating with the lender to let it go at that price; possibly a prepackaged bankruptcy, or you would be the white knight, who would take the asset out of bankruptcy, for a discounted payoff, and then exchange for shares.

I’d love to speak to you about this. Let me know if you’d like to schedule a call: ###-###-#### and redacted

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