reductions and extended payment
terms. To assume and assign a key
supplier contract to the buyer in a
363 sale, the supplier must be made
whole through the payment of a
“cure” claim. But there is no such
requirement in an out-of-court deal.
Without consistent communication
and careful management of supplier
relationships, those who have paid
a price due to the seller’s distress
may look to exert leverage to make
up for past harm post-acquisition.
Retaining Key Employees. A
distressed company may have
difficulty retaining key employees,
especially those who are aware of
a sale process involving a strategic,
or even a financial, buyer. Problems
with employee retention may arise
for a host of reasons, including
compensation freezes or cuts,
elimination of 401(K) matches, lack
of bonuses, and requirements for
larger employee contributions toward
employee benefit plans. Buyers,
therefore, must have a plan in place
to incentivize key employees to stay.
Peter J. Smidt is a shareholder of Conway MacKenzie
and leads the firm’s Transaction Services practice.
He has 20 years of experience in mergers and
acquisition services, advising on more than 350
transactions, including buy-side, merger integration,
and sell-side engagements. Smidt provides strategic
consulting, debt restructuring, and performance
improvement services for performing and
underperforming businesses, and works extensively
with the firm’s private equity and hedge fund
clients. He is a CPA and holds MBA and bachelor’s
degrees from Central Michigan University.
Distressed deals in today’s market
require quick, decisive, and thorough
due diligence and execution and,
thus, can be very challenging. There
are many advantages to purchasing
assets and companies in Chapter 11
through a 363 sale, but bankruptcy
is not always possible or advisable.
Therefore, buyers of distressed assets
in out-of-court transactions must
act strategically to limit downside
risk and maximize upside potential.
Buyers must have a solid strategy in
place when pursuing a distressed deal
and be ready to adapt to changing
circumstances. While the unwary
or uninitiated may face challenges,
the increased risk profile of the
distressed deal landscape presents
big opportunities for bold buyers. J
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