This article are provided for information purposes only, and are not intended as legal advice.


Buying bankrupt companies – does this make good sense?

August 14th, 2009

You want to expand your business but buying your competition is too expensive a proposition.  If you do have the capital or you have a lot of business experience with financial backers behind you, you may want to start a business or buy a business but where do you look?  Why not look for assets of bankrupt companies.  Not a lot of companies come out of bankruptcy and that is because of the CYA syndrome that we have. The bank manager does not want to be blamed for a bad loan so they put the company into special loans.  Special loans in turns determines if the company can be nursed back to health, if they are not sure, they contact a receiver.  A receiver is paid for by hours worked therefore there is no incentive to sell the company as a going concern since they could make considerably more money if they take years to wind up a company. 

 

By the time the assets come on the market, the company has probably lost all its customers.  The only thing that you are buying is assets.  But can you do something with those assets?  The company which has gone bankrupt does not have to be in your industry.   If the assets can be used in another business, this could be a cheap way for your to expand or grow a business in another area.  For example, companies in the pharmaceutical business use aluminum vats for mixing ingredients.  If a supplier went bankrupt, could those vats be used for mixing other products outside the pharmaceutical business?  Could they be used in a food business, a liquid processing facility?  The list can go on. 

 

It takes money to buy a bankrupt company because the banks will not lend to you based on future projected revenue.  What gets interesting if you can find more than one bankrupt company and put them together, this again depends on the size of each respective company.  If you find two companies in similar or complementary businesses, can you then buy each, try to recover the old customers and if the customers of both businesses are complementary, can you now cross sell new products to old customers?  If you can, then you can turn around the companies in a very short period of time. Some entrepreneurs have done this and built companies from bankrupt businesses and generated hundreds of millions of dollars in revenue in less than 10 years.

 

Some bankrupt companies may have work in process at the time the bank cut off their funding and they went bankrupt.  I know of a company who was bought out of bankruptcy and had a lot of work in progress.  Since the business stopped, the receiver did not think that there was any value to the partially completed inventory assets.  The company was purchased, the buyer of the business invested $1 million in working capital to finished the processing of the inventory and sold the finished the inventory for $2 million – a 100% return on his money in only a few weeks.  No one could see that there was such an opportunity.  The receiver, the banker got lost in business, they were not visionaries nor were they looking to expand the business.  These are the types of opportunities that my exist.

 

A business servicing the automotive industry went bankrupt and the assets were sold by the receiver.  They assets are being disassembled, then reassembled in another city and the buyer is hoping to generate $3 million in business from his existing clients in a totally different business. Processing facilities have many different uses.  If it was used to make cookies, it may also be able to make goods in an unrelated business.  No one will tell you what the equipment can do.  You have to be the visionary and do your own research.  Too often companies only look at businesses for sale assets in their own industry and do not look at other businesses and see if their equipment can be used in another industry. A very simple example would be office furniture.  Furniture in a bankrupt company can be used in any other business.  Some of it may be high quality, some of it in poor shape and old but many people attend auctions to buy filing cabinets, desks, old computers etc.  What is the difference between office furniture and equipment.  In the right setting, both work.

 

If you can find these opportunities, you are able to buy the assets for pennies on the dollar compared to if you had to buy the equipment brand new from a supplier.  If the equipment is well built or built out of aluminum, it may have a long life.  You may have to clean up the equipment because it was not well looked after but it still may last another 5, 10 to even 20 years with minimal maintenance.  Sometimes, you may have to buy a bundle of equipment to get what you want but the scrap value of the equipment that you do not want may help pay a substantial portion of the purchase price if you can find the right buyer for the scrap.  I have had clients buy buildings with equipment left over.  They bought the building for a depressed value and then old scrap for hundreds of thousands of dollars.  The building was purchased at a very good price, factoring in the sale of scrap, it became an unbelievable purchase price. 

 

If you are looking for business opportunities, do not look where everyone else is looking.


Filed under: Buy a business — Gary Landa @ 9:31 am


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